Birmingham office market research – quarter 2 2017

Q2 2017 continues at a slow pace for the Birmingham office market with a notable absence of larger lettings. After an exceptional first half of last year, economic uncertainty arising from Brexit and its aftermath, together with a lack of major lease events have subdued the market.

However, some buildings have prospered, the most notable of these being CEG’s Alpha and Bruntwood’s Cornerblock, which have outperformed the rest of the Birmingham office market over the last six months. These office buildings offer competitive quoting rents and a higher degree of flexibility, which seems to have been well received by occupiers.

Healthy activity at just over 10,000 sq ft

As with the previous quarter, we’ve seen a healthy number of office space transactions in the 10,000-20,000 sq ft bracket of the Birmingham office market. Lettings of this size, although substantial, would not typically headline the quarterly total. However, this quarter, these four deals amount to just over 50,000 sq ft, providing nearly half of the quarter’s total 112,263 sq ft.

The largest letting to recruitment giant, Hays, at 1 Colmore Square, represents a drive for improved efficiency.  Their existing offices at St Philips House in St Philips Place, a self-contained block which housed their operations over four floors, was a period building in need of refurbishment. Consequently, Hays took the decision to literally move around the corner to 1 Colmore Square.  This enabled them to take advantage of the greater space efficiency of the building’s 22,000 sq ft floorplate, by reducing their square footage and, at the same time, increasing the quality of their office space.

Companies seeking greater efficiency, combined with improved quality of office space, has been a common trait in those occupiers looking to relocate. A number of occupiers are also using lease events to consolidate, which then permits them to afford better quality office space at a higher rental rate per sq ft, but with reduced global costs.

Notably, Alpha continued what has been an excellent 2017 for them, with the letting of 14,221 sq ft to West Midlands Combined Authority. In Q1, Alpha saw a flurry of lettings at the property, following its relaunch. Our research for last quarter praised the work undertaken at Alpha for meeting the on-trend needs of the Birmingham office market – with affordable, well-located, high quality office space.

Assembly of HS2 contractors falling into place

With the recent announcement of the key contractors for the HS2 project, we can see both the companies who have recently taken office space, as well as the companies likely to be looking for office space in the coming quarters.

In Q1, Carillion took 7,100 sq ft at Alpha. We would now see this as an HS2-related letting, as it has been named as a key contractor for the north portal of HS2. Further lettings linked to HS2 are likely to be announced next quarter for Cornerblock – more on this below.

Other companies announced who could, potentially, now be looking at taking office space in Birmingham city centre include Balfour Beatty and Vinci. As such, commercial property agents, landlords and developers are likely to be looking to engage with these companies, as they begin their search for administrative offices close to the HS2 headquarters.

Recruitment and training

Recruitment and training was a strong business sector taking office space this quarter, as it has done consistently for the past few years. Lettings spanned the full range of the market, from the largest letting of the quarter, Hays, to Thorn Baker at Imperial & Whitehall.

Cornerblock’s high quality refurb and flexible terms strategy pays dividends

In the previous quarter, we sang the praises of Alpha, which experienced much success in Q1 with a flurry of lettings following its relaunch. In Q2, Cornerblock seems to have seen a similar level of reward for its owner’s efforts, with 17,097 sq ft transacted.

Bruntwood’s Cornerblock secured lettings to Beazley Insurance, of 12,587 sq ft, and 4,150 sq ft to Finance For Business.

Bruntwood has taken an aggressive approach to lease negotiations, by offering more flexible leasing terms than seen elsewhere on similarly specified office space in Birmingham city centre core. Cornerblock’s largest letting in Q2, to Beazley Insurance of 12,587 sq ft, represented a consolidation of the insurance company’s existing properties, and the office lease features a lease break at five years.

Cornerblock is also understood to have two further deals under offer, totalling 24,000-25,000 sq ft, which are likely to complete in Q3. These are thought to be HS2-related, and to feature shorter lease breaks than Beazley.

For companies involved with HS2 that are being signed up on short-term contracts, for what will be a 7-year build, this is very appealing because, although their contracts may get extended, they will not be tied into a long-term lease if contracts are not renewed.

Capita’s serviced office arrangement shows flexibility reigns supreme

At this point in time, occupiers are looking for more flexibility to ‘play it safe’ in a time of uncertainty. Cornerblock and Alpha may be offering the flexibility that occupiers are demanding, but there are also occupiers manufacturing their own flexibility.

Capita will occupy 7,607 sq ft at Gateway House through its letting to Instant Managed Offices. Capita is being provided with a serviced office solution on office space larger than you would typically expect with a serviced office occupier.

This arrangement affords Capita the benefits of flexibility and known budgeting.

Firstly, the nature of Capita’s work requires them to have fixed, known costs. Managed and serviced offices provide an all-inclusive option for occupiers, with various utilities and occupational costs included in a single price.

Secondly, and perhaps most interestingly, Instant Managed Offices is understood to have taken a 10-year lease, which is likely to be the contract length that Capita would have been required to sign up to themselves. However, serviced office agreements tend to involve far shorter terms, with rolling contracts. As such, Capita may well have the ability to vacate the property before the expiry of this 10-year lease.

Using an intermediary company, a managed or serviced office operator, in this way when relocating offices is not new, but it could become increasingly popular in this climate.

Lack of lease events leaves top end of the Birmingham office market quiet

Q1 and Q2 2016 delivered an extraordinary result but, since then, we have only seen modest quarterly totals. This has, primarily, been due to a lack of the larger ‘hero’ office lettings in Birmingham city centre.

In recent years, we’ve seen Deustche Bank, HS2 and HSBC all take landmark leases and push their year’s transactions total up to, or above, the long-term average lettings total.

In the past four quarters, we have seen plenty of the ‘bread and butter’ deals coming through, yet the top of the Birmingham office market has been quiet.

This appears to be due to a lack of lease events to drive those larger office space transactions. Larger occupiers are not in the habit of moving for moving’s sake, and there aren’t many significant rises in headcount to speak of. Instead, we see landlords taking an aggressive negotiating position with their existing tenants to retain them in the property.

Expansions

Whilst we may not be seeing major increases in headcount, expansions are still occurring.

The largest of these expansions is engineering consultancy Cundall, which has increased its stake in its existing building, Cathedral Court, to now occupy 5,412 sq ft.

Livery Place houses the steady expansion of two existing tenants in Quarter 2.  Engineering and environmental consultancy, BWB, has expanded within the property, now taking 3,182 sq ft.  Packt Publishing now occupies 1,880 sq ft.

Expansions such as these tend to be a helpful indicator of how companies are performing in Birmingham city centre – in short, growth is good.

Edge of Birmingham city centre core takes lion’s share of office lettings

The trend, apparent in lettings within Birmingham city centre has been companies seeking office space that has been refurbished to a high standard and that sits on the edge of Birmingham city centre core. Properties that fit this description have much to offer, particularly in respect of value for money.

Alpha and Cornerblock, previously mentioned, are perhaps the most prevalent examples of properties that are best addressing the trending needs of the Birmingham office market.

Similarly, Guildhall Buildings, which has just seen two lettings – 2,713 sq ft to SLC Rail and 721 sq ft to My Show Home – is benefiting from providing a tailored offering to a certain area of the Birmingham office market.

Specialising in smaller amounts of office space, with an impressive location adjacent to the entrance of Birmingham New Street Station, Guildhall Buildings appeals both to larger companies needing a satellite, city centre office and SMEs being attracted as new entrants to Birmingham city centre.

These trends are likely to be partly responsible for why we see, in Q2 (and indeed Q1), a relative reduction in deals occurring in the true fringe areas of Digbeth, Edgbaston (two deals this quarter) and the Jewellery Quarter (three deals this quarter).

Office space availability

Another factor to consider, both when looking at the office space that is proving popular and the level of market activity, is the availability of office space. In respect of prime office space located in Birmingham city centre core, there is much in the way of forthcoming stock, but only a modest amount that is immediately available to move into today.

The buildings currently available in a prime location, at Grade ‘A’ quality and offering the larger floorplates that are appealing to corporates, would be:

• The Colmore Building
• 55 Colmore Row
• 1 Colmore Square
• Baskerville House

If large lettings – aside from pre-lets – are to occur, they’re likely to be at these locations.

Meanwhile, we have various developments in progress in Birmingham city centre that will provide the Birmingham office market with much needed new stock, including:

Outlook

Typically, year on year, we see a seasonal trend within the quarterly transaction totals. Q1 and Q4 tend to be the most active, with Q3 being the quietest due to the diminished activity that takes place over the summer holidays. As a result, Q3 is unlikely to improve the outcome of the year overall.

However, as mentioned above, there are two deals at Cornerblock totalling approximately 24,000-25,000 sq ft that are currently under offer and expected to complete in Q3. Nevertheless, this will not be enough to turn around the first two quarters, which currently leaves the Birmingham office market 100,000 sq ft short of its normal run rate.

Q4 may still offer larger lettings, but this is dependent on the office lease events that are yet to land in 2017, and occupiers are giving themselves longer decision making periods to consider all the options.

See full details of the transactions featured in our Birmingham office market research, comprising office space in Birmingham city centre and Edgbaston.

For more information, please contact Mark Robinson direct on 0121 212 5994 or email mrobinson@kwboffice.com.