Economy Policy Development and Review Sub-Committee

Transcription

1 Economy Policy Development and Review Sub-Committee am, Tuesday, 7 October 2014 Office supply and demand in Edinburgh Item number Report number Executive/routine Wards All Executive summary This report introduces a paper the Economic Development service has prepared dealing with office supply and demand in Edinburgh. The paper identifies a potential future shortfall in the office supply of Edinburgh, with a particular shortage of grade A office space in the city centre. The office development pipeline is at approximately 50% of what might be expected to be required. The commercial specialist property community in Edinburgh has offered to provide input on the state of affairs in the office market to inform the Council s policies on this topic. The Economic Development service proposes to prepare follow-on papers relating to hotels and student housing. Dr Mark Robertson from Ryden will attend this Committee to present on office markets in Edinburgh. Links Coalition pledges Council outcomes Single Outcome Agreement P17 CO7 SOA1

2 Report Office Supply and Demand in Edinburgh Recommendations 1.1 To note that the Economic Development service is to use the office markets paper as an evidence base for responses to planning consultations and other activities relating to development. 1.2 To note that the Economic Development service is to prepare similar papers for hotels and student housing. Background 2.1 Since September 2013, the Economic Development service has been providing the Planning service with commentary on the economic implications of major developments coming before the City of Edinburgh Council. 2.2 To inform this commentary, and to support related areas of work, the Economic Development service has prepared a paper on the office market of Edinburgh. The service plans to complete additional papers on hotels and student housing. Main report 3.1 The Economic Development service has prepared a report looking at supply and demand in office markets in Edinburgh. 3.2 The report indicates a likely future shortage of office space in Edinburgh, in particular a shortage of grade A office space in the city centre. Rising demand, a weak development pipeline and the conversion of existing stock to other uses is eroding the available supply of office space, driving up rents. The future office development pipeline is at approximately 50% of what might be expected to be needed based on historical levels of take-up. 3.3 The city centre remains the core area of demand in Edinburgh, although developments such as The Haymarket could make peripheral locations such as Haymarket and Fountainbridge more attractive. The secondary office locations of West Edinburgh and Leith are currently less attractive to occupiers. 3.4 The commercial specialist property community in Edinburgh has offered to provide input on the state of affairs in the office market to inform the Council s Economy Policy Development & Review Sub-Committee 7 October 2014 Page 2

3 policies on this topic, including formal comments on the Local Development Plan as appropriate. Measures of success 4.1 Not applicable Financial impact 5.1 The costs of preparing papers on the hotel and student housing markets will be met from within the existing Economic Development budget. Risk, policy, compliance and governance impact 6.1 Not applicable Equalities impact 7.1 Not applicable Sustainability impact 8.1 Not applicable Consultation and engagement 9.1 An in-depth consultation has been undertaken with a number of Edinburgh s commercial property agents and with colleagues in the Planning service. Background reading / external references Greg Ward Director of Economic Development Contact: Steve McGavin, Head of Business Partnerships steve.mcgavin@edinburgh.gov.uk Tel: Economy Policy Development & Review Sub-Committee 7 October 2014 Page 3

4 Links Coalition pledges Council outcomes Single Outcome Agreement Appendices P17 Continue efforts to develop the City's gap sites and encourage regeneration CO7 Edinburgh draws new investment in development and regeneration. SOA1 Edinburgh's Economy Delivers increased investment, jobs and opportunities for all 1 - Office Supply and Demand in Edinburgh Page 4 Economy Policy Development & Review Sub-Committee 7 October 2014

5 Office supply and demand in Edinburgh 1. Executive summary 1.1. This paper summarises key messages on supply and demand in Edinburgh s office market Available office space in Edinburgh is currently at a record high, but this figure masks a looming shortage of grade A office space in the city centre. Much of the existing available space is not considered viable for occupation in its current condition. Instead of refurbishing this space, many property owners are converting older offices to other uses, diminishing the supply of lower cost office space Office take-up in Edinburgh was 753,000 sq ft in 2013 the highest annual figure since Office rents are beginning to rise after several years of stagnation. Around 80% of demand is in the city centre, with the core area of demand remaining George Street and the Exchange District. The Haymarket could potentially shift demand westward, making peripheral areas such as Fountainbridge and Haymarket more attractive. Leith remains less attractive due to weaker public transport links, while parking is an issue for some occupiers at West Edinburgh As of October 2013, there was just 44,000 sq ft of office space under construction in Edinburgh. Historically, Edinburgh has required around 325,000 sq ft of new grade A office space each year to accommodate demand. The office development pipeline for 2016 to 2020 is at around 50% of what might be expected to be required based on historical building rates. Even in the highly unlikely case that all office developments in the pipeline for 2016 to 2025 were to be constructed, this would still be significantly below historical levels of development. No significant new office space is expected to be completed until mid-2016/ Introduction 2.1. This paper summarises key messages on Edinburgh s office market. This paper draws upon roundtable discussions with a number of local commercial property agents held on 23 June 2014 and 19 August 2014, along with a range of research papers produced by property agents and the Planning Information team of the City of Edinburgh Council The provision of a healthy supply of office accommodation in a suitable mix of locations, floor-plates and grades is essential to the health of the economy. Offices are used by a broad range of businesses, ranging from traditionally important industries such as financial services to sunrise industries such as software development. Business users range from large companies to micro-businesses with just a handful of staff, as well as the public sector. A sustained shortage in the supply of office space in Edinburgh would have significant repercussions in terms of both the growth of indigenous businesses and the ability of the city to attract inward investment. Supply shortages will also inevitably result in price rises, forcing businesses to trim costs elsewhere, including staffing costs. Page 1 of 10

6 Ernst & Young have identified business services as a key driver of the economy and this business classification will show the greatest growth. Edinburgh s economy is particularly dependent on its service sector which is again showing the need for growth in a number of key areas The fundamental questions of what growth looks like in Edinburgh and how big the city should ultimately be have never been fully answered. 1 It is not clear whether the city should grow indefinitely or whether there is an optimal size for the city after which further growth should be constrained. 2 The position of Planning is that the role of the Planning system is to respond to and manage demand for land, not limit it. 3. Existing supply of office space 3.1. The total supply of vacant office space in Edinburgh stood at 2.2 million sq ft in April 2014 (of a total supply of around 23 million sq ft). 3 Of this vacant space, around 1.28 million was in the city centre. Around 80% (1 million sq ft) of the available space in the city centre was grade A or high quality refurbished space. 4 As of the end of 2013, there was approximately 450,000 sq ft of available grade A office space in Edinburgh The overall supply of vacant stock in Edinburgh remains at near record high levels. Much of the current old supply is, however, expected to revert to other uses such as residential, serviced apartments and hotels. In addition, the high overall level of supply masks large variations in supply by geography and by quality, with a particular shortage of grade A space in the city centre. The overall vacancy rate in Edinburgh was 7.1% in Q It has remained relatively flat since 2010 and is still significantly higher than in the peak years of However, the vacancy rate for grade A office space in Edinburgh city centre is considerably lower. 6 Edinburgh has a lower vacancy rate than any UK office market bar Aberdeen. 7 There is something of a mismatch in supply in that the quality and location of much of the available stock makes it unattractive to prospective occupiers Across the eight regional UK cities, the available office supply given current levels of demand as of February 2014 averaged 1.6 years supply for grade A space and 2.9 years supply for grade B space. The availability of grade A space in Edinburgh was 2 years, 4 months as of February 2014, i.e. until July The supply of grade B office space is being eroded by the conversion of older office buildings that could provide low cost accommodation to other uses, such as hotels, serviced apartments and residential. There has also been a fall in office refurbishments. This is of concern as the majority of office-based businesses in Edinburgh do not occupy grade A space and look for grade B or C space to do business. Grade B space can be very successful for example, Waverleygate is now almost full after the less desirable floors were successfully pitched as the best grade B space in town. 10 Many townhouses have now been converted back to residential uses. 11 Historical trends suggest that the conversion of ex-office space surges during periods of economic malaise. 12 A total of 308,700 sq ft of sub-prime office space was lost in 2013 due to Page 2 of 10

7 change of uses and demolitions, with the largest properties being 154 McDonald Road (36,600 sq ft, changed to residential), Hillside Crescent (35,500 sq ft, changed to residential) and 36 South Gyle Crescent (28,100 sq ft, changed to a laboratory). 13 More recently, a series of older office buildings in the West End and New Town have been acquired for conversion to other uses, including Lismore House on George Street; Erskine House on Queen Street; and 34 Torphichen Street. These trends are eroding the overall office supply, with particular implications for newly-formed companies who are unable to afford grade A accommodation Edinburgh currently has just four office developments capable of providing 35,000 sq ft of space or greater in the city centre: Atria, Tanfield, Westport and Exchange Crescent. The maximum requirement that the city centre could currently accommodate is approximately 60,000 sq ft. 14 This shortage of options means that occupiers with large requirements have very little choice, with implications for pricing and, in turn, for employers locating in the city Demand for office space 4.1. Total office take-up in Edinburgh was 753,000 sq ft in 2013 the highest annual figure since In the year ending March 2014, this rose to 979,000 sq ft the highest annual figure recorded since In the second quarter of 2014, there was 217,000 sq ft of take-up: 154,000 in the city centre and 63,000 out of town The city centre accounted for over 80% of total take-up in the year ending March Demand in peripheral office locations remained subdued. 19 Office take-up in Edinburgh city centre was 218,318 sq ft in Q the highest of any of the nine regional UK cities bar Manchester. 20 This demand was dominated by larger deals, with implications for the shortage of larger developments Prime rents are increasing for both grade A and grade B properties. Incentives continue to be offered to secure long leases at high rents and are likely to take some time (12 to 15 months) to be eroded by the tightening supply. 22 Rising prices mean some businesses are migrating out to less central locations. 23 City centre headline rents, /sq ft (Q2 2014) Manchester Birmingham Cardiff Glasgow Bristol Newcastle Edinburgh Leeds Liverpool Source: GVA (2014) The Big Nine 4.4. Demand in recent years has mainly been driven by "incumbent occupiers [upgrading] to better quality grade B space". 24 During the recession, many occupiers extended their leases, resulting in low demand. 25 However, demand for grade A space is increasing. A spate of lease expirations in the 2014 to 2017 period will further increase demand. 26 A spike in demand from 2016 to 2020 is expected. Occupiers are starting to relocate to Page 3 of 10

8 larger premises during their leases rather than simply waiting for their leases to expire this has the potential to account for a significant proportion of the development pipeline Many businesses that downsized during the downturn are now enlarging their property holdings. Spare capacity within existing floor-plates is being filled, reflecting improvements in the economy There is a tendency towards large floor-plates as occupiers seek to consolidate their operations in Edinburgh on a single floor-plate within a single building The technology sector accounts for a growing share of demand (by way of comparison, 40% of all office demand in London now comes from the technology sector). Some of the largest deals in the past year in Edinburgh have been struck by technology companies Relative to other UK cities, the public sector accounts for a relatively small proportion of office space demand in Edinburgh George Street and the Exchange District remain the core area of demand for office space. Occupiers are very discerning when it comes to location and look for offices within 10 minutes walk of the train stations and with good access to shops, etc. Tanfield, Quartermile and (Greater) Fountainbridge are seen as offering a different environment to the office core The Haymarket development may shift demand slightly westward and make locations such as Greater Fountainbridge and the Haymarket area itself more attractive (albeit road access to Fountainbridge remains an issue). The east end is also becoming more attractive, in large part due to its retail offering, but very little space is available. 34 Leith is presently seen as somewhat remote; it is likely to become more attractive if the tram line is extended to there Offices in West Edinburgh require parking due to the weaker public transport links, particularly where commuters from the Lothians, Fife and the Borders (who will not benefit from the tram line) are concerned. 37 The focus on Edinburgh Park has to some extent overshadowed the smaller business parks in the South Gyle area. 38 More could be done to promote West Edinburgh as an office location it is one of the largest office markets in Scotland in its own right, and Edinburgh Park one of the most significant office parks in the UK Edinburgh needs a lower cost alternative to the city centre to attract more cost sensitive organisations and also inward locating businesses. West Edinburgh is the ideal location with Edinburgh Park and other existing business parks, which have expansion space. It is critical that Edinburgh Park remains in office use to meet the needs of occupiers who need to be close to the motorway network and Edinburgh Airport As of 2010, 16 organisations accounted for around one-third of all occupied office floorspace in Edinburgh. 40 The large owner-occupiers e.g. the Scottish Government, the Page 4 of 10

9 City of Edinburgh Council, Standard Life and Scottish Widows account for 14% of all office utilisation in the city. A large requirement from any of them could absorb much of the vacant stock. There have not been any major investments along the lines of Avaloq or the UK Green Investment Bank for around 18 months this may pick up following the referendum. Even in the event of a no vote, it is likely that some central government functions will be devolved to Scotland, boosting public sector demand Between 80% and 90% of deals (by number) are for small units of below 10,000 sq ft. Offices of this size can still employ a substantial number of people. 42 New office stock should be varied in terms of both geography (both in the city centre and on the periphery) and quality (both grade A stock and lower cost refurbished stock). It is important that the development pipeline is diverse and is not dominated by large, open plan developments as these will not be suitable for all occupiers The office development pipeline 5.1. As of October 2013, there was just 44,000 sq ft of office space under construction in Edinburgh. 25% of the office space under construction as of October 2013 was pre-let, compared to 50% in the prior year, suggesting developers are becoming more willing to undertake speculative development Historically, Edinburgh has required around 325,000 sq ft of new grade A office space each year to accommodate demand The office development pipeline for 2016 to 2020 is at around 50% of what might be expected to be required based on historical building rates Even if all office developments in the pipeline for 2016 to 2025 were to be constructed, this would still be significantly below historical levels of development No significant new office space is expected to be completed until mid / Important developments in the pipeline include The Haymarket, St Andrew Square and further development at Quartermile. In July 2014, Moorfield announced that it would begin speculatively develop 200,000 sq ft of grade A office space at Quartermile. It is highly likely that some of the space coming online then will be pre-let As of 31 December 2013, the office development pipeline in Edinburgh totalled 11.0 million sq ft across 48 sites. The vast majority (87%) was at West Edinburgh, the city centre or the Waterfront. The three largest developments sites H to L at Edinburgh Park (2.2 million sq ft), the remaining plots at the BioQuarter (1.2 million sq ft), and the former Fountain Brewery site (1.1 million sq ft) accounted for 4.5 million sq ft 41% of the total pipeline. 53 It is important to note that several of the consents are extremely unlikely to ever be acted upon, while others are currently in the process of being revised. 54 Office development pipeline in Edinburgh as of 31 December 2013, sq ft (gross) Location Area Comment City centre 2,705,780 Fountainbridge 1,469,650 A revised masterplan for Fountainbridge was Page 5 of 10

10 Morrison Street 472,170 Canongate 460,330 St James Quarter 161,459 St Andrew Square 131,697 Castle Terrace 6,039 Wemyss Place 4,435 West Edinburgh 4,334,133 Edinburgh Park 2,346,458 Newbridge 707,426 South Gyle 510,726 Ingliston 475,507 Sighthill 141,707 Riccarton 113,021 Edinburgh Airport 39,288 Waterfront 2,583,233 Page 6 of 10 submitted in July 2014 that would deliver significantly reduced office space, with a focus on small and medium-sized companies. This includes the 23,960 sq ft Scottish Widows scheme at Semple Street which has now been consented. This is the The Haymarket development, which is expected to commence in This includes the Caltongate development, for which a revised planning consent was approved in January The revised consent is expected to deliver approximately 144,000 sq ft of office space. The developer of the St James Quarter, TIAA Henderson Real Estate, plans to deliver just 25,000 sq ft of the consented office space. A revised planning application for this development is currently being prepared. This relates to the conversion of bar and restaurant space within the Saltire Court office building to office uses. This relates to the conversion of a medical practice to an office building. This relates to sites H-L of Edinburgh Park. The new owner of the Park, Parabola, is to begin development of the remaining land. This location is dominated by heavy industry and distribution uses and is less attractive for the bulk of office occupiers. This relates to a variety of consents in the South Gyle area. This relates to the redevelopment of the Royal Highland Centre. This relates to a long-consented development at 11 Bankhead Crossway. This location is dominated by scientific research uses and is less attractive for the bulk of office occupiers. This relates to the redevelopment of the former RAF Turnhouse. Leith 1,499,414 This relates to various developments on the waterfront in Leith. Granton 1,083,819 This is unlikely to be delivered Granton is no longer recognised as a key area for office development in the emerging Local Development Plan and the current focus has shifted to residential uses. South East 1,248,237 BioQuarter 1,248,237 This location is dominated by scientific

11 research uses and is less attractive for the bulk of office occupiers. Other 130,685 Total for Edinburgh 11,002,058 Source: Planning Information Team, Services for Communities, City of Edinburgh Council (May 2014) City of Edinburgh Office Development Schedule Although the office market has picked up, development is still sluggish due to funding issues. However, an increasing number of decisions are being taken that will lead to speculative development. Rents in West Edinburgh remain too low to justify speculative development, albeit they are expected to rise over the next 12 to 15 months While the current development sites are well known, there is a lack of clarity as to where the next wave of development in the 2020s will be located. The city centre and West Edinburgh are likely to remain the key business areas. Edinburgh has relatively few large development sites left in the city centre. The Castle Terrace car park and Argyle House are probably the most interesting development site in the city centre Major infrastructure funding is required to unlock the International Business Gateway site in West Edinburgh, but the revenue from office space in West Edinburgh is currently inadequate to fund the infrastructure needed to make the development of new office space financially viable. As a result, the International Business Gateway is probably at least years away from being developed and is likely to need to include other uses to make it financially viable It is not thought that the International Business Gateway would be a suitable location for residential development, particularly as it is under the flight path it therefore should remain earmarked for business space development in the longer term It is important that mixed-use developments include employment uses General observations 6.1. There is a delicate balance to be struck between supply and demand. Neither an overly tight market nor a market with inadequate space to accommodate demand is desirable. 60 The relative shortage of space in Edinburgh was a boon to the office market during the economic downturn, with vacancy rates and rents remaining relatively healthy It is important to be careful about how the situation in Edinburgh s office market is communicated. In the past, Edinburgh has been perceived as a premium location compared to other UK cities if this becomes the case again, many potential occupiers will dismiss Edinburgh out of hand. It needs to be presented as a success story. 62 West Edinburgh is important to the city as a source of lower cost accommodation, counterbalancing the city centre. 63 Page 7 of 10

12 6.3. What is required is a balance between supply and demand wherein occupiers have confidence that their future demand can be accommodated at a reasonable price via a known pipeline of forward opportunities. 7. Summary 7.1. The main messages for Edinburgh are: o There is a lack of clarity about how Edinburgh should grow in future and whether there is an optimal size for the city. o There is a projected 2.2 million sq ft of available office space in Edinburgh (as of April 2014) million sq ft is located in the city centre. 450,000 sq ft is grade A. Although this is a near record level, vacancy rates are among the lowest in the UK. o The office supply in Edinburgh is projected to be exhausted by mid-2016, assuming demand remains steady. This may be compounded by a series of lease events between 2014 and The supply of grade B space is being eroded by change-of-uses; however, the most pressing issue is a lack of grade A space in the city centre. There are just three developments with 35,000 sq ft+ of available space in the city centre and no developments with 80,000 sq ft+ of available space anywhere in the city. o The city centre remains the location of choice for a significant and increasing number of occupiers. o Rents are beginning to climb and could potentially rise sharply as the supply pinch point is reached, with implications for the competitiveness of Edinburgh as a location. o The future office development pipeline remains virtually empty up to 2016/2017 (after which developments such as The Haymarket will begin to enter the market). However, these developments are only expected to deliver 50% to 75% of the space required. It is unclear what the next tranche of development sites will be. o There is a perceived need to protect West Edinburgh as an office employment zone to meet the needs of inward investors, ensuring that Edinburgh has a value-for-money offering to compete with other key cities in the UK and overseas. o The commercial specialist property community in Edinburgh has offered to provide input on the state of affairs in the office market to inform the Council s policies on this topic, including formal comments on the Local Development Plan as appropriate, as well as providing a mutually agreed set of supply and demand figures and opinion on likely timescales for future development. Kyle Drummond (8 September 2014) / kyle.drummond@edinburgh.gov.uk Page 8 of 10

13 8. References 1 Roundtable discussion with agents (23 June 2014) 2 Roundtable discussion with agents (21 August 2014) 3 Roundtable discussion with agents (21 August 2014) 4 Ryden (April 2014) 74 th Scottish Property Review 5 Knight Frank (2014) Edinburgh Offices Market Update 6 JLL (2014) Edinburgh Office Update 7 Roundtable discussion with agents (23 June 2014) 8 Roundtable discussion with agents (23 June 2014) 9 DTZ (February 2014) Property Times 10 Roundtable discussion with agents (23 June 2014) 11 Roundtable discussion with agents (21 August 2014) 12 Planning Information Team, Services for Communities, City of Edinburgh Council (April 2013) Office Demand in Edinburgh 13 Planning Information Team, Services for Communities, City of Edinburgh Council (May 2014) City of Edinburgh Office Development Schedule Roundtable discussion with agents (21 August 2014) 15 Roundtable discussion with agents (21 August 2014) 16 JLL (2014) Edinburgh Office Update 17 Ryden (April 2014) 74 th Scottish Property Review 18 GVA (2014) The Big Nine 19 Ryden (April 2014) 74 th Scottish Property Review 20 GVA (2014) The Big Nine 21 GVA (2014) The Big Nine 22 Roundtable discussion with agents (21 August 2014) 23 Roundtable discussion with agents (21 August 2014) 24 DTZ (February 2014) Property Times 25 Roundtable discussion with agents (23 June 2014) 26 DTZ (February 2014) Property Times 27 Roundtable discussion with agents (23 June 2014) 28 Roundtable discussion with agents (21 August 2014) 29 Roundtable discussion with agents (21 August 2014) 30 Roundtable discussion with agents (23 June 2014) 31 Roundtable discussion with agents (23 June 2014) 32 Planning Information Team, Services for Communities, City of Edinburgh Council (April 2013) Office Demand in Edinburgh 33 Roundtable discussion with agents (23 June 2014) 34 Roundtable discussion with agents (23 June 2014) 35 Roundtable discussion with agents (23 June 2014) 36 Planning Information Team, Services for Communities, City of Edinburgh Council (April 2013) Office Demand in Edinburgh 37 Roundtable discussion with agents (23 June 2014) 38 Roundtable discussion with agents (21 August 2014) 39 Roundtable discussion with agents (21 August 2014) 40 Planning Information Team, Services for Communities, City of Edinburgh Council (March 2013) Edinburgh s Office Stock Roundtable discussion with agents (23 June 2014) 42 Roundtable discussion with agents (21 August 2014) 43 Roundtable discussion with agents (23 June 2014) 44 Deloitte Real Estate (October 2013) UK Cities Crane Survey Roundtable discussion with agents (23 June 2014) 46 Roundtable discussion with agents (21 August 2014) 47 Roundtable discussion with agents (23 June 2014) 48 Roundtable discussion with agents (21 August 2014) Page 9 of 10

14 49 Dr Mark Robertson, Ryden LLP (13 August 2014) Edinburgh Office Market: Long Run Analysis 50 Roundtable discussion with agents (23 June 2014) 51 Knight Frank (2014) Edinburgh Offices Market Update 52 Roundtable discussion with agents (23 June 2014) 53 Planning Information Team, Services for Communities, City of Edinburgh Council (May 2014) City of Edinburgh Office Development Schedule Roundtable discussion with agents (23 June 2014) 55 Roundtable discussion with agents (23 June 2014) 56 Roundtable discussion with agents (23 June 2014) 57 Roundtable discussion with agents (21 August 2014) 58 Roundtable discussion with agents (21 August 2014) 59 Roundtable discussion with agents (21 August 2014) 60 Roundtable discussion with agents (23 June 2014) 61 Planning Information Team, Services for Communities, City of Edinburgh Council (March 2013) Edinburgh s Office Stock Roundtable discussion with agents (23 June 2014) 63 Roundtable discussion with agents (21 August 2014) Page 10 of 10