Back to the bad old days?
Estates Gazette
21/02/2009
Take-up declines: Hopes that the private sector would take office space on the back of Capital of Culture status have not materialised, and agents are once again looking to public-sector requirements. David Quinn reports
Say it quietly, but 2009 is feeling a bit like 1999 in Liverpool. Take-up is sluggish, rents are not high enough to make speculative development worthwhile, and the public sector once again represents the best hope for striking a decent-sized deal.
The excitement felt among many visitors to the city during the Capital of Culture festivities last year was not shared by office occupiers, as take-up slumped to its lowest level since the late 1990s.
Official figures from Merseyside Property Forum have not yet been confirmed, but are likely to come in at around 260,000 sq ft. This represents a 40% decrease on the five-year average, and a similar annual fall. The reason for the collapse is obvious, according to just about everyone.
As Mark Worthington, a director at CB Richard Ellis, points out: “There was a complete absence of significant public-sector activity, otherwise the figures would have been very different.”
The key public-sector deal that Liverpool was waiting for never materialised during 2008. Public transport operator Merseytravel, which was widely expected to sign for around 120,000 sq ft at Neptune Developments’ and Countryside Properties’ Mann Island, completed the deal only in January.
“Usually, there is one big deal that boosts the figures, and in 2008 it was supposed to be Merseytravel,” says Stuart Keppie, director at Keppie Massie.
“If that deal had dropped last year, the figures wouldn’t be nearly so bad,” adds Worthington.
The deal’s completion provides a solid launch pad for this year’s take‑up. In addition, the UK Border Agency, part of the Home Office, has intensified its search for up to 230,000 sq ft. Downing Development’s The Capital is thought to be the favoured option, although the developer’s senior agency surveyor Robin Ellis would not comment.
Simon Williams, director at DTZ, which is advising the UK Border Agency, also declines to comment on the progress of the search, and on the likely timing of any deal. The local rumour mill is split, with some agents suggesting the letting could happen this year and others pointing towards 2010, or even 2011.
Pace of development
A third potential public-sector deal comes from HM Courts Service, which has narrowed its options to two sites for a Magistrates’ Court. The first is believed to be Kajima’s site at Moorfields, while the other is Terrace Hill’s site close to The Strand, adjacent to Liverpool One.
“The Magistrates’ Court will be a huge stimulus for the city’s economy and a shot in the arm for investor confidence,” says Michelle Steel of Drivers Jonas’ planning and development team. “Large public-sector schemes like this play an important role in maintaining the pace of development that was set in the run up to the 2008 Capital of Culture.”
The fact that Liverpool is pinning its hopes on a public-sector revival to boost take-up could be perceived as a retrograde step in a city that has recently talked up its burgeoning professional and financial sectors.
As one agent jokes, lettings to the likes of Merseytravel are not very “rock ‘n’ roll”.
Deals such as solicitor Hill Dickinson’s 130,000 sq ft letting at St Paul’s Square in 2005 had convinced some that the market’s dependence on such unglamorous government lettings was becoming a thing of the past.
Ian Steele, a director at GVA Grimley, believes that, while some professional occupiers will make a move, a slowdown in requirements from the private sector is inevitable.
“In some cases, professional occupiers will be forced to take space but there aren’t many expanding. I expect a lot of them to take stock and tread water,” he says.
Keppie adds: “We are still looking for the public sector to provide the base. Liverpool hasn’t achieved anywhere near the level of inward investment enquiries that were anticipated in the run up to Capital of Culture.”
The dearth of private-sector requirements could prove problematic for developers of new-build schemes. These include Rumford Investments, owner of 20 Chapel Street, where 121,000 sq ft remains available. Rumford has been keen to push Liverpool’s headline rents forward after achieving a record £22 per sq ft in a 4,000 sq ft letting to architect Broadway Malyan in 2007.
However, few people expect further rent rises in Liverpool. Agents and developers are merely hopeful that existing headline rents in the city can be maintained.
“We are still quoting £16.50 per sq ft at The Capital – we aren’t reducing rents, but all landlords are being more creative about how deals are structured,” says Downing’s Ellis. “People are accepting market conditions and dealing with the challenge.”
Jim Gill, chief executive of economic development body Liverpool Vision, is honest about rental prospects in the city.
“Rents will come under pressure because of the downturn, mainly on new space that hasn’t let,” he says.
Gill has a key role to play in the next tranche of Liverpool city centre office development. Because of yield shift and rising construction costs, agents suggest rental levels that are currently unachievable are now needed to make development financially viable, echoing the position immediately before the last boom.
Back then, £20 per sq ft was the magic number at which a development became profitable. Now, it is closer to £25 per sq ft, creating the feeling that Liverpool is destined to be constantly playing catch-up.
“New-build just doesn’t stack up at the moment, and it’s a brave person who wants to develop speculatively without public support,” says Ian Sherry, director of developer UK Land & Property, owner of Exchange Flags. “The public sector will play a big role in guiding the city through the turbulence.”
As a result of the gap between development cost and final return, developer English Cities Fund has been liaising with Liverpool Vision and the Northwest Regional Development Agency over the terms of a European Objective One follow‑on grant. This would enable the developer to push ahead with the third phase of its St Paul’s Square development on Old Hall Street.
Gill says he is keen to see work start on the scheme but does not want to see it “competing in the market” at “less than the sorts of rental level it should be able to achieve”.
“Each time we have supported a scheme, we have been pushing the rental values in the appraisal,” he explains. In this climate, simply maintaining rents above £20 per sq ft is likely to be the main priority.
Liverpool Vision is disinclined to flood the market with grant-assisted buildings for which tenants may prove to be scarce.
“We don’t want to be overrun,” says Gill. “Right now, it doesn’t make sense to encourage an awful lot more new schemes, especially when we have refurbished space available.”
Getting the balance right between future supply and likely demand in the face of unpredictable property values is undoubtedly taxing. Nonetheless, if ECF’s building goes on site later this year – with completion in 2011 – it will be the only new-build office block in the pipeline.
“Now is great time to start to develop if you have money in the bank,” says Steele.
Unfortunately for Liverpool, few developers do, meaning that, like elsewhere, prelets are likely to become the norm in the short term.
In truth, Liverpool’s position is no worse than that of other cities around the UK, while the increased availability of public funding – and requirements from the public sector – could be the city’s saving grace as the recession takes grip. Agents and developers in the city will be hoping this is the case.
Out-of-town market outpaces city centre
Liverpool’s maturing out-of-town market had a strong 2008, with unconfirmed take-up of around 280,000 sq ft, outpacing that of the city centre for the first time.
“The market out of town has not suffered the same reduction as the central business district, and the figures have held up reasonably well. We have seen some decent deals of more than 10,000 sq ft,” says Alistair Newman, partner at King Sturge.
Building contractor Kier’s decision to take 15,000 sq ft at UK Land & Property’s Estuary Office Quarter in Speke provided an end‑of-year boost for the established south Liverpool market. UKLP managing director Ian Sherry says around 100,000 sq ft of further office space will be developed at the site “when the market stabilises”.
Meanwhile, the freehold sale to One Vision Housing of the 35,000 sq ft Atlantic House in Sefton shows that there is growing interest in the north of the city among occupiers.
The seller was the Mason family - owner of Mason & Partners surveying practice – which developed the building.
Market at a glance
City centre take-up for 2008 is likely to be between 250,000 and 260,000 sq ft. This compares with 463,000 sq ft of take-up in 2007 and a 432,000 sq ft five-year average
City centre rents are £21 per sq ft for grade A stock. Refurbished buildings are £17 per sq ft
Out-of-town rents are £14 per sq ft for new-builds and £11 per sq ft for refurbishments
Availability of new city centre offices is around 188,000 sq ft, comprising 121,000 sq ft at Rumford Investments’ 20 Chapel Street and the remainder at English Cities Fund’s St Paul’s Square
Sources: Merseyside Property Forum GVA Grimley
Tags: liverpool
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