THE RACE FOR SPACE

18 CUSHMAN & WAKEFIELD 19 RACE FOR SPACE As shown in Figure 12, the regional cities appear to have shrugged off Brexit concerns, with two-year rolling take-up registering a record level of performance in Q3 2018. This is particularly important given that this data point is largely unaffected by pre-referendum deals. Although office take-up has been driven, in part, by large requirements generated by the rationalisation of the government’s property portfolio, corporate activity has also played a significant role. Much has been made of the ‘north shoring’ of back-office functions from London, but it should be noted that regional take-up has grown alongside London take-up and not at its expense. In Glasgow, Barclays committed to one of the largest leasing transactions ever recorded outside Central London, pre-letting 470,000 sq ft at Buchanan Wharf. The new building will house existing Glasgow staff along with new positions created in technology and operations functions. In addition, Booking.com has pre-let 222,000 sq ft at St John’s, Manchester as the new global headquarters for its ground transportation division, which will consolidate from four offices around the city. Does this increase in pre-letting from corporates represent the start of a trend, or is it merely an anomaly? Pre-letting in London normally occurs at the extremes of a cycle; at a time when supply levels are bottoming out and demand has peaked. In the regions, the relationship between the market cycles and pre-letting has been less clear as requirements tend to be smaller and can often be absorbed by existing speculative stock. As a result, true pre-lets (commitment pre-construction) have tended to be the domain of the regional mega-deals. This is changing. As take-up continues to increase, there has been a corresponding fall in the availability of quality space in the majority of markets. The vacancy rate for new and refurbished space across the regions is just 1.9%, falling to just 0.8% in Bristol. This has led occupiers to focus on stock in the pipeline to satisfy their requirements. As shown in Figure 13, as the total amount of space under construction has fallen, the proportion that is committed has risen. As this space continues to be absorbed, occupiers will look further ahead to ensure their requirements are satisfied. In London, lead-in times for requirements have already increased significantly; we will see a similar trend in the regions. Where in the past, an occupier might activate a requirement 18 months in advance of expiry, confident of securing quality options, requirements will become live far sooner as the choices become fewer. What does the future hold for pre-lets in the regional markets? The pre-let market over the last three years outside Central London has largely been driven by consolidation requirements from the government and, in particular, HMRC. The department has consolidated its occupation from 170 offices to just 13 – the final transaction for a regional centre in Nottingham was signed recently. In many ways, the government is the ideal tenant for an off-plan pre- let. Headcount is less affected by market movement, meaning future requirements can be more accurately forecast, mitigating the risk of committing to accommodation years in advance of a move. In addition, as a tenant the government offers a triple A covenant, which should facilitate debt availability. We expect to see more large scale government moves out of London with the implementation of the Government Estate Strategy 2018, which aims to relocate ‘thousands’ of civil service posts around the country by 2030. Source: Cushman & Wakefield Leasing activity across the UK regions has experienced a significant boost in the last five years as the market recovered from the effects of the global financial crisis. Conversely, the combination of uncertainty surrounding the outcome of Brexit and the limited availability of development debt has caused a fall in the amount of space being built speculatively. We anticipate demand for pre-lets will strengthen in the UK regions given the low volume of new space being developed speculatively. The ongoing relocation of the government estate out of London will place further pressure on the development pipeline and cause corporate tenants to look even further into the future to secure their real estate options. Barclays Buchanan Wharf, Glasgow 470,000 sq ft, off-plan pre-purchase Booking.com Goods Yard, St John’s Quarter, Manchester 222,000 sq ft, off-plan pre-let Figure 12 2-year rolling take-up in the regions Figure 13 Pre-lets as percentage of total space under construction, big eight cities Source: Cushman & Wakefield WHAT ABOUT THE REGIONS? “THE VACANCY RATE FOR NEW AND REFURBISHED SPACE ACROSS THE REGIONS IS JUST 1.9%.” 10 15 20 25 30 35 40 45 Q4 16 Q3 16 Q2 16 Q1 16 Pre-lets as % of under construction Total space under construction (m sq ft) Pre-lets as % of under construction Total space under construction Q4 17 Q3 17 Q2 17 Q1 17 Q3 18 Q2 18 Q1 18 4 5 6 7 8 6 7 8 9 10 Million sq ft 11 12 13 ‘18 ‘17 ‘16 ‘15 ‘14 ‘13 ‘12 ‘11 ‘10 ‘09 KEY REGIONAL PRE-LET TRANSACTIONS (2018)