Law Sector and the Office Market Update

Knight Frank, the property consultant, has just published an update on trends in the law sector over 2017-18 which impact on the UK office market. Some of the main points include:

Consolidator firms such as Gordon Dadds, Redkite Solicitors, Knights and Metamorph Law are acquiring smaller rivals to gain market share. Consolidation activity is driving occupier demand in certain markets as merged firms looked to consolidate into single offices;

Some mid-tier law firms are aggressively expanding, in particular those that have focussed on niche services. One such firm that is forging ahead is Weightmans which has invested £1.3million on new technology over the last year. Another leading mid-tier firm is Fieldfisher who recorded a second consecutive year of double-digit growth that included moving into a single site in London;

New market players are expanding in regional markets. These included Leeds-based Alpaca, who launched in 2017, and Rradar, who relocated to larger office space at the Bruntwood Platform building in Leeds having undergone rapid growth;

Meanwhile, Norton Rose Fulbright revealed plans to create 100 new jobs in its legal process hub in Newcastle, Simmons & Simmons taking larger offices in Bristol, Walker Morris will relocate to 33 Wellington Street, Leeds, Reed Smith opening in Leeds, Graysons moved into larger, more modern premises in Sheffield, Pinsent Masons consolidated their two offices into 141 Bothwell Street in Glasgow, while Hogan Lovells tripled its space in Birmingham;

Manchester recorded the highest legal services sector takeup by square footage across all the UK regional cities at 155,328 sq ft or 13% of total take-up last year. This was followed by Bristol where legal services accounted for 9.4% of total take-up

Knight Frank conclude that changing business structures will demand a resetting of the corporate footprint with most relocating to higher quality office space in core CBD locations.

Metropolis is tracking over 100 law firms with either identified requirements or potential requirements for relocation from October 2018 onwards.

 

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Technology Companies and Offices

CBRE has recently published its ‘Tech Cities’ report looking at  office leasing patterns in the technology sector across Europe.

Conclusions include:

Technology companies still dominate tech activity across Europe in real estate terms – 65% of all deals tracked fall under software, IT services, telecom or hardware;

The e-commerce sub-sector accounts for the largest average deal size of leasing transactions, which reflects the aggressive growth of the sector across industries. Berlin for instance has attracted larger
e-commerce floorplates than anywhere else in Europe along with London, Dublin and Amsterdam;

While new tech companies make up a smaller proportion of total deals than traditional sub-sectors, they are just as space-hungry as the more traditional companies in terms of average deal size. This reflects differences in growth speeds of companies within each of these two categories in the global marketplace, with the new tech sector seeing particularly rapid growth;

Depending on the tech sub-sector and business strategy, occupiers will be able to agglomerate with peers within the same sub-sector, or identify a different sub-sector that offer benefits of a close location, with London, Reading, Bristol and Cambridge as examples;

London is CBRE’s top-ranking technology cluster. The city is a magnet for young technology talent, and employment in the tech sector has grown by 20% since 2008. Major employers in the IT services sub-sector include Capgemini & Cognizant; the largest employers in the software sub-sector include Microsoft and Oracle and in telecoms the city is home to major operations for BT & Vodafone. Other top employers of tech talent in London include Accenture, IBM, and Thomson Reuters;

The Thames Valley region is one of the most established technology clusters in Europe. The Thames Valley is dominated by very large organisations which make up more than 62% of employment. Telecoms, IT services and software are the dominant sub-sectors in the cluster with major employers being largely global tech companies including Vodafone, Huawei, Telefonica, Microsoft, Oracle and Hewlett Packard. Oracle, Cisco and Microsoft are major employers of development talent in the Thames Valley region with Visa and Sky also having large operations in the cluster;

Bristol is one of the major regional centres for tech outside of London and the Thames Valley with employment in the sector growing by 25% since 2008. Bristol is a major centre for the telecoms industry with EE, BT, Nokia, Orange and Vodafone all having a presence in the city. Other major employers of tech talent include Lloyds Banking, IBM and Hewlett Packard. Bristol is also home to IT service companies Softcat plc and Civica.

CBRE say that understanding underlying demand conditions using this framework helps inform potential future office transaction strategies.

Metropolis is currently tracking around 150 IT, technology and telecom companies searching for offices across the UK.

 

Regional Office Boost

CBRE’s recent report ‘United Kingdom Office – The Property Perspective H1 2018’ concludes that office mover activity in the regions outside London continued to be ‘lively’ during the first half of 2018

CBRE say that regional office occupier markets in the first half of 2018 with few signs of Brexit-related uncertainty. The ten regional cities monitored by CBRE, saw take-up reach nearly 3.9m sq ft, which was 24% above the five-year average and 37% higher than the 2.8m sq ft newly occupied in the same period of 2017.

CBRE saw large numbers of requirement in regional cities and say that relocation activity could have been even higher if there had not been a shortage of new office space in some cities. CBRE particularly point to shortages in Bristol, Edinburgh and Glasgow where the development pipeline has not kept pace with demand. These shortages will drive further pre-let and refurbishment activity.

Metropolis echoes the CBRE findings, with nearly 400 regional office requirement leads flagged to subscribers in the first half of 2018, together with a similar number of companies finding space for moves between January and June.

CBRE say that The UK’s flexible office space operators continued to expand, with Bristol, Birmingham, Glasgow, and the wider South East the stand out expansion locations in H1. Bristol witnessed a
notable increase in demand with a key deal to Runway East (30,000 sq ft). In Birmingham, deals were concluded with BE Group, Instant, iHub, Regus and Orega, whilst in Glasgow there were prominent deals to
Orega and Regus. In the wider South East region, flexible office space providers took nearly 200,000 sq ft with Slough and Reading the most popular locations. Runway East and other operators also have live requirements in all the regional cities, with CBRE predicting more activity from this sector in H2.

Regional cities saw a record year of take-up in 2017, with the public sector playing a large role in regional office space demand in H1 2018 (just over 0.9m sq ft). HM Revenue & Customs accounted for the three largest transactions ranging between 157,000 – 270,000 sq ft in Manchester, Glasgow and Liverpool.

CBRE forecast the West Midlands as a region to watch. They say the West Midlands is experiencing some of the fastest growth in the country – Birmingham itself seeing prices rise by 6.9% in the year to May Birmingham is attracting public sector bodies, looking for more affordable solutions away from London. The latest requirement is from the General Dental Council, relocating 200 staff London.

Requirements on the Rise?

Over the first two months Metropolis Property Research has noticed a small rise in the numbers of office occupiers launching new searches for office accommodation.

Some examples researched and published over the past week include:

  • An IT support firm, has told Metropolis that it is currently searching for around 200 sq m (2,200 sq ft) of office space within the South Bank area of London. The firm is planning to move from its current base in the Autumn of 2018;
  • A City of London-based energy consultancy, has told Metropolis that it has appointed an un-named property agent to advise on relocation or lease options in central London, ahead of a late 2018 lease break option. The company currently occupies 465 sq m (5,010 sq ft) of offices with about 35 staff;
  • A computer consultancy firm, has told Metropolis that it is currently searching for around 475 sq m (5,100 sq ft) of office space in the Maidenhead area. Staff advise that a move date has not been set, but that it will likely take place around Autumn 2018.;
  • An energy exploration company, has strongly hinted that it is considering launching a search for alternative London West End offices in 2018;
  • An IT consultancy firm, has told Metropolis that it is currently searching for around 220 sq m (2,400 sq ft) of office space in Bristol. A senior contact has stated that an ideal move date would be around October or November 2018;
  • A Leeds headquartered print management company, is planning to open an office in London by 2020;

Metropolis researches around 140 new office requirements each month in the UK, plus hundred of other companies pondering move decisions and agreeing lettings.

The Magnificent Seven

A recent report from Savills reveals that for a fourth consecutive year, UK regional city office take-up has surpassed the long term average of 9.1m sq ft. Total take-up in 2016 reached an impressive
9.6m sq ft, despite a year of political uncertainty.

The final quarter of regional office take-up in 2017 reached 2.4m sq ft, the strongest quarter since Q2 2015. Roughly the same level of occupational demand was recorded during the first half and second half
of the 2016, with no post referendum slowdown evident.

The most active of the seven major UK cities in 2016 were Bristol and Cardiff, which recorded take-up improvements of 42% and 10% on 2015’s levels respectively, with Cardiff achieving its highest level of take-up in 15 years. A key driver of occupational demand in these cities was the Government Property Unit (GPU) requirements for consolidating public sector bases into regional hubs. Savills expect the GPU to be the key contributor to acquisitions over 100,000 sq ft in 2017 in cities including Birmingham, Manchester, Leeds, Edinburgh and Belfast, during 2017.

The most active business sectors during 2016 were the insurance and financial services sector, accounting for 1.2 million sq ft (15%) of space taken, which marked a record year. Key deals include: Swinton
Insurance taking 165,000 sq ft at 101 Embankment, Manchester, whilst MotoNovo Finance took 72,000 sq ft at One Central Square, Cardiff.
The tech sector remained an important contributor to take-up during 2016 and accounted for 20% of the number of transactions. This sector has traditionally contributed to the smaller end of the market, but also included Co-op Digital acquiring 45,000 sq ft of accommodation in Manchester, while Micro-chip designer, Cirrus Logic’s 70,000 sq ft letting at Quartermile, Edinburgh marked the largest regional tech deal last year. Edinburgh witnessed the highest proportion of tech take-up of all the UK cities.

Metropolis ran 53 medium and large office requirements for Birmingham in 2016, totalling 1.4m sq ft; the totals for other cities were Bristol 66 requirements and 1.6m sq ft; Cardiff 35 requirements and 1.1m sq ft; Edinburgh 65 requirements and 1.5m sq ft; Glasgow 51 requirements and 1.4m sq ft; Leeds 74 requirements and 2m sq ft; Manchester 90 requirements and 2.5m sq ft.
A shortage of Grade A floorspace in city centres,  prompted occupiers to look out of town as total fringe/out of town take-up reaching 2.8 million sq ft, eclipsing the record level set during 2014. Occupiers were also attracted out of town offices due to availability of larger floorplate stock and cheaper rents, particularly in the Manchester and Glasgow markets. Glasgow was boosted by the University of the West of Scotland’s 225,000 sq ft pre-let of the Eco Campus.

Overall, 44% of the 3.6m sq ft of regional office space currently under construction across the UK regions has been pre-let. Examples include PwC’s part pre-let of One Chamberlain Square in Birmingham
There are 8 million sq ft of known lease expiries over the next five years, there also remains underlying demand for new space, with the likely strongest performers for 2017 predicted to be Leeds, Cardiff and Bristol. There is a shortage of Grade A space, particularly in Bristol and Manchester. Top regional rents remain low relative to Central London.

The Metropolis view is that demand is holding up well in regional cities with 130 new requirements added to the database for the seven largest cities outside London in Q1 2017.

Regional Office Market Outlook

In a recent 2016 reporty by Savills, the consultant points to a trend for demand for prime office space in regional cities to increase dramatically during 2016.

Savills say that demand is driven by local businesses, start-ups, and the rise in ‘northshoring’, where London costs are driving relocations to regional markets.

Manchester, Birmingham, Cardiff and Edinburgh saw increases of 39%,105% 41% and 44% respectively, above their ten year average annual office take-up, with Birmingham and Cardiff having record years. Bristol is tipped to see the best lettings growth in 2016.

Metropolis has seen a 20% rise in the number of regional city office requirements between 2014 and 2015.

Deutsche Bank’s move to Birmingham and HSBC pre-let of 210,000 sq ft at Birmingham’s new 2 Arena Central scheme are examples of ‘northshoring’ with companies moving staff away from London to cheaper office space in regional cities. In addition, the number of local pre-lets in regional cities is growing, such as Squire Patton Boggs’ pre-let on 27,500 sq ft at No.1 Spinningfields in Manchester and Cirrus Logic’s 70,000 sq ft pre-let at Quartermile 4 in Edinburgh.

Tenant demand has re-ignited speculative office development in regional cities, with construction up 130% on a year ago.

Savills concludes that UK wide activity points to increasing demand from sectors such as TMT which is estimated to see a c.700,000 of jobs created in the regions over the next 10 years. More office requirements from public sector agencies and Central Government are also expected

The 2016 UK Office Market Outlook

A report out this week from consultant CBRE on the outlook for the UK office market in 2016, suggests that despite some slight economic slowing, that most office sectors will see further growth over the next 12 months.

The report forecasts that although central London will continue to be the major engine of UK office market growth, the pace of that growth will ease slightly in 2016, due to a softening of UK growth. The report suggests that a dip in new office completions in London in 2016 will push up rental growth, however an increased pipeline of completions in 2017 will give office tenants more choice in the medium term.

Outside London, the report suggests that the South East will see more activity in 2016, after a sluggish 2015. Recent, mainly pre-let driven, quarterly take-up records set in Bristol, Manchester, Leeds, Aberdeen and Birmingham are unlikely to be repeated and the churn of secondhand office space is likely to become the mainstay of regional office take-up again, albeit alongside a lower level of pre-let deals.

The report spotlights that the areas where office demand is currently highest include West London and Thames Valley. Central London demand remains around 10m sq ft. It also forecasts an increase in speculative office development in regional centres. Schemes are tracked on the Cityoffices website.

Current Metropolis statistics show close to 1,000 unsatisfied office requirements across the UK of 2,000 sq ft+. In addition, there are over 500 lease expiries approaching in London alone, where companies have yet to make up their minds on whether to stay or go.

Based on similar audits of office requirements in recent years, office demand looks stronger than for a number of years.