South Coast: Office supply shortage becomes critical, finds LSH

According to quarterly research released by Lambert Smith Hampton (LSH), the South Coast office market is in supply shortage due to increasing demand.

Significant South Coast office occupier activity in Q1 delivered an emphatic start for 2015 and overall supply fell by 14% along the M27 corridor.  As a result, prime rents are on the rise, both in town centres and out of town.

Andrew Hodgkinson, director of office agency for LSH, explained: "With a continual trend of falling supply, possibly to a level below 1,000,000 sq ft in 2015, we anticipate prime rents may breach £20 per sq ft.  Investors have been hesitant to purchase in the first quarter, largely due to the imminent election and the uncertainty surrounding it, further increasing the pressure."

Q1 office take-up provides a strong start to 2015

Take-up figures soared in the first quarter of 2015, thanks to some significant office lettings along the South Coast.  Over 190,000 sq ft of transactions completed in Q1 2015 – double the 10-year quarterly average and five times greater than the take-up figures for Q1 2014. In large part, this was due to the 70,310 sq ft letting of Forum 1 on Solent Business Park to HSBC.

Twelve deals were recorded for the quarter (above 2,500 sq ft), which represented a fall from the 20 deals transacted in Q4 2014, however the average deal size was in excess of 15,987 sq ft, representing almost a three-fold increase.

South Coast office enquiries up by 10%

The number of enquiries has increased by 10% from Q4 2014 to 52 and new requirements have been recorded for office space in excess of 50,000 sq ft, both highlighting continued demand from corporate occupiers.

Overall supply falls sharply

Office supply fell to 1.301 million sq ft in Q1 2015. This represented a 14% fall in supply in a single quarter. We anticipate this trend to continue and it is possible that supply may fall below 1,000,000 sq ft by the end of 2015.

Prime rents on the rise

With occupier demand continuing to improve, we are now seeing prime rents increasing, as predicted, with £19 per sq ft being achieved both in the city centre and along the M27 corridor. As supply continues its sharp descent, in particular grade A space, prime rents could now breach the £20 per sq ft barrier by the end of 2015.

Quiet Q1 for South Coast office investment market

While the South Coast office market proves popular with investors outside of London, there has been only one significant office investment sale completed in Q1 2015. Investors appear hesitant to purchase due to the imminent election and the uncertainty surrounding it.

This factor, coupled with the lack of good quality office stock, as well as the number of buildings being lost to residential use as reported in our last pulse, has resulted in just one transaction taking place.

Evidence suggests that there is still a degree of caution when it comes to business parks in the region.

Key investment deals of Q1 2015

Carnac House, Carnac Court, Fareham was sold by St John’s Income Fund for circa £2.18 million reflecting a NIY of 8%. Carnac House has a floor area of 10,512 sq ft and is let to The Injury Care Clinics at a current passing rent of £185,000 with an unexpired term of 10 years.