RESEARCH ABERDEEN OFFICE MARKET ACTIVITY REPORT SPRING 2014 HIGHLIGHTS Underpinned by record levels of Reflecting developer confidence The investment market enjoyed investment in the North Sea oil and in the market, a host of schemes another record year of turnover gas industry, Aberdeen recorded a are set to be brought forward in 2013, backed by its thriving third consecutive year of impressive speculatively within the city core occupier market and fuelled by office take-up, reaching 740,000 sq ft during 2014. substantial capital inflows among in 2013. the UK funds. ABERDEEN OFFICE MARKET ACTIVITY REPORT SPRING 2014 ECONOMIC OVERVIEW Amid a long and difficult period for the wider UK economy, the relatively strong performance of Aberdeen’s own economy in recent years has been intrinsically linked to the fortunes of the North Sea oil and gas industry. The city’s economy is currently benefiting key decisions on investment, relating to the “ The future of from a wave of fresh investment into the oil industry and the wider economy more North Sea oil sector, which in 2013 reached £14bn, the generally. Regardless of the outcome of highest annual total in real terms since the the vote, above all investors are seeking and gas is one of mid-1970s. certainty and clarity. the key campaign The investment has been stimulated by UK Government fiscal measures, including battlegrounds FIGURE 1 tax allowances on mature oil fields and North Sea oil and gas: Production ahead of tax relief for decommissioning costs. This and Investment is absolutely critical in increasing the the Scottish viability of extraction and boosting levels 15 5.0 independence of production, which has fallen by 38% since 2010. The Government also plans to 12 4.0 referendum.” implement the key recommendations set out in the Wood Review, which argues that ) 9 3.0 greater collaboration across the industry is required in order to maximise the potential 6 of the North Sea’s remaining reserves over 2.0 £bn (nominal the next 50 years. 3 1.0 oduction (million boepd) Pr The future of North Sea oil and gas is one 0 of the key campaign battlegrounds ahead 0.0 of the Scottish independence referendum in 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 September 2014. There are understandably CAPITAL PRODUCTION concerns that the uncertainty surrounding INVESTMENT (MILLION BOEPD) the outcome of the referendum may delay Source: Oil & Gas UK FIGURE 2 Aberdeen office take-up and oil prices 1,000 160 140 800 120 el ft 600 100 rr 80 ba 000s sq 400 60 $ per 40 200 20 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EXISTING SPACE PRE-LET PRIOR TO CONSTRUCTION BRENT CRUDE OIL PRICE (annual average) The occupier market’s largest deal in 2013 was EnQuest’s 120,000 sq ft pre-purchase of The Grande, Palmerston Source: Knight Frank Research / Thomson Reuters Road. The development is under construction and will be ready for occupation in Q1 2015. RESEARCH ABERDEEN SPRING 2014 2 ABERDEEN OFFICE MARKET ACTIVITY REPORT SPRING 2014 “ Current office OCCUPIER MARKET availability in the Unprecedented levels of investment in the North Sea oil city equates to a and gas industry resulted in a third consecutive year of vacancy rate of impressive take-up in the Aberdeen market, reaching 740,000 sq ft in 2013. The energy sector has dominated only 3.5%, which occupier activity in each of the last four years, and in 2013 is lower than any accounted for almost 80% of all the space transacted. of the UK’s key office markets.” With an ongoing shortage of existing supply, Group / M&G’s City View Business Park, pre-committed space featured prominently West Tullos, totalling 33,500 sq ft, and is among the larger transactions. 2013 saw presently understood to be under offer on seven pre-let / pre-sale agreements, which a third pavilion of 35,500 sq ft at the site. combined accounted for a significant An acute shortage of supply remains a 43% of 2013’s total take-up. However, not persistent theme in the market, and it is to underplay the importance of smaller occupiers in driving the market, 65% of notable that space previously shunned 2013’s 85 deals were below 5,000 sq ft. by occupiers has now been taken up. For example, in Q3 2013, Aberdeen The largest deal of 2013 took place in the Appointments Agency acquired 9,400 sq ft North Dee Business Quarter (NDBQ), where at Dee Bridge House, Leggart Terrace, EnQuest agreed to pre-purchase ‘The Grande’ a building which, owing to its relatively from Drum Property Group, a new HQ off-pitch location, had remained vacant for building totalling 120,000 sq ft. Another of four years following completion. Drum Property Group’s developments also attracted a significant pre-commitment in Total current office availability in Aberdeen 2013, with Premier Oil agreeing to pre-let equates to a vacancy rate of only 3.5%, 63,000 sq ft at Phase 2, Prime Four, Kingswells. which is lower than any of the UK’s key Reflecting the strength of demand, a office markets. Aberdeen is also unique significant proportion of new speculative among the UK’s office markets in that there development has attracted occupiers prior is – at the time of writing – no Grade A to practical completion. Last year, AMEC space available in units above 10,000 sq ft acquired two pavilions at Knight Property in the market. FIGURE 3 2013 office take-up vs 10-year average TABLE 1 Key office transactions in 2013 Leeds Aberdeen Address Tenant Size Rent Date (sq ft) (£ per sq ft) Glasgow London City Pavilion 4, Prospect Park, Westhill Proserv 23,358 £23.50 Apr-13 Birmingham Phase 2, Prime Four, Kingswells Premier Oil 63,180 £27.75 May-13 London West End Kirkgate House, Upperkirkgate Atkins 17,638 £24.00 May-13 M25 Newcastle Aberdeen Gateway Business Park Ensco 25,000 £20.25 Oct-13 Manchester The Grande, Palmerston Road EnQuest 120,000 Purchase Oct-13 Bristol Pavilion 1 & 2, City View AMEC 14,090 / £24.00 Oct-13 / Sheffield Business Park 19,339 May-13 Edinburgh Grampian House, Union Row Dana 45,543 £21.95 Nov-13 Cardiff Petroleum -40% -20% 0% 20% 40% 60% Source: Knight Frank Research Source: Knight Frank Research RESEARCH ABERDEEN SPRING 2014 3 At £31.50 per sq ft, Aberdeen continues other regional office markets, they typically to command the highest prime headline range between 24 and 36 months for an rent of any office market outside London equivalent term, quite unlike the situation and the South East. Ironically, despite the in Aberdeen. strength of the market, it has remained Two out-of-town developments have unchanged at this level for the past two years, a situation which reflects the dearth come forward speculatively during 2013, of new supply in the city core and a namely City View, West Tullos and Kingshill “ Underlining consequent absence of any transactions Business Park, Westhill, although this has developer to confirm pricing. That said, at the time hardly been sufficient to address the city’s of writing, 9,000 sq ft is under offer at 20 acute shortage of supply. However, this confidence in the Queens Road in the West End, at a rent situation is set to change dramatically. market, a host rumoured to be at £32.00 per sq ft. According to figures from Aberdeen City Council, 873,500 sq ft of office space was of schemes are Rental growth has nonetheless been more awarded detailed planning consent in 2013, clearly evident outside the city core, with also set to be occupiers opting to relocate out-of-town a six-fold increase on 2012’s figure. brought forward in order to satisfy their requirement for Underlining developer confidence in the speculatively new-build space. Headline rents in Westhill market, a host of schemes are set to be and Kingswells have increased by over brought forward speculatively during 25% during the past two years, to stand at during 2014.” 2014. Moreover, c.525,000 sq ft is set to £24.00 and £27.75 per sq ft respectively, commence construction within the city eroding much of the price differential that core, and this will undoubtedly redress the traditionally existed between the city core supply issue in 18 to 24 months (details of and out-of-town locations. key schemes provided overleaf). Landlords in the city also continue to Notably, however, SWIP and Manse’s benefit from extremely limited incentives, regardless of location. Generally, a 48,500 sq ft refurbishment of AB1, Huntly maximum of just three months is offered Street is set to be the only “New” space on a fifteen year FRI term, although in delivered in the city core during 2014. many instances no rent free period has The timing of the scheme means it is been seen. While evidence suggests that well-placed to capture the strong pent-up incentives are starting to harden in the UK’s demand for space in the city core. KNIGHT FRANK VIEW • Substantial investment in the North appetite for development risk reflects Sea oil and gas industry will continue developers’ confidence that strong to drive strong levels of office occupier demand will be sustained, demand. With several major pre-let with expectations that occupiers will commitments already confirmed, we take space prior to completion. are confident that 2014 will be another record year for the market, with take- • Despite the likely arrival of several up surpassing 2012’s previous high to developments two years from now, reach an impressive c.1m sq ft.