Thames Valley: Steady stock erosion of quality Thames Valley offices

National commercial property consultancy Lambert Smith Hampton (LSH) has published its annual Thames Valley Offices Market Report, highlighting steady office take-up over the past two years, resulting in shortages of quality office stock in certain centres.

The report, now in its fourth year, looks at the dominant commercial property trends over the last year, with detailed statistics and forecasts for 11 key centres in the region. It also looks at drivers behind office demand, as well as Crossrail and Western Rail Access to Heathrow (WRAtH); two of the most influential infrastructure projects currently facing the Thames Valley offices market.

Key points from the report include:

• Office stock in the region totals just over 64 million sq ft, with current availability standing at 11.9 million sq ft (as at Q2).

• Office demand is recovering from the 2009 low of 1.1m sq ft, with take-up in 2011 totalling just under 1.7 million sq ft - a similar level to that recorded in 2010.

• There continues to be limited appetite for speculative development, with only three new speculative schemes under construction in the 11 Thames Valley centres featured in the report. In the short/medium term, therefore, refurbished secondary space must fuel office supply in the region.

• Investment volume in the Thames Valley has significantly increased over the past year. Total investment in the region in 2011 is estimated at £1.03 billion - some £673m higher than the previous 12 months.

Nick Coote, head of LSH’s Thames Valley team, commented: “The stable levels of take-up in 2010 and 2011 might be surprising to some, given the negative macroeconomic environment. However, this stability is reflective of the main driver of office demand: occupier lease events. These are date -driven rather than being indicative of the business and economic environment; if an occupier has a lease event looming, and has an opportunity to vacate dated offices, they will do so to improve business and occupational efficiency.”

He added: “While letting velocity remains relatively slow, activity is focused on the better quality office stock. As a result, there is a steady erosion of quality office supply in the region, so we anticipate that market supply issues (where there are shortages of quality stock) will become increasingly exposed in some centres. This may lead to increases in rents, and potential frustration from occupiers seeking quality solutions in specific locations.”

However, with a high proportion of 25-year leases on late 1980s stock coming to an end between 2013 and 2016, there is the opportunity for some of these buildings to be recycled. This will create ‘new’ stock for the under-supplied centres, as consolidation and churn continues.

Coote concluded: “As ever, the challenge for landlords will be to provide the quality product demanded by occupiers, in the right locations, and restoring value to newly vacated stock. The impact of the occupier dynamics on the investment market is likely to encourage continued competitive bidding on low risk and good growth opportunities – with secondary assets falling to ‘income + Vacant Possession’ values. However, the combined influence of all these market forces will create mis-priced opportunities for investors with an appetite for some risk.”

Resources: You can see a presentation of the highlights from the Lambert Smith Hampton report into Thames Valley offices  here