North West Square | The subplot
HBD’s decision to speculatively build the £66million island implies the office market is recovering from the pandemic. Credit: Our studio
welcome to The subplotyour regular slice of commentary on the Northwest business and real estate market Northwest Square analysis editor, David Thame.
- Risk of frost: confidence in the North West office market is rising with the sap, but a cold snap could curb speculative development outside city centers
- Elevator pitch: your weekly overview of who and what is going up, and who is heading the other way
GREEN SHOOTS MEET SPRING FROSTS
Tender or rustic?
April is known to be the cruelest month, but March might get its money’s worth this year. Is the office market about to feel a few late frosts just as the tender shoots of recovery are taking shape?
The sun is out (briefly), the streets are busier, the cold mornings aren’t as cold as they used to be. The cycle of life has taken a turn. In the real estate market too, the sap is flowing. HBD and its financial partner Greater Manchester Pension Fund have had enough to launch a £66m speculative office scheme at the Isle of Manchester site, John Dalton Street. Work on the 100,000 square foot block begins more or less immediately. Given that the world is poised between a global pandemic and Europe’s first war for 70 years, that sounds like the definition of March Madness. Is it?
We are well
No madness at all. The usual data sets have been muddied by Covid, so things like five-year supply and demand averages aren’t much of a guide. Meanwhile, HBD believes it offers an unusually different product that won’t directly compete with much of the apparent competition.
“During the pandemic, we completely overhauled the product and made some changes, revamping the whole building to be net zero carbon. This took time and a significant overhead, almost 15% overhead in this case. So a significant cost and something that we made the decision to absorb as a company,” HBD executive director Adam Brady told Subplot. The math is that this is a sufficiently different – and attractive – product that it can escape the gravity of current market numbers.
For the record, Manchester city center support is around 30% lower than before the pandemic (although it is recovering) at the same time as the supply pipeline is quite stable. Deloitte’s crane survey said 1.34 million square feet of office space is currently under construction across 12 programs (with 744,000 square feet to be built this year). A large part of the 1.2 m² delivered in 2021 remains unoccupied, but 54% of the office space to be completed in 2022 and 30% to be completed in 2023 are already pre-let. Not bad at all, although there is still work to be done.
Different product, different market
Brady believes the island site will provide the kind of excitement and quality that others cannot match, and will attract tenants even if Manchester occupier requirements drop by 10-20% in the medium term (which could be the case). The city’s appeal is intact, Brady thinks, because the city’s talent pool is too good for office occupants to ignore. “There was standing room only on my train to Manchester today,” he said. Spring is in the air.
Beyond the city center?
Springtime confidence has not, so far, reached much beyond sheltered downtown hotspots. As Brady explains, the attraction of talent to Manchester isn’t so strong elsewhere. “That vibe seems more localized in city centers where office occupants are looking for a talent pool that hasn’t fundamentally changed. Elsewhere, I don’t see, for example, masses of people looking at places like Chester or opening speculative offices there.
The colder you go
In Chester, they see things much the same way. Katrina Kerr is president of Chester BID and is by no means gloomy about the city’s outlook. She says there are some encouraging straws in the wind, including The Armstrong Partnership’s 12,000 square foot refurbishment of the Old Post Office and deals in the 250,000 square foot HQ Chester building. But the big deal or game-changing development that raises rents enough to make speculative development viable is nowhere in sight.
Hopes for warm weather
“We have options, but nothing has happened yet, and we have sites with consent where nothing has happened, and the hope is that we will see more offices under mixed development” , says Kerr. “The University of Chester’s plans to link its north and south campuses via a ribbon of sites in the central area would mean the absorption of city center space, and that would displace the market a bit,” she says. . But that’s for the future.
Suburban Belt Softness
Towns in the suburban belt of Cheshire have seen more activity, but don’t be misled into thinking this is a sign that confidence in speculative development has returned, warns James Dickinson of Canning O’Neill. “There really is no speculative building, unless you count 15,000 square feet in Holmes Chapel built as a condition to a residential project. Everything else that looks like speculative development either has someone behind it, like Stockport Council at 2 Stockport Exchange, or was pre-let like Cheadle Royal and Booths Park Knutsford,” says Dickinson. Of course, a bunch of pre-leases isn’t bad news – on the contrary – and perhaps thanks to them, developers don’t feel the need to take speculative risks. But the lack of spec is still interesting.
And getting softer
There are, of course, major renovations as well as the repurposing of former retail space (many thanks to Stok from Glenbrook to Stockport and Rackham’s redesign from Bruntwood to Altrincham). But Dickinson reports a chill in the air. “The market is only willing to take limited risk, and rents don’t quite justify it outside of the city centre, although we may be reaching the tipping point with numbers like 27.50 £/square foot at Towers Didsbury. This type of rent is where speculative development makes sense. So, signs of spring, but not yet the daffodil fully open.
Watch the weather
However, the risks of frost are real. The massive inflationary shock of rising fuel prices could do a lot of damage to the economy and therefore to the real estate market. The government really can’t do much to lessen the pain. A modest economic slowdown is more or less a certainty, and analysts speak hesitantly of stagflation. Inflation risk should not be overstated – much of the momentum will fade from the numbers later this spring as last year’s unusual price movements kick in. But it’s not a scenario that can be ruled out.
The Northwest office market is not as soft as some regions and cities, but it is still soft. Chills are not welcome.
SUMMARY IN SECONDS
Up or down? This week’s movers
It’s a week of two halves. The office market is feeling the g-force, but Liverpool’s cohousing scene is suffering an unpleasant sense of sinking. Hope the brakes work.
The Battle of Talents
An interesting secondary light on the North West office market comes from Manchester-based recruitment consultancy Caliber Search. The business specializes in the construction and property sector and has garnered it, with 2022 turnover expected to reach £6.6m, around £2m more than in 2020. Demand for staff in some recruiting specialties is out of scale, says manager Pete Gillick.
“In white-collar consultancy – architects, structural and civil engineers – there is a real skills shortage. You can blame the big warehouse developments as well as HS2,” he says.
As a result, the business moved from The Landmark building on North Quarter Turner Street to a new suite at 9 Stevenson Square. Although the floor area won’t increase much – from 1,200 square feet to 1,460 square feet – the headcount will increase, from eight to 14, then to 20. Like many office occupants, density is increasing. “It’s a better managed space,” says Gillick. “The rent may have gone up 20%, but this is a building I’ve always wanted to be in.”
The battle for talent seems to be raging. Meanwhile, office occupants have strong opinions about what they want, right down to individual buildings. This will be the new normal.
Flatshare in Liverpool
Liverpool City Council has long agreed to a hold stance on cohabitation (see Subplot, 13 January 2022) and it’s debatable whether that’s as bad, or worse, than it could have been for the nascent sector of cohabitation. . You can read it here. Flatlets (served by shared facilities) must meet the national minimum standard of 37m², which is hardly a surprise, and like other local authorities Liverpool are concerned about the potential for alternative uses should failure of cohabitation. There must also be some form of off-site affordable housing provision (the council recognizes that affordable co-housing is going to be tricky). So far so good, many developers will be able to live with this, despite the grumbling.
The issues stem from the council’s desire to see more single-family homes, rather than one-bed apartments, and to encourage stable, non-transitional communities. That means a big frown on leases of less than six months and an insistence that cohousing programs include a mix of apartment sizes – which slightly negates the interest of cohousing.
The crisis is accompanied by a clause reminiscent of the Manchester approach which insists that cohabitation can only be justified if there are jobs likely to depend on it. “Developers will need to demonstrate that prospective tenants can easily access employment opportunities in the city and must present a clear rationale and need, based on the proposal’s contribution to the local economy, meeting the specific needs of employers and supporting jobs”, it says. This could eliminate all but a handful of larger, hipper, and better-resourced programs. We will see.
Contact David Thame: [email protected] | 01544 262127
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