War for talent and dwindling supply in London boosts regional office market ⁰

London office supply is at an all-time low according to JLL’s latest research, with around 18 million sq ft of offices required, but less than 7 million sq ft under construction. This is one of the reasons why 2015 saw a surge in pre-leasing activity across the Big 6 regional office markets, comprising Birmingham, Bristol, Leeds, Manchester, Glasgow and Edinburgh, with 850,000 sq ft let across 17 transactions compared with 15 over the five years from 2010-14. The survey shows that rental growth and refurbishment are key themes with refurbishment schemes totalling 800,000 sq ft will be delivered in 2016, with a further 10 new schemes totalling one million sq ft due to start. Greater convergence between HR and real estate also means the war for talent is a factor influencing occupier decision making. CEOs continue to cite a shortage of skills as a concern, as many Gen Z students are expected to leave their first job within a few years.

Karen Williamson, associate director in JLL’s Corporate Real Estate Research team, said: “Increased competition for staff is driving Corporate Real Estate teams to engage in targeted talent initiatives with 56 percent reporting increased demand from leadership around the issue of staff attraction and retention.

“As the war for talent intensifies, affordability, particularly in London, will continue to present occupiers in the Capital with challenges. As a lower cost alternative, the Big 6 is in a good place to benefit.”

A total of 14 office schemes are now on site across the UK’s Big 6 regional cities, which is set to bring 2.1 million sq ft of new space, albeit 43 percent is already pre-let. The rise of refurbishment schemes has led to a strong rental growth story especially in the secondary office market. This was evidenced by the Castlemead scheme in Bristol, which saw a 65 percent rental increase over the last 12 months and Minerva in Leeds [pictured] witnessing a 50 percent rise.  Reflecting the solid outlook for demand and tight supply, JLL expects this trend to continue, with headline rental growth across the UK expected to average 2.7% per annum over the period 2016-19.

Jeremy Richards, head of National Office Agency at JLL, said: “The Grade A office shortage, improving corporate confidence and increased competition to attract and retain talent motivated a record number of occupiers to pursue pre-lets, which in turn is helping to address the supply gap.”

Permitted Development Rights (PDR) could however put pressure on the availability of office space in the regional markets in England – around 5 million sq ft has already been taken out of the market across some of the Big 6 cities. A concern is that if a rise in residential values outstrips office values, combined with an increasing tendency for city centre living, it will increase the pressure on office space.

Jeremy Richards added: “PDR, which requires no planning consent, could tempt developers to taking a less risky option to develop residential flats rather than offices which could see some of our strategic commercial buildings in the Big 6 cities come under threat.”