COMMERCIAL REPORT NORTHERN POWERHOUSE OFFICE MARKET UPDATE

October 2017

Manchester The office market is bringing in a steady stream of investment deals. In the first half of 2017, over £170 million worth of investments were made. Demand and Supply In the largest deal of Q2 2017, CIS Tower was sold for £66 million. In addition to that, recent sale of 101 Manchester office market remains strong with take- Embankment for £105 million and acquisition to No. up in early 2017 of 492,730 sq.ft. Grade A space 1 for £200 million boost investment accounted for 22% of total take-up, putting it on par revenues as well as the office market as a whole. with the 8 year average. Recent trends towards flexible working spaces has driven up demand for Market rental values and yields these specification in office space and amounted to Prime headline rents in the Manchester city core 20% of total demand in Q2 2017. Over the next two have remained unaltered over the past year and years, additional 1.2 million sq.ft. worth of lease stand at £34 psf. The highest paid rent in 2016 was events in the pipeline. This strong market dynamics at £33 psf, thus aptly reflecting the strong rental is encouraging several -based occupiers to market. Despite strong supply to meet demand, set up offices in Manchester to cut costs. Manchester landlords hold leverage over the Supply has not kept pace with the strong leasing tenants. However, with no new builds scheduled for activity and therefore grade A office availability is 2018, the fall in supply is set to increase the rents decreasing. The city center currently has around with Grade A offices expected to reach £40.00 psf 230,000 sq.ft. of existing grade A office space stock, over the next few years. Resultantly, Grade B office including 41,505 sq.ft. at One St Peter’s Square and rents in the city centre rose by 10% year on year, 76,000 sq.ft. at 40 Spring Gardens. In 2017, new with current rental values at £27.00 psf. office space was added at Two St Peter’s Square Outlook and a further 784,000 sq.ft. of new grade A stock is under construction. The following projects for office Manchester has witnessed take-up to surpass 1m space are in the pipeline: 11 York Street, 100 sq.ft. in 2016 which outperformed the annual Embankment and Two New Bailey Square. All three average. The prime headline rent is forecasted to of these schemes are expected to get underway climb to £36.00 per sq.ft. as new-build supply is this year. Reduced supply of new builds has pushed increasingly absorbed. As an alternative to London, for greater demand towards secondary units and with regards to sophistication and strong renovated office space. workforce, Manchester has a great prospect in attracting possible inward investment over the next Investment few years.

All Rights Reserved ®

October 2017

Liverpool building’s ground floor into suites for small businesses ranging from 900 sq.ft. to 3,000 sq.ft. This project is Taking into account the slowing UK market, valued at £7 million. Currently, the only new build has performed well in 2016. ‘Take up’ in the first three office scheme that has been granted planning quarters of 2016 totaled 364,668 sq.ft. , marginally permission is William Jessop House in Princes Dock, below the same period the year before and in line with with 80,000 sq.ft. of space. Construction of the the 10 year average. Take up values were boosted in Knowledge Quarter, one of UK’s largest academic and Q3 by Liverpool John Moores University’s lease of clinical campuses, will be set up in Liverpool thus 63,611 sq.ft. at Exchange Station. This was the largest adding demand for office space in the city. transaction registered since early 2014. Shortly after this, Anglo Scandinavian Estates acquired the scheme Market rental values yields in March, and initiated a £7m phased refurbishment. Liverpool’s prime headline rent remains unaltered Currently, insurance broker Griffiths & Armour have over the past 5 years, valued at £20.50 psf. Despite a expressed their interest for 19,000 sq.ft. of space in lack of quality grade A stock available in the city core, city center, this is sure to enhance office market and the rental value constraints speculative development. demand from other businesses. Feasibility can be ensured for rents greater than £22 to For 2017, availability has reduced slightly and it £23 psf. From an investment perspective, a few currently stands at 2.8 million sq.ft. However, this is acquisitions made a mark on the market in 2016. 20 equivalent to 5.7 years supply, the highest for any Chapel Street was acquired for £20 million and Northern Powerhouse market. Despite elevated Skyways campus was purchased for £32 million with supply, grade A availability is constrained at only expected net initial yield of 7%. Market sentiment 210,000 sq.ft. across the market as a whole. Currently, suggests that prime office yields moved out 25 bps in only 4 St. Paul’s Square is the single building offering the past 12 months to stand at 7.00% at the end of Q3 grade A office space. In recent years, lack of new 2016. builds has advanced demand for refurbishments. Outlook Completed in 2015, The Watson Building and The Department still have 75,000 sq.ft. and 38,000 sq.ft. of The prospect of prime headline rent increasing to space available, respectively. Current trends are also £21.00 per sq.ft. during 2017 is inevitable because of seeing available office space being converted to shortage of grade A space. Take-up across Liverpool is alternative use. Although this is reducing excess to reached 475,000 sq.ft. in 2016 which was in line supply from the market, it fails to address the need for with the ten-year average. The government’s growing demand of grade A office space. announcement that Liverpool will be a civil service ‘super-hub’ in the region requiring 200,000-250,000 Development prospects sq.ft. for HMRC in the city brought positive market Following the refurbishment of Exchange Station, the sentiment this year. developers are looking to transform part of the

All Rights Reserved ®

October 2017

Leeds by 23% over the past 5 years from £22 psf in 2012 to £27 psf in 2017. These rents closed the gap on the Demand and Supply rental differential with new builds from £4 psf to only Demand is being driven by strong influx of £50 psf. However, recent trends show this gap professional and financial services, strengthening of widening again with top rents going over £27.50 to healthcare and digital sectors and greater investment £30 psf. in the city. Amidst, wider economic uncertainty, Investment Market ’s growth is strong. A key feature of this success has been improved office offerings in the city. £174 For the city center, the investment volumes for 2016 million of public expenses have been financed to were £182 million. Although 2017 started slowly, there improve transport in Leeds, which will enhance is now increasing positive sentiment within the connectivity and attract more demand from market. Thus far, the most significant deal was the businesses. The economic growth resulted in an 88,000 sq.ft. of Toronto Square which was sold for addition of 19,000 office based jobs over the past 5 £22.2 million. In 2016, Leeds Council purchase of 3 years, which represents a growth of 12.4%, thus Sovereign Square for £44 million was the largest outpacing UK average of 10.9%. transaction of the year. This shows strong incentive for UK institutions to resume activity along side with Office take-up in 2016 was at 415,000 sq.ft., 42% lower international investors. Leeds prime office yields trail than last year and 25% lower than the long term behind Manchester and by around 25 average. However, it is expected that the market will basis points and currently stands at 5.5%. With stability recover in 2017 with an additional boost from HMRC/ coming back after the EU referendum, it is expected NHS Digital’s new headquarters in the city that will that yields will return to strong levels. take up 38,000 sq.ft. of office space. In early 2017, the office space market had strong indicators with Outlook Burberry taking 46,000 sq.ft. of space in the second City centre activity has seen a 10% drop in 2016 which is quarter of this year. This trend of 'north-shoring' is short of the 10-year annual average at approximately expected to pick as the city’s attractive qualities 750,000 sq.ft. Though the uncertainty over Brexit become better known. does present risk to occupier confidence, however, 3 Wellington Place is the only new development that the increase in lease events will help to underpin will be complete within the next year and will have activity into 2017. Over the next 12 to 18 months prime 109,000 sq.ft. of office space. With only 130,000 sq.ft. rents for both city centre and out-of-town markets are of Grade A supply on the market by mid of 2017, Leeds expected to increase. The availability of new space in currently has only 6 months worth of Grade A space the city centre is anticipated to boost the prime available. Rental pressure also continues to develop headline rent to a new high of £30.00 per sq.ft. by the on good quality refurbished space across the city. end of 2017. Leeds has seen top second hand office space rent rise

All Rights Reserved ®