The opportunities for growth and return on investment within the burgeoning office sector in the Midlands Engine region are abundant despite Brexit uncertainty, according to a new report from national commercial property consultancy Lambert Smith Hampton (LSH).
The Midlands Engine Office Report 2018 (MEOR) says while Birmingham has been at the forefront of the revival in the office development for the past few years, the East Midlands is also showing optimistic signs of growth and regeneration.
Adam Ramshaw, regional director for LSH in Birmingham and East Midlands, said: “I’m pleased to see that institutional and overseas investors alike are seeing through Brexit uncertainty and showing real faith in both Birmingham and the wider region.
“The opportunities for growth and return on investment are abundant in the Midlands Engine region, we just need to be strategic about how we approach them. With this in mind, a forensic understanding of the markets is critical.”
Phil Quiggin, head of office at LSH Nottingham, said Derby and Leicester have each experienced solid take-up this year, while in Nottingham the technology, media and telecommunications sector is emerging as a key employment driver, with 26% of occupiers in this field taking space in the city and out of town in the past 12 months compared to 7% in the previous 12-month period.
The report says that the Derby office market has been reasonably active over the past two years, despite a lack of large deals, but that Q2 2018 saw its second strongest quarter in almost three years, with take-up of 44,147 sq ft. The stand-out deal of Q2 was Pattonair Derby Ltd’s lease of 13,269 sq ft at 1-29 Brunel Parkway on Pride Park. A major employer in the city, it is a supplier to Rolls-Royce.
“Derby is relatively exposed to Brexit uncertainty, with major manufacturers such as Rolls-Royce and Bombardier understandably wary of what the future holds,” said Phil.
“The regeneration of the town centre is improving the quality of the offer, and in time rental growth should help to attract the attention of other would-be office developers to the city.”
In Leicester, the office market enjoyed a solid start to 2018, with the first six months recording take-up of 123,000 sq ft, up 67% on the same period in 2017. Q2 was particularly strong, with take-up of 80,000 sq ft, the highest quarter since Q4 2015, says the MEOR 2018.
In the city centre, The University of Leicester agreed a lease for Enkalon House, comprising 17,714 sq ft, while Charles Alexander Distribution took 14,000 sq ft at Peat House. Out of town, Q2 2018 saw a confidential occupier pre-let 15,000 sq ft at Waterside Office Park and ERIKS also signed a pre-let for 10,000 sq ft at Leicester Forest East.
“Leicester’s reputation as a leading location for technology and research and development has been reflected in recent office demand, particularly in the out-of-town parks,” said Phil. “We’re also seeing forecasts for seven per cent jobs growth in the finance and business sectors in Leicester over the next five years, which is the strongest growth of the key Midlands Engine markets.”
Take-up in Nottingham has been relatively subdued in the past 18 months, with few major deals. H1 2018 saw a recorded take-up of 137,000 sq ft across the city centre and out-of-town market, which is down 11% on the same period of 2017. However, deals under 20,000 sq ft saw a three percent increase compared to the same period in 2017.
“Take-up for 2018 as a whole is unlikely to exceed 300,000 sq ft, falling slightly short of 2017’s level. However, there could be a major requirement from HMRC as their current premises, at Mapeley’s Castle Meadow, is under review. Unity Square is the only foreseeable site large enough to accommodate the 2,200 staff,” added Phil.
The MEOR report acknowledges that while ongoing uncertainty around Brexit may be having an impact on corporate demand, there remains a “business as usual” attitude in the smaller, busier end of the market, especially in the 10,000-20,000 sq ft segment.
“While Birmingham city centre was a focus, every key market saw at least some activity in this size bracket, most notably Leicester,” explained Phil.
MEOR says that supply has fallen across the Midlands Engine region for the past five years, which reflects a combination of healthy absorption as well as very little speculative development outside of Birmingham. In the East Midlands, total availability is low with 2.4 years’ supply in Derby, 1.6 years in Leicester and 1.8 in Nottingham. Grade A supply is also an issue, with 8%, 2% and 12% availability respectively and they comprise several medium-sized options.
“Without the provision of quality space, there will be little incentive to drive relocation to the key East Midlands centres,” adds Phil.