M42 and Solihull office market research – quarter 4 and full year 2017

In a year that saw the Birmingham office market achieve its highest ever take-up in square footage, the M42 and Solihull office market was constrained by a shortage of supply and lack of landlord flexibility. As a result, we have the lowest take-up since 2013, with 51 transactions totalling 269,498 sq ft. However, whilst supply has been challenging, demand remains strong.

During 2017, Birmingham had far more available office space to meet its demands than the Solihull office market, and this is a primary reason behind a year which fell 20% short of the market’s long-term average.

Nevertheless, interest remains strong and, throughout the year, there have always been parties to talk to. However, product and location are paramount. If occupiers had found a building of the correct size, that they liked, and on terms that they were agreeable with, they would have gone for it.

Occupiers have taken a long time to make their decisions, in part because they’re considering space that may not fully meet their requirements, and this has stalled decision making. Lack of certainty and lack of choice has created the ‘perfect storm’.

Recent years have seen the Solihull office market go from strength to strength – delivering some excellent annual totals –  but now, we see a dip. It’s not so surprising though, that the market finds itself in this position, with the lack of size and variety of space available, and terms being harder than potential occupiers would like. Occupiers are left feeling that they’re not being negotiated with fairly – when greater flexibility is being offered in Birmingham city centre.

Key transactions

1. Gymshark Trigen House 42,408 sq ft
2. BCA Logistics 1320 Solihull Parkway 20,774 sq ft
3. PKF Cooper Parry One Central Boulevard 17,810 sq ft
4. Legal & General Home Finance Chadwick House 14,000 sq ft
5. Purplebricks One Cranmore Drive 11,250 sq ft
  Total 39% of annual take-up 106,242 sq ft

 

Size bracket

A shortage of transactions over 10,000 sq ft, particularly in the 10-20k sq ft bracket, has certainly impeded the market in achieving a healthier total for the year. 2017 only saw 5 deals over 10,000 sq ft, which is far lower than has typically been achieved – with 9 deals of this size in both 2016 and 2014, and 11 in 2015.

The year also lacked sub 2,000 sq ft deals – though we saw a few more of these transactions in the last quarter. These ‘bread-and-butter’ deals are few due to lack of supply, with the Solihull office market just not catering for occupiers of this size. Seeing a rise in this bracket in Q4 – 9 of the 16 transactions of the year – is the reason why the quarter had the highest number of transactions, yet the smallest square footage of the year.

 

The 5-10k sq ft bracket did well this year, which was somewhat expected as, at the beginning of the year, this bracket held the most available supply. However, the office space in this bracket has now been substantially eroded by the year’s lettings.

Inward investment

Despite the lower figures achieved by the Solihull office market in 2017, it saw a good level of inward investment. These transactions are mainly driven by lease events and the search for better quality office space.

The largest transaction of the year, the letting of 42,408 sq ft to Gymshark at Trigen House, represented excellent inward investment for the Solihull office market. The sports clothing company has enjoyed exponential growth, and is now consolidating its various locations in Redditch and moving into a single building on Blythe Valley Business Park. It is thought that this building will be able to house a range of the company’s operations, including demonstration rooms for its gym clothing.

Other inward investment transactions include:

  • PKF Cooper Parry – the accountants and business advisers moved out of Edgbaston to 17,810 sq ft at One Central Boulevard on Blythe Valley Business Park
  • Configit – the software specialist has relocated from Warwick into 8,859 sq ft at Rhodium on Blythe Valley Business Park
  • Inchcape – the automotive dealer group has relocated from Oxfordshire to 6,210 sq ft at 3140 Park Square, Birmingham Business Park
  • ConocoPhilips – the energy company has taken 1,924 sq ft at Cornwall House on Blythe Valley Business Park

These clearly demonstrate that office space demand remains strong, and that the talent pool and prosperity of the area are big draws.

Interior of PKF Cooper Parry, One Central Boulevard
PKF Cooper Parry, One Central Boulevard

Sub 2,000 sq ft market

The sub 2,000 sq ft market is one that has particularly suffered from lack of supply. The majority of the area’s business parks do not cater for this area of the market, and this could potentially be a missed opportunity.

The last speculative developments catering for this size of occupier were Quartz Point at M42 Junction 6 and The Pavilions in the Cranmore area (M42 Junction 4) a decade ago. In the intervening time, office space has been eroded, and now the lack of new build on the horizon is inhibiting the market. If commercial property developers are unsure of whether they can speculatively develop, then considering a multifaceted approach to their offering, to include incubator space, would be prudent.

Incubator space would give the smaller businesses, hungry for space, shorter leases of 2-3 years, allowing these companies to grow. This is a grow-your-own occupier approach, which allows landlords to take on an occupier whilst small and eventually see them taking much larger space elsewhere within the same building or within the wider property portfolio – the Bruntwood model that we see in Birmingham city centre.

Solihull town centre has been one of the few locations able to offer smaller space, and where that has been available, it’s been popular. Properties such as The Courtyard and, more latterly, 43 Dominion Court have both welcomed a raft of new occupiers in 2017. When these companies grow, they will need larger space to move into, and it’s possible that these are occupiers that the business parks will lose out on.

Solihull office market - size band analysis

Business sectors

The letting to Gymshark has had a substantial impact on the Solihull office market figures this year, as far as square footage is concerned, making the ‘miscellaneous’ category the largest contingent. This year, this category, which reflects the diverse nature of occupiers in the Solihull office market, comprises sports clothing, facilities management, care, education and retail (last year it included health, transport, government, leisure and distribution).

However, when we consider the number of transactions per sector, it’s professional services that comes out on top – by a considerable margin, achieving 16 of the 51 deals.

It’s been a relatively quiet year for the automotive industry, which typically sees a good number of transactions across the region. Only 4 office space transactions relating to automotive, manufacturing and engineering sectors took place in 2017, compared with 11 in 2016 and 10 in 2015.

The performance of the TMT sector has varied substantially over the past 3 years – this year achieving 8 transactions, totalling 41,296 sq ft. Last year proved to be a bumper year for transactions, with 15 in total, yet the square footage achieved was almost 20% less than the previous year, which saw only 9 deals.

 

Location analysis

Over the past 3 years, as office space has been depleted in certain areas, the strongest locations for activity within the M42 corridor have shifted. Birmingham Business Park, located at Junction 6 of the M42 has dominated the market in recent years due to the plentiful supply of available office space it had to offer – in 2015, Junction 6 achieved 302,739 sq ft. However, as space has all but run dry – with only 8% of the total space at the Park available to let –  2017 saw Junction 6 achieve just 86,227 sq ft.

In 2017, the area of strongest activity has moved down the M42 to Junction 4 – home to Blythe Valley Business Park, where Gymshark’s landmark deal took place. At the start of the year, Blythe Valley had some of the market’s most desirable office space, and that space has now been snapped up.

Over the past 3 years, transactions at Junction 4 have crept up, from 71,265 sq ft to 105,655 sq ft. Blythe Valley now finds itself, however, in much the same place as Birmingham Business Park, with virtually no space left available on the site.

Solihull town centre has performed well, with Blenheim Court (comprising Chadwick House and Radcliffe House), The Courtyard and 43 Dominion Court proving popular. This has continued into Q1 2018 with a letting of 13,000 sq ft at, newly refurbished, 31 Homer Road to a software company.

Redditch and Bromsgrove

Redditch (6% of market share) and Bromsgrove (just 3%) are seeing less demand for office space as occupiers have become completely frustrated by a lack of availability for too long, giving them no choice but to go elsewhere. The space that will be vacated by Gymshark may reinvigorate the market, if landlords refurbish and reintroduce at a quality that appeals to occupier demands.

‘First’ speculative build in over 10 years

IM Properties is presiding over the first speculatively built office property in the area for over 10 years. The 15,000 sq ft building, being marketed as ‘First’, on Blythe Valley Business Park is now due for completion. It will be interesting to see how it is received by the market, but we would expect it to be fully let within the year. The unit has been built to a similar size and style as that of the adjacent pre-let to Prologis.

Requirements being fulfilled elsewhere

Whilst demand across the area has been good in 2017, larger requirements have not been coming to fruition, at least not in and around the Solihull office market. Instead, some lettings have been falling outside of the area, and business parks further down the M42 have done increasingly well.

Warwick is a great example of this, as it has proven to be very attractive with a similar range of occupiers as we see in the Solihull office market. Notably, Nurton Developments let 50,000 sq ft at One Warwick Technology Park. A further 28,000 sq ft has recently let at Opus 40, and Walsgrave Triangle Business Park is also receiving lots of interest in the office space that it currently has available.

Opus 40 Warwick

Opus 40, Warwick

Serviced offices

Solihull and the M42 do not offer much serviced office space – not on the scale we see in Birmingham city centre, but many occupiers in the out-of-town market want the same flexibility as those in the City. Serviced offices have become a go-to option for occupiers currently experiencing a lack of certainty, as a result of the Brexit process – but this is not being catered for in Solihull, to the extent necessary. As a result, occupiers that can’t find the serviced office space they need in the Birmingham out-of-town office market will be looking elsewhere, perhaps even to the city centre.

It’s also worth noting that those companies, of up to 20 employees, which may want to leave their current serviced offices, are staying put – simply because of the lack of supply.

Owner occupiers

Buying your office space has been very popular in the out-of-town office market. When sub 5,000 sq ft offices become available to buy, they rarely stay vacant for long. Larger SMEs, or SMEs with an excess of working capital, see office space as both a good investment opportunity and also a chance to secure their occupancy in the area, long term. We have quite a number of owner-occupied office buildings on Birmingham Business Park, but lack of supply continues to frustrate the market.

Currently, freehold space in places such as Birmingham Business Park are in the region of £200 per sq ft, but rental values on leasehold space in these same areas suggest that freehold space should actually be at around £250 per sq ft. This apparent room for growth in asking prices may motivate some landlords to consider making their property available for purchase.

1320 solihull parkway

1320 Solihull Parkway, Birmingham Business Park

Negotiating tactics

Some landlords cannot afford to refurbish their commercial properties – but these investments could be what separates them from an occupied property. However, specific refurbishments – rather than a comprehensive overhaul – may well be similarly effective, yet far more affordable.

We would advise landlords to work with occupiers, and take a more pragmatic and longer-term view – as this is likely to lead to greater success in the year to come. There are deals to be had, but taking inspiration from the tactics of the Birmingham city centre market will help to secure them. If the market is to achieve more than the 270,000 sq ft transacted in 2017, we will need to see more tactics like those of Bruntwood at the city centre’s Cornerblock.

With rents at the level they currently are, properties that don’t meet the requirements of occupiers that view them are being passed up on – when there are no incentives on the table. Many deals in Birmingham city centre, which saw a record year, were secured with appealing incentives thrown into the bargain – be it rent-free periods or 3-year lease breaks.

Upcoming availability

Over recent years, the office market has never done so well and therefore, with regard to availability, it has become a victim of its own success, and lettings will only be secured if the product, size and location are right.

Vacancy levels are at their lowest rate for a decade – Birmingham Business Park has just 8% of its space remaining available and Blythe Valley Business Park has virtually no availability, until the new speculative development comes to market. This begs the question, where will space come from?

UK Central is a development that promises much needed fresh stock for the market. However, it is a long way off at this point, and we are unlikely to see real progress on it until the HS2 track is almost ready.

Solihull Council recently approved the business case for the £286m HS2 integrated transport hub at Birmingham International Station, designed to open in December 2025, a year ahead of the HS2 high-speed rail service. The Urban Growth Company has also unveiled its development framework for the adjacent 400-acre UK Central scheme, which includes 2.65 million sq ft of commercial space, suitable for national and international occupiers.

2018 outlook

It remains that the M42 and Solihull office market has a widely diverse occupier base that propagates demand. Despite the uncertainty created by the referendum and snap election, which disrupted the Birmingham city centre office market, Solihull has continued on at a steady pace and been consistent.

What has been lacking from Solihull in recent times are the singular, landmark deals, which have a huge impact on the overall total. The last transaction of this kind was the pre-let of International House to Interserve in 2015, which represented 113,657 sq ft.

There is a healthy pipeline of demand, but often with quite specific requirements, for which we need landlords to work with occupiers and be pragmatic in negotiations. This will help stimulate the Solihull office market, encourage occupiers to relocate and free up space that can be refurbished and re-marketed to satisfy demand for higher quality product.

“2017 has seen a strong level of transactions in Solihull – including the Hong Kong based Lei Shing Hong Group’s £20 million investment into a new 2.5-acre site, for occupation by Mercedes-Benz and LSH Auto Properties’ UK HQ.

“Our future plans for growth and development across the Borough – ‘UK Central’ – are well underway, with West Midlands Combined Authority Devolution Deal packages to deliver infrastructure across the HS2 Interchange and UK Central Hub area, as well as across Solihull.

“This includes a new vision for Birmingham International Station for a fully-integrated multi-modal interchange – bringing together future high-speed rail, existing rail, air, trams, buses, private vehicles, taxis and bicycles through seamless connections to Birmingham Airport and the new HS2 Interchange Station by 2025.

“Initial development is also underway in Solihull town centre for a project that will ultimately deliver 800,000 sq ft of office space with the enhancement of accessibility via Solihull train station to the town centre.”

Anne Brereton, Director of Managed Growth, Solihull Metropolitan Borough Council. 

For more information

See full details of the transactions featured in our M42 and Solihull office market research.

Download KWB Office and Industrial Market Review 2017.

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

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