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Investment News
The UK office investment market continues to undergo significant changes even nearly five years on from the COVID-19 pandemic. As occupiers rationalize their spaces to adapt to new working patterns, landlords face a series of challenges that are reshaping the landscape of the office market. Mark Tomlinson, Director at FHP provides a market update.
Capital Expenditure and Tenant Attraction
One of the primary challenges for landlords is the need for substantial capital expenditure (capex) on older buildings. Upgrading mechanical and electrical (M&E) systems, as well as creating amenities that meet modern standards of an increasingly discerning office occupier base, is essential to attract high-quality tenants. In a market where occupiers are increasingly demanding ‘best in class’ facilities, landlords must invest significantly to remain competitive with increased focus on high quality finishes and the lifestyle which an office can create.
Market Uncertainty and Obsolescence
The uncertainty in the market has been exacerbated [not only by COVID-19 but through the rise in base rate] impacting significantly on yields. With office occupiers continuing to assess their office strategies even nearly 5 years ‘after the event’. Many older buildings are no longer fit for purpose, either due to outdated design or failure to meet new energy efficiency standards. This obsolescence not only affects rental values but also increases the risk of prolonged marketing voids.
Investment Yields and Market Opportunities
Investment yields in the UK office market have softened considerably, with many office buildings in the East Midlands now selling for yields in excess of 10%. This presents both a challenge and an opportunity. While it indicates a more cautious market, it also opens the door for new investors to reposition assets and achieve strong returns by bringing them up to ‘best in class’ standards, albeit for correct office buildings with strong fundamentals in terms of location, specification and tenant amenity.
Repositioning Assets for Success
The key challenge for landlords is to successfully reposition their assets to meet the evolving demands of occupiers. This involves not only significant capex but also a strategic approach to marketing and tenant engagement. By focusing on sustainability, modern amenities, and flexible solutions on lease structure and fitout arrangements, landlords can attract high-quality tenants and achieve strong rental returns. Creating ‘best in class’ office spaces can attract top-tier tenants who are willing to pay premium rents. For instance, prime office buildings in Nottingham are now achieving rents upwards of £26 per sq ft, while secondary office rents are either stagnant or falling, with lengthy void periods.
Limited Supply of Grade A Properties
The Nottingham office market is currently experiencing a significant imbalance between supply and demand, particularly in the Grade A office segment. One of the most pressing issues in the Nottingham office market is the limited supply of Grade A properties that are immediately available. Currently, less than 5% of the readily available office supply in Nottingham qualifies as Grade A, or in other words high-quality, modern office spaces that meet the latest standards for sustainability and amenities. This scarcity is driving up demand for these premium spaces, as occupiers seek out the best possible environments for their businesses.
Occupiers ‘Sitting on Their Hands’
Underlying occupier demand is there but many occupiers are adopting a cautious approach, choosing to ‘sit on their hands’ and wait rather than commit to available office spaces that do not meet their specific requirements. This wait-and-see strategy is contributing to a stagnation in office take-up, as businesses hold out for the emergence of Grade A properties that align with their needs. This trend is particularly pronounced in Nottingham, where the demand for top-tier office spaces is robust, but the supply is limited. FHP estimates that over the last two years, 50% of the city centre take up has been for Grade A space despite only 5% making up of overall supply.
There is Rental Growth
Despite these challenges, the current market dynamics present opportunities for new investment. By repositioning existing assets and upgrading them to meet the ‘best in class’ standards, investors can unlock significant value. There is continued upward pressure on rents moving into 2025 for well-located prime office buildings. The supply and demand mismatch highlights the potential for strong rental returns for those who can successfully reposition assets and take advantage of the supply shortage.
For further information please contact Mark Tomlinson on 07917 576 254 or mark@fhp.co.uk.
Mark Tomlinson, Director
November 2024