Birmingham office market research: 2017 annual review

Business sector analysis

Professional services remained the most popular business sector, although the volume of office space transacted was 11% less than in 2016. It represented a markedly smaller percentage of the overall square footage compared with last year – from 51% in 2016, down to 31% in 2017. This year, the mix has been skewed by the size of the letting to HMRC, which alone accounts for 24% of the year’s total. Another sector to show exponential growth is that of lettings to serviced and managed office operators, which has seen a 15-fold increase in square footage from 2016.

Inward investment

This year, we have seen a flight of people into Birmingham city centre for the first time, a prime example being the RICS. Inward investment echoes the same sentiments of companies expanding in the City, it demonstrates confidence in its prosperity. Having an elected Mayor for Birmingham, with his focus on economic growth, transport, housing, skills and jobs also makes the City more attractive for business.

The RICS, the membership body which regulates chartered surveyors, was perhaps one of the biggest surprises of the year. The organisation had its West Midlands regional offices at Westwood Way Business Park in Coventry, but has now relocated to 30,808 sq ft at 55 Colmore Row offices in Birmingham city centre.

55 Colmore Row

Other recent examples of inward investment include:

• Serviced office operators, MSO Workspace, who are currently present in Solihull, taking 9,843 sq ft at 11 Brindleyplace.
• Insurance software specialists, Acturis, taking 6,302 sq ft at Edmund House – with seven insurance firms also featuring in the transactions this year, it is possible that Acturis’ move was motivated by the desire to be closer to clients or potential clients.
• St Joseph Homes, part of the Berkeley Group, taking 4,750 sq ft at 9 Colmore Row – the company had been considering Solihull, but made the decision to take office space on Colmore Row in order to be closer to agents and developers.
• Trinity Mirror taking 4,235 sq ft at Embassy House, relocating from Fort Dunlop – it is thought that the desire to make the commute into and from work easier for staff was a key motivation for the move.

Of course, inward investment is not just restricted to companies creating a presence in Birmingham for the first time. It is also represented by companies expanding their office space stake in the City to accommodate consolidation of regional offices or relocation of staff from other areas of the country. International law firm, Hogan Lovells is a prime example, taking 23,388 sq ft at The Colmore Building in Q3, tripling the size of its previous space to a whole floor. PWC taking 58,631 sq ft at One Chamberlain Square is in addition to the 90,000 sq ft that they signed up to in Q1 2016, effectively now taking the whole building – again, most likely to accommodate staff from other locations.

These transactions demonstrate that Birmingham is seen, not just as a place to do business, but somewhere that has a strong talent pool. The hunt, across the country, for highly skilled staff has never been so fierce, and for more companies than ever, Birmingham seems to be providing a solution. 40% of the City’s population is under 25, the highest percentage of any city in Europe (source: birminghamtoolkit.com), and the talent pool being generated by the City is growing.

This is echoed by the growth in Birmingham’s higher education sector – significant lettings to Birmingham City University (BCU) in recent years (34,500 sq ft at the NTI Building and Millennium Point in Eastside in 2014), as well as University College Birmingham (UCB) launching in 2017 the next phase of its £100 million investment in student facilities with a £38 million higher education centre in the Jewellery Quarter. These, together with the growth in demand for student accommodation, all demonstrate that the student population is booming, and Birmingham’s offering for leisure and quality of work, will keep them rooted in the region.

Serviced and managed offices

Serviced and managed office providers, and the demand for their product and services – which are now regarded as ‘cool’ by millennials rather than a start-up or interim arrangement – have had a considerable impact on the figures this year. Accounting for 20% of the square footage transacted in 2017 (2% in 2016), it is clear that quality and flexibility are ‘king’.

Instant Offices – providing HS2 contractors with a flexible, managed office solution on large pieces of office space at Bruntwood’s Cornerblock – introduced a new approach to occupancy for the City in 2017. They enable large occupiers to take office space for a period of time that matches the contracts they’ve been instructed on, without taking on responsibilities of the true lease.

The serviced and managed office trends have, until now, been significantly more prominent in Manchester and London. However, the strength in growth of serviced offices within Birmingham city centre, with a simultaneous reduction in the number of 0-5k sq ft deals, would suggest that this may be changing.

The approach is also much more tailored – not just in the Instant Offices offering. Regus is also differentiating its offering between The Lewis Building, which is likely to be more traditional HS2 contractor-led space, and The Crossway, which will offer a more relaxed ‘jeans and T-shirts’ office environment, catering for a different area of the market, similar to Alpha Works.

Flexibility

A nice follow-on from serviced and managed offices is the topic of flexibility. Flexibility has been a key factor in many office negotiations and occupancy decisions this year, with serviced and managed offices forming a major part of that.

The drivers behind flexibility this year have been contract lengths, economic uncertainty and, going further, a change in attitude. Millennials – cutting their teeth with working practices such as hot-desking and BYOD (Bring Your Own Device) – value flexibility and quality. For many, this may even extend or stem from their relationship with residential property, as they look to take advantage of the ability to be more footloose.

We could well see many cities, not just Birmingham, follow the route that is being taken in London, where serviced and managed offices are continuing to rise.

WeWork, which offers a fresh approach to the serviced office model, is an excellent example of what’s in demand in London. WeWork operates on a license model that can offer office space for any period of time – by the month or even by the hour. The company has enjoyed meteoric expansion in the capital city – driven by the demand from the youth of the talent pool. Could we see them take office space in Birmingham in the quarters to come?

The office space transaction/availability illusion

This year, we see a significant separation between the amount of office space transacted and the amount of readily available space being removed from the market, and this is for various reasons.

Firstly, managed and serviced offices, in many cases, are transactions which do not represent occupied space. The two lettings to Regus at The Crossway and The Lewis Building – which total c. 109,000 sq ft – are great examples of this. This space is still technically available to let to companies, under the serviced or managed office operator.

Also deserving consideration is the amount of office space that has been pre-let in 2017. The pre-lets to HMRC at Arena Central and PWC at Chamberlain Square total just under 300,000 sq ft, 30% of the overall space transacted this year. Although this space is now spoken for, it will not be occupied or even be habitable for some time.

Nevertheless, the amount of high quality, readily available office space is being quickly eroded and, for many companies, the cost of – and wait – for new build office space may be impractical. As such, though Q4’s breadth and volume of deals is impressive, the rate of activity within the Birmingham office market may not be maintained. Without supply, there can’t be lettings, and this presents a problem both to the market as a whole and to a specific bracket of occupiers.

Those needing over 5,000 sq ft will begin to see fewer and fewer options available to them as far as good quality office space is concerned. The erosion of available space – which has reduced significantly following the strength of lettings in the second half of 2017 – particularly in the middle of the market – means that some of Birmingham’s ‘bread and butter’ occupiers may become short of options in the near future.

The market will need to find a solution for this size of occupier, as 2018 is likely to be when the problem becomes most prevalent. Some may be able to consider serviced office space and others may be able to afford more expensive new build space, but no developments will be readily available until 2019 – when Three Snowhill and Two Chamberlain Square open their doors.

Conversion to residential

Many defunct office premises, no longer capable of meeting the needs of modern office occupier requirements, are being converted into residential space.

Properties being refurbished for the residential market include Herbert House, Broadway, Beaufort House, Galbraith House and Century House, to allow these properties to generate greater returns. Similarly, Beneficial Building is now being converted into ‘boutique’ hotel accommodation.

Conversion does not reflect a lack of demand for offices in the City, as these properties cannot meet those demands in a material way, but will help to meet the thirst for residential space.

71 Cornwall Street (formerly Herbert House)

Flight to quality

The Birmingham office market has shown a noticeable trend in demand for higher quality office space. With higher quality, typically, comes greater efficiencies and appeal to staff. Attracting and retaining the right, talented individuals is by far the biggest issue facing businesses, at this time. Staff will always be the significantly greater cost for an employer and, as such, cost of office space for some has become less of a concern, and instead, a way to retain staff.

We have seen expansions at a number of prominent properties over the course of the year. These are either to house the consolidation of another office in or near the city, or genuine growth which involves recruitment or relocating staff from other areas. Companies consolidating their office space stake are able to choose quality over quantity, improving the environment for staff and visitors.

Transactional analysis by size bracket

We know that 2017 achieved a dramatically higher square footage than 2016, but where did this extra space come from? It would be incorrect to say that it was all down to HMRC.

When you look at the analysis by size bracket, there are some striking differences. The 10-20k sq ft bracket saw double the transactions of the previous year, with 14 lettings totalling 197,149 sq ft achieved in 2017, compared with 6 lettings totalling 99,898 sq ft in 2016.

The 10-20k sq ft bracket isn’t the only example of a significant increase, with the 5-10k size band also showing growth from 80,991 sq ft (13 transactions) in 2016 to 142,183 sq ft (20 transactions) in 2017.

There was, however, a decrease in the 0-5k sq ft band, from 114 deals in 2016 down to 91 in 2017, with a corresponding 11% reduction in square footage. The incubator section of this market can be catered for by serviced offices, but the City also needs to provide a quality offering for the larger occupiers in this band who want to occupy offices on a traditional lease basis.

Upcoming availability

When HMRC relocates to 3 Arena Central, this will result in a number of newly vacated properties. As departments move out of the space, the properties are likely to be refurbished and promptly brought back to the Birmingham office market.

2016 was a record for development in the City, and so there is now currently 1.4 million sq ft of office space under construction. The latest Deloitte Crane Survey, which not long ago saw Birmingham with not much to show for itself, now records 24 new starts breaking ground in the City in 2017.

Upcoming new build, Three Snowhill, will provide 403,540 sq ft of prime office space and, realistically, an occupier for this property would have to be an inward investor. Given that few new city centre properties of this size exist across the country, it could prove that its existence is enough for a suitable occupier to take the whole space. For 2018’s Birmingham office market to deliver a total square footage that can stand up to its predecessor, a landmark deal of this kind would be needed. Only time will tell.

One Centenary Way, Paradise

On the horizon, new mixed-use developments at the planning stage and expected to include office space are:

• New Garden Square, planned by Calthorpe Estates, is set to revamp a sizeable chunk of Edgbaston, and is proposed to deliver c.600,000 sq ft of office space.
• Beorma Quarter in Digbeth – plans outline 155,000 sq ft of new Grade ‘A’ office space for Birmingham’s Eastside.

Rental levels

Commercial property owners have become more assertive in their marketing and negotiation strategies over 2017. However, rather than a lower rate of rent, the tactics that have been employed include the sweetening of incentives – such as rent-free periods – allowing landlords to either maintain rents or push them on.

Rents for the highest quality new build office space are slowly increasing. It is expected that the top of the Birmingham office market will be achieving rents of £34 per sq ft by the end of 2018, and £35 per sq ft by the end of 2019.

The driver behind the rental increase is the rapid reduction in high quality refurbished office space, which has eroded the range of options for many occupiers and, in turn, pushes up the demand for higher rate space.

Location analysis

This year we saw a significant dip in lettings outside of the core of the city centre. Lack of supply in areas, such as Edgbaston, has left occupiers with fewer options and the city core’s office stock has provided them with space that is better supported by public transport links and amenities.

Digbeth and Aston are seen, by some, as future hotspots for commercial property, with developments such as Beorma Quarter on the cards, but at this moment in time, these are not tangible prospects.

2018 outlook

We expect the trends that we have outlined in the Birmingham office market review to continue – particularly where flexibility is concerned. SMEs with a lease event in 2018 could well choose to relocate into serviced offices for a period of time, rather than commit to a new traditional lease, in order to wait out the storm, so to speak, while more information regarding Brexit arrangements drips through.

With regard to corporate occupiers, inward investment and the consolidation of regional offices will be behind the largest lettings in 2018. The most recent announcement of major engineering consultancy WSP to take 47,000 sq ft of newly refurbished office space in The Mailbox in Q1 2018, is further testimony to this, in which they will be bringing 700 staff to the site.

Quality, suitability and flexibility will be the priority of most ‘switched on’ commercial property owners – currently the key demands of the market. It is the properties which have played to these strengths, such as Cornerblock and Alpha, where we have seen the best rate of take-up.

The gap in supply appearing in the middle of the market is an area that landlords will need to consider addressing. Further office space requires refurbishment in order to meet demand and fill the void.

“It is clear that Birmingham is undergoing a seismic shift in its economic performance. The City can boast an array of positive traits that are making it a destination of choice for investors, developers and businesses. Alongside the quality of life and a talented and youthful population, Birmingham is experiencing an unprecedented scale of infrastructure investment which will continue for many years now. Not only will it improve connectivity but it will act as a catalyst for wider development and business growth. The level of interest and the number of cranes in the skyline, particularly in the city centre, are testimony to Birmingham’s continued upward trend. And with leasing activity surpassing the 1m sq ft milestone as well as major deals taking place, most notably HMRC taking 3 Arena Central in what was the city’s largest pre-let in a decade, the City will undoubtedly keep surprising the market.

“What is genuinely exciting is that Birmingham is in the early phases of its growth curve. The next 10 years promise even greater change and opportunity underpinned by a growing population, an entrepreneurial spirit – where more businesses are created than in any other regional city – and a burgeoning culture scene, as well as incredible connectivity, particularly with the advantages that will come from being at the centre of the planned High Speed rail line. And then there is the impact of the Commonwealth Games.”

– Waheed Nazir, Strategic Director, Birmingham City Council

For more information

See full details of the transactions featured in our Birmingham office market research, comprising office space in Birmingham city centre and Edgbaston. Also, see our in-depth analysis of Q1, Q2, Q3 and Q4.

Download KWB Office and Industrial Market Review 2017.

For more information on Birmingham city centre office space, please contact Nigel Tripp on 0121 212 5981 or email ntripp@kwboffice.com or Mark Robinson on 0121 212 5994 or email mrobinson@kwboffice.com.

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