CBRE research reveals office market performance in Scottish cities in Q1 2022
Signs of recovery in Edinburgh, Glasgow and Aberdeen with a strong start to 2022
LEADING Real Estate Advisor CBRE has released its latest figures for office markets in Edinburgh, Glasgow and Aberdeen in the first quarter of 2022.
Andy Cunningham, head of CBRE’s Scottish advisory and transactions business, said: “We have seen an encouraging start to the year in all three cities with the same recurring themes that were prevalent in 2021 – a flight to a quality and strong environmental credentials. It is pleasing to see that Aberdeen is having a particularly strong first quarter, thanks in large part to the team’s recent letting of Shell’s new headquarters in the Silver Fin Building.
“Going forward, we believe there will be fewer lease renewals than in the past, as the desire for a more modern building will be stronger, and with so little supply, large occupiers will have to s ‘hire sooner than ever to get the best space which means we’re likely to see an increase in pre-rental activity.
Office take-up in Edinburgh totaled 118,926 square feet in Q1 2022. This represents a 33% increase on Q1 2021 and only slightly below pre-pandemic levels in Q1 2020.
A similar trend continues in 2022, with occupiers remaining focused on a flight to quality space, as evidenced by the number of Class A office transactions. Class A take-up reached 67,161 square feet, or 56 % of first quarter total. Notable transactions included two further rentals in the Haymarket development, where Shoosmiths and Dentons occupied space totaling 31,345 square feet. The development is now fully pre-let, underscoring the occupiers’ appetite for new premium Grade A space that remains very scarce across the city.
There was an influx of deals in the first quarter, with 31 deals for new retail space in the city, up 15% from the first quarter of last year. The highest level of activity was in the under 5,000sqft market with 29 transactions, again underlining the strength of this market in Edinburgh. It was also a strong quarter for the 10,000+ square foot portion of the market with four transactions totaling 57,501 square feet. These included transactions at Haymarket as well as Trust Pilot, the Danish consumer assessment company, letting 10,515 square feet at 10 George Street. and Roslin Cells agreeing to lease around 15,000 square feet at the Edinburgh Technology Park.
Coinciding with the increase in the number of transactions, there was also a high level of redevelopments and lease extensions across the city, totaling 77,727 square feet across twelve transactions. The most notable being at Princes Exchange, where Turcan Connell agreed to a five-year lease extension in which CBRE acted on behalf of the owner, Lloyds Banking Group.
Serviced office space remains scarce in Edinburgh city center with various flex operators at full capacity for the foreseeable future. Operators continue to seek space in Edinburgh city centre, however, due to a lack of large floor plates and a preference for management agreements, landlords continue to seek traditional leases.
There is continued pressure on prime rents in Edinburgh as the supply of Grade A space continues to shrink in the city centre. Prime rents currently stand at £38.50 per square foot, but with supply tight and the development pipeline limited in the near future, it should soon reach £40 per square foot.
Supply increased again in the last quarter, with 1.97 m² of office space now available in the city. Basically, with a longer-term supply average of 1.99m², Edinburgh still finds itself below that figure despite the impact of the Covid pandemic.
Beverley Mortimer, Associate Director, CBRE Edinburgh, said: “As hybrid working becomes synonymous with everyday life, the increased level of transactions is set to continue throughout the year. We are currently working with a number of occupiers to reassess their space plans, better understand their needs, and help them find a space that suits their new needs and ways of working.
“While we see occupants taking up less space, they still want to secure the best space possible, as evidenced by the demand for good ESG credentials and wellness facilities. Occupants need space to meet their net zero internal commitments, an attempt to encourage staff to return to the office and help win the war on talent.So far, this trend has been mainly driven by large multinational companies, but we are starting to see smaller companies demanding the same quality.”
Take-up for the Glasgow office market totaled 95,496 square feet in the first quarter of the year, an increase of 28% compared to the first quarter of 2021.
A total of 38 rentals took place during the quarter, which already represents 30% of the total number of transactions throughout 2021, proving that the recovery momentum shows no signs of slowing down. Additionally, Glasgow’s rolling 12-month average has increased, with 623,888 square feet processed over the past year.
The largest of the first quarter deals was Burness Paull’s 14,814 square foot lease at the recently completed 2 Atlantic Square, on which BDO also took 8,078 square feet, with CBRE involved in both deals. An additional 10,200 square feet was negotiated at Tay House with Fairhurst Civil Engineers taking space in the building on a ten-year lease. 180 West George Street has also been involved in a few deals – with Frazer Nash and LMR Partners responsible for around 13,454 square feet of exchange over two floors.
The supply of office space continues to increase gradually in the city, with availability now standing at 2,684m² – the highest since 2015. However, the supply of Class A office space remains at a critical shortage with only 168,000 square feet available, reflecting a vacancy rate of 0.74%. Demand for prime space remains strong, as evidenced by the current list of office space needs in the city. Indeed, numerous pre-lettings at 177 Bothwell Street throughout 2021 have shown occupiers’ appetite for Class A space in the city, and with a lack of new developments in the pipeline, it is expected to which the current prime rent of £35.25 per square foot will continue to rise. This is partly explained by inflation in the cost of construction, but also by users’ recourse to pre-letting. The supply of renovated second-hand spaces continues to be good, with positive rental growth in this sector as well.
Martin Speirs, Associate Director of CBRE in Glasgow, said: “Glasgow remains at the forefront of the revival of the Scottish office market as lockdown measures are eased. The city’s offer of a highly skilled and educated workforce, coupled with modern and affordable workspace to meet the demands and needs of today’s office tenants, means it continues to attract new occupants and investments to the city. In addition, positive rental growth in both the Class A and Class B office markets will be an attractive proposition for investors and further indicate the recovery path Glasgow is on post-Covid; highlighting how well Glasgow looks set for the next few years to come.
Aberdeen had an exceptionally strong first quarter of 2022 with support reaching 195,905 square feet, an increase of 115% from the previous quarter and the highest since the first quarter of 2012. CBRE advised on 169,460 square feet of the space traded, representing 86% of all transactions during the quarter.
The largest transaction of the quarter in Aberdeen and Scotland was energy giant Shell, which committed 100,312 square feet to the Silver Fin Building, resulting in full occupancy of the building from Category A downtown offices.
Other significant deals in the quarter include the recently rebranded North Sea Transition Authority (formerly Oil & Gas Authority) acquiring 18,000 square feet in Marischal Square, PBS and RelyOn Nutec taking 17,911 square feet and 7,933 square feet respectively in Westhill , DNV leasing 10,948 square feet in the Aberdeen International Business Park, Dyce and Waldorf Production buying 6,803 square feet at 70 Queens Road.
Last quarter office supply was reduced by 5% and currently stands at 2.67m², with only 428,000 square feet of available Class A space.
Amy Tyler, Associate Director of CBRE in Aberdeen, said: “Aberdeen has had a strong start to the year with a series of transactions taking place both in the city center and in out of town markets. The six largest deals of the quarter involved energy occupiers, CBRE was involved in all six deals, each seeking a modern workplace as it reinvigorates its energy transition business.
“Most notable has been the deal with Shell at the Silver Fin Building. This is the largest and most significant office rental to take place in Aberdeen city center and represents the growing confidence in the market and even in the physical workplace. Contrary to the usual trend, this is the first time that a major energy operator has decided to move its headquarters from a location outside the city to the center city, bringing around 1,000 staff to Union Street, is a sign that Aberdeen City Council’s city center masterplan investment is having an impact on occupier decision-making.”