Office market finally drops off the cliff
THERE'S been no shortage in recent years of strong warnings from industry experts about the lack of availability of Grade A office space in Northern Ireland.
From Invest NI and the Royal Institute of Chartered Surveyors, to media commentators and economists alike, a long queue has formed to highlight the damaging impact on the local economy of the severe office supply shortage.
And they’ve all been proved right with take up for 2015 being estimated at 160,000 sq ft, down more than 50 per cent on the 2014 figure of 340,000 sq ft. Office take up has virtually dropped of a cliff in the last 12 months.
A key driver of the Northern Ireland economy in recent years has been the arrival of foreign direct investors (FDIs) keen to lay down roots and avail of our skilled workforce, advanced infrastructure, competitive costs and excellent support packages.
However, Northern Ireland’s ability to offer suitable Grade A office accommodation to potential FDIs – or indeed to any local company with plans for growth - has been ever-diminishing and has become a major economic impediment.
Unfortunately, 2015 will be remembered as the year when the Northern Ireland office market finally dropped off the cliff we’ve been edging towards for so long, largely due to a supply failure.
With a severe shortage of Grade A stock and headline rents not yet justifying viable development of speculative Grade A office space, there is almost zero pipeline or Grade A activity within the traditional office core in Belfast.
Supply of Grade A stock remains restricted with virtually no new, previously unoccupied space available in the city centre core. And the worrying news is that this restricted supply is likely to continue for the foreseeable future.
With the absence of this Grade A office stock, 2016 will see investors and developers continue to chase older, vacant, secondary buildings with a view to refurbishing office space, changing the use - for example – from office to hotel or office to student housing.
It’s also worth noting that of the Grade A stock which is available, a significant proportion is in small floor plate sizes across a large number of buildings – thus making it difficult for Belfast to satisfy large-scale ‘footloose’ requirements, particularly those that are likely to be originating from FDI.
A further challenge which the office market is having to overcome in terms of new stock delivery is the drain of trade skills from Northern Ireland during the economic recession and a restricted number of contractors available to complete construction projects.
Due to a lack of activity here, many of our indigenous contractors have been deployed in a number of other, more ‘profitable’ locations throughout the UK.
The strengthening of demand for Grade A office space combined with the lack of supply has, naturally, led to an increase in rents. While still lagging behind the levels of major cities such as Dublin, Glasgow and Cardiff, Grade A office rents in Belfast are rising beyond £15.50 per sq ft for the first time and incentive packages are continuing to reduce. Again, this rise in rentals looks set to con-tinue in the future.
If we are looking for crumbs of comfort amidst the bleakness of the office supply market, there have been some notable lettings in 2015. PwC secured c 21,200 sq ft adjacent to its existing presence at Laganbank Road (with the space understood to accommodate a joint venture with Google), WhiteHat Security acquired c 9,000 sq ft in The Linenhall Building and Capita secured c 5,000 sq ft in Capital House.
The government has recognised the failure of the office market and the prospect of intervention measures being offered to the development sector is now a very real one. There is also, of course, now the certainty of the corporation tax reduction in 2018 and the injection this will provide.
However, there’s no denying the perilous state the office market is in – and the need for a serious hike in supply if the market is to scale that cliff once again.
Declan Flynn is managing director of Belfast-based commercial property agency Lisney, which works on behalf of many of Northern Ireland’s most significant investors and developers as well as major retailers and businesses