UK Office Market Outlook - Q3 212 UK Office Market Outlook Leasing volumes picked up in Q3, but the market continues to be driven by smaller deals. Given the limited jobs growth the importance of structural lease events cannot be overstated. The development pipeline has remained constrained since the beginning of the year. A lack of finance will continue to limit the future pipeline placing pressure on Grade A supply. Prime rents increased by 3. over the year driven by increases in the Western Corridor and Cardiff. Grade A supply shortages will drive further prime rental growth, with the gap between prime and secondary likely to widen.
On Point UK Office Market Outlook Q3 212 3 Statistical summary Summary statistics* Q3 12 (s sq ft) 1,714 +29.% +14.% Supply (s sq ft) 26,27-1. +1.9% Vacancy Rate (%) 12. -2bps +2bps Average Weighted Prime Rent ( psf) 27.68 +. +3. U/C (s sq ft) 1,43 4. +14. Investment Vol. ( m) 48 +65.% -7. *(Includes Birmingham, Bristol, Cardiff, Leeds, Manchester, Western Corridor, Edinburgh & Glasgow) UK office rental clock London City, London West End Rental Growth Slowing Rents Falling Rental Growth Accelerating Rents Bottoming Out West London Manchester, Thames Valley Birmingham, Bristol, Cardiff Edinburgh, Glasgow, Leeds For information on the Central London market, please see the Jones Lang LaSalle Central London Market Report
4 On Point UK Office Market Outlook Q3 212 UK Outlook Executive Summary Activity picked up slightly in the third quarter with 1.7 million sq ft let, up 1 compared to the equivalent period last year. Grade A supply remains constrained and will drive further rental polarisation between the best and secondary space. Investors continue to focus largely on Central London and the Western Corridor. Occupier and Demand Occupier take-up remained relatively subdued in the third quarter of 212, despite the fact that leasing volumes were up 1 year-onyear. Occupiers remain cautious with many opting to renew or regear existing leases in the absence of any significant improvement in the strength of the economy. There was some recovery in Birmingham, but this followed on the back of a weak first half of the year. The most notable improvement was seen in the Western Corridor where Q3 volumes were boosted by a number of notable deals in excess of 1, sq ft. Both Scottish cities saw a reversal in fortunes as the strong start to 212 gave way to a somewhat weaker third quarter. There remains a lack of truly Grade A activity in most markets, with the majority of deals focused on Grade B or refurbished/secondhand space. In Glasgow and Cardiff, there were no Grade A lettings in Q3 and elsewhere Grade B lettings made up the majority of deals. The office lettings market remains relatively exposed given the lack of larger deals. Outside of the Western Corridor, there were just 14 deals over 1, sq ft, representing just of deals. The majority of activity remains focused on smaller transactions. Figure 1: Big 8 office take-up 22-212 s sq ft 9, 8, 7, 6, 5, 4, 3, 2, 1, 22 23 Source: Jones Lang LaSalle 24 25 26 The services industry drove volumes in Q3, particularly companies from within the IT and recruitment & training sub-sectors. Serviced office operators were also active. I2 Offices acquired 22,6 sq ft at 3 Hardman Square, Manchester and a further 16,923 sq ft at 2 Exchange Place, Edinburgh, adding to its portfolio of prime locations across key cities in the UK. These latest deals, represents two of several acquisitions the company has made in the last 12-18 months with additional acquisitions made in Manchester and Leeds in 211. Regus, also acquired 12,636 sq ft at Birmingham s Quayside in Q3. 27 28 29 21 211 212 The rise of the serviced office sector reflects continued occupier demand for more flexible solutions. A minimum term is usually just s, often less, which is ideal for new start-ups or companies testing the market and location. The TMT sector demonstrated its continued growth in the third quarter. This sector has been responsible for driving volumes in Central London accounting for 21% of leasing activity this year, the highest on record. Outside of Central London there have been some notable deals within the TMT sector, including the Chinese telecoms company Huawei who acquired 139,24 sq ft at Green Park, Reading and Teleperformance who acquired 1,57 sq ft at 1 Cadogan Square Glasgow. Leasing activity remains dominated by smaller deals The UK Economy returned to growth in Q3, with preliminary estimates indicating growth of 1.% compared to Q2 212. Despite this, the for a recovery in occupier demand remains uncertain. On a positive note September s Markit/CIPS survey of UK service providers continued to rise and sentiment suggests an underlying improvement in demand and a boost to business activity post Olympics. The unemployment rate continued to fall in the three months to August, down. compared to the previous 3 months, to 7.9%. Despite this, the business operating environment remains challenging. In view of the economy s sluggish recovery and uncertain, we may see renewed weakness in the labour market. The latest figures from Oxford Economics, point towards a slight fall in total employment in 213. Consequently, concern remains as to where the next wave of demand will come from. Figure 2: UK total employment growth forecasts 1. 1.%..% -. -1.% -1. -2.% 213 214 215 216 Source: Oxford Economics Given the limited jobs growth the importance of structural lease events cannot be overstated. Economic uncertainty and weak demand will increase the reliance on lease events, however continued caution will increase the propensity of occupiers to renew.
On Point UK Office Market Outlook Q3 212 5 Existing Supply & the Development Pipeline Overall supply fell marginally over the quarter but increased yearon-year, with 26 million sq ft currently available. Vacancy rates increased from 12. in Q3 211 to 12. and remain well above the 1 year average of 1.. The majority of space is of Grade B quality or second-hand, much of which could be difficult to let in the current market. In the UK, the majority of office buildings are old and the natural rate of commercial building replacement and refurbishment is just 1- per year. s in sustainability legislation, workplace technology and changing corporate preferences will combine to accelerate the obsolescence of offices. Where office stock falls out of favour with occupier preferences or is unsuitable for refurbishment, we can expect to see a move towards alternative uses. Grade A supply continued to fall in the majority of locations with just one completion recorded in the third quarter (Stanza, Uxbridge 81, sq ft). Average Grade A vacancy rates across the key UK regional markets stood at 3.3% at the end of Q3, down from 3. in the previous quarter. The development pipeline has remained largely unchanged since the beginning of the year. There is currently 3. million sq ft of space under construction across the eight key regional markets, of which just 1.4 million is due to be delivered speculatively. The majority of space, around 7, is scheduled to complete in 213, however much of this (51%), will be confined to the Western Corridor. Overall supply remains inflated, with Grade A supply more constrained Rents and Rental Expectations Despite the weak demand side, limited Grade A supply drove rental growth of. in the UK Regional Office Rental Index over the third quarter. Average weighted prime rents stood at 27.68 at the end of Q3 as increases in the Western Corridor and Cardiff drove annual growth of 3.. Despite this the market remains broadly tenant favourable with prime rents heavily supported by incentives with no change to incentives in Q3. Investment Volumes and Yields Prime UK regional office yields remained stable at 6.3% in Q3 as inward movement of 25 basis points in the Western Corridor, counterbalanced outward yield shifts in Birmingham, Manchester and Leeds. According to Jones Lang LaSalle s UK Prime Office Index, regional offices recorded marginally positive capital value growth over the quarter of 1. driven by the Western Corridor. However, looking at the wider market, the IPD monthly index for Rest of UK offices recorded negative capital value growth of -8.1% over the s to September 212. Figure 3: UK weighted prime rental index, Q1 2 = 1 2 18 16 14 12 1 8 6 4 2 1Q 2Q1 3Q2 Source: Jones Lang LaSalle 4Q3 1Q5 UK incl. London 2Q6 3Q7 4Q8 1Q1 UK excl. London Investment activity in Q3 totalled 48 million, up 6 on the back of what was a weak second quarter. Investors continued to focus on the Western Corridor market, which accounted for 5 of transaction volumes. Volumes for the year to end Q3 totalled 1.1 million, compared with the 1.4 million that was transacted over the same period in 211. Investors continue to focus on prime town centre assets, particularly those offering security of income. Figure 4: UK weighted prime office yields 9% 2Q11 3Q12 Prime rental growth will continue to be driven by the lack of Grade A supply in the regions. In the latest round of forecasts, rental prospects have improved slightly. On aggregate, we forecast growth of 2.9% per annum over 212-216 in the major UK cities. The Western Corridor is predicted to outperform this, with growth of 4.3% per annum over the same period. 3% 1Q 2Q1 3Q2 Source: Jones Lang LaSalle 4Q3 1Q5 2Q6 UK incl. London 3Q7 4Q8 1Q1 2Q11 UK excl. London 3Q12 Beyond the prime end of the market, rental growth will be far more limited. Jones Lang LaSalle s forecasts of IPD data indicate much more limited growth of just 1. per annum over 212-216.
6 On Point UK Office Market Outlook Q3 212 Birmingham Summary statistics Q3 12 (s sq ft) 171.5 +84.3% -22.3% Supply (s sq ft) 3,156-3.% -9.9% Vacancy Rate (%) 17.1% -4bps -14bps Prime Rent ( psf) 28.5.%.% U/C (s sq ft) 118.3.%.% Investment market Q3 12 Cap. Value ( psf) % 456-4.% -4.% Investment Vol. ( m) 32.2 +44 +85. Prime Yield (%) 6.2 +25bps +25bps Market overview Leasing activity picked up in Q3 with seven deals over 1, sq ft compared with just two in the first half of the year. Overall vacancy rates remain inflated however Grade A vacancy rates are as low as 2.. Prime yields moved out from 6.% to 6.2 over the third quarter reflecting continued investor caution. totalled 171,5 sq ft in Q3, a significant improvement compared to H1 212 when take-up totalled 148, sq ft. The largest deal was to training company BPP who acquired 21, sq ft at 2 Colmore Square. Activity was driven by a broad range of sectors, although the services sectors continued to dominate, accounting for 4 of take-up. Despite the improvement in Q3, take-up for the first three quarters of 212 fell by 3 compared to the same period in 211 and by 43% compared to the five year average for Q1-Q3. Looking ahead take-up is expected to be broadly stable, with the result that year end volumes are likely to remain below average levels. Overall supply fell slightly in Q3, with around 3.2 million sq ft currently available. The majority of space is of Grade B quality with just 538, sq ft of Grade A space currently available. The development pipeline was unchanged with no new starts. Snow Hill (phase II) remains the only scheme currently under construction. Any new development starts are likely to be underpinned by pre-lets. Prime rents remained at 28.5 per sq ft. The market remains broadly tenant favourable with tenants able to achieve up to 36 months rent free based on a 1 year term. City centre investment volumes totalled 32.2 million in Q3, across just one deal. Israeli financial services company, CLAL Insurance, acquired 115 Colmore Row. The 8, sq ft Grade A office building is fully let to law firm Eversheds with 11 years remaining on the lease. The sale demonstrates continued demand for high quality assets providing surety of income. Figure 5: s sq ft 1,2 1, 8 6 4 2 Figure 6: Supply and vacancy rates s sq ft 3,5 1 3, 1 2,5 1 2, 1 1% 1,5 1, 5 % Supply (lhs) Vacancy rate (rhs) Figure 7: Prime rents and rental growth 1 35 3 1% 25 2 % 15 - -1% 1-1 5 - Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 8: Prime yields Prime yields 1 year average 2 year average per sq ft Source all Charts: Jones Lang LaSalle
On Point UK Office Market Outlook Q3 212 7 Bristol Summary statistics Q3 12 Figure 9: 1,2 (s sq ft) 113 17. 6. 1, Supply (s sq ft) 1,72-3.1% -1. 8 Vacancy Rate (%) 11.3% -4bps -2bps Prime Rent ( psf) 27.5. %. % U/C (s sq ft) 47 n/a n/a Investment market Q3 12 Cap. Value ( psf) % 423.% -3. s sq ft 6 4 2 22 23 24 25 26 27 28 29 21 211 212 Investment Vol. ( m) 32.1 22.% -44.1% Prime Yield (%) 6.5 % bps +25 bps Figure 1: Supply and vacancy rates 2, 1 Market overview Annual take-up likely to be close to 5-year average Grade A vacancy rate lowest of all Big 6 cities Investment market anticipates a strong Q4 Bristol s city centre market had a relatively strong Q3 with the volume of space taken up 61% on the same period last year. The only Grade A transaction was Simmons & Simmons taking 7,813 sq ft at Temple Quay, demonstrating the growing trend of London-based lawyers outsourcing work to Bristol. During 212 the Bristol market has been kept afloat by the steady churn of sub-1, sq ft deals and the largest deal in Q3 was 12,32 sq ft of Grade B space let to SDL at The Pithay. With take-up for the year-to-date standing at 3, sq ft the year-end figure should top the level achieved last year (425, sq ft). The for 213 is reasonably positive but economic uncertainty continues to delay decision-making for the large corporates. However, Bristol City Council s requirement for up to 2, sq ft could provide a welcome boost. Total supply fell marginally during Q3. However, only of available stock is Grade A and the equivalent vacancy rate has slipped to 2.3% - the lowest of all the Big 6 cities. Speculative activity is returning to the Bristol market with Prupim/Cubex starting on site with the major refurbishment of 1 Victoria Street (45, sq ft) and Skanska s purchase of 66 Queen Square is likely to open up a development opportunity. Prime rents remain stable at 27.5 per sq ft in the city centre and incentives remain generous at up to 36 months on a 1 year term. However, the shortage of Grade A supply in the city could lead to incentives moving in over the next 6 months. Bristol s investment market increased momentum during Q3 with 32.1m transacted. Prupim acquired two of the three properties sold, namely 2 College Square, Harbourside and One The Square, Temple Quay. We expect Q4 to see a further increase in investment activity with a handful of significant properties on the market. Prime yields remain at 6.. s sq ft 1 1,6 1% 1,2 8 4 % Supply (lhs) Vacancy rate (rhs) Figure 11: Prime rents and rental growth 28 27 26 25 % 24 - - 23-22 - 21 Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 12: Prime yields Prime yields 1 year average Source all Charts: Jones Lang LaSalle per sq ft
8 On Point UK Office Market Outlook Q3 212 Cardiff Summary statistics Q3 12 (s sq ft) 95.6 97. -19. Supply (s sq ft) 1, -4..9% Vacancy Rate (%) 9.% -4bps -33bps Prime Rent ( psf) 22.. % +4.8 % U/C (s sq ft) 121. 12.% 59. Investment market Q3 12 Cap. Value ( psf) % 338. % +4.8 % Investment Vol. ( m) 12.4 n/a n/a. Prime Yield (%) 6.5 % bps bps Market overview One deal accounts for of take-up Large requirements likely to follow the pre-let route Prime rents remain stable albeit with limited evidence The Cardiff city centre market had a challenging quarter but saw take-up boosted by one deal of 45, sq ft at Ocean Park House (Grade C space). for the year to date stands at 243,3 sq ft and it is likely that the year-end figure will edge above the 5-year annual average of 281, sq ft. There were no Grade A transactions in the city centre during Q3. A number of substantial enquiries continue to circulate in the market, including the new requirement from Geldards (solicitors) for 35-4, sq ft, but economic uncertainty continues to delay decision making. The volume of available space continues to be eroded with total supply falling by 4. q-on-q. However, this has not translated into take-up as some space has been lost to other uses. The short-term sees Cardiff continuing to face a limited supply of immediately available Grade A space with 137,7 sq ft currently available in both new and second-hand buildings. Capital Quarter (76, sq ft) remains under construction in the city centre but is not due to complete until Q4 213. Therefore the market for new Grade A space will be predominantly pre-let driven. Prime city centre rents remained at 22 per sq ft during Q3. Typical rent free periods remain at s for a five-year term and 24 months for 1 years, although the lack of Grade A space should lead to the tightening of incentives. Cardiff s investment market recorded one transaction during Q3, namely Topland s purchase of Capital Tower and Friary House for 12.4 million. Prime stock remains limited although Aviva s Cardiff Waterside (4, sq ft) is currently being marketed. Prime yields remain in the region of 6.. Figure 13: s sq ft 6 5 4 3 2 1 Figure 14: Supply and vacancy rates s sq ft 1,4 1,2 1 1 1, 1 1% 8 6 4 2 % Supply (lhs) Vacancy rate (rhs) Figure 15: Prime rents and rental growth 9% 22 21 2 19 3% 18 17 1% % 16 Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 16: Prime yields 9% per sq ft Prime yields 1 year average Source all Charts: Jones Lang LaSalle
On Point UK Office Market Outlook Q3 212 9 Leeds Summary statistics Q3 12 (s sq ft) 123.3 +118. +6.3% Supply (s sq ft) 1,252-4. -5.3% Vacancy Rate (%) 1.1% -4bps -5bps Prime Rent ( psf) 26.. %. % U/C (s sq ft) 38..% -4. Investment market Q3 12 Cap. Value ( psf) 4-3. -3. Investment Vol. ( m) 7. -81.% -79. Prime Yield (%) 6. +25bps +25bps Market overview totalled 123,3 sq ft in Q3, up 6.3% compared to the equivalent period in 211. Further development will be dependent on pre-letting activity. Prime yields drifted outwards to 6., reflecting continued caution. Leeds witnessed a healthy volume of take-up in Q3, with volumes up 11.1% compared to the 1 year quarterly average. A number of significant Grade A lettings at No. 1 Leeds helped to boost the market in Q3. Johnston Press acquired 33,8 sq ft and a further 31,155 sq ft was let to energy company GDF Suez. Despite a sluggish performance in Q2, leasing volumes for the year to end Q3, totalled 335,6 sq ft, up 7. compared to the five year average. In line with previous quarters, the services sector continued to dominate accounting for 4 of take-up in the first three quarters of the year. The majority of deals (8), continue to be driven by the sub 1, sq ft market with just seven deals over 1, sq ft recorded in 212. Overall supply fell -4. over Q3 as increased activity in the letting market resulted in marginally positive net absorption both year-on-year and quarter-on-quarter. Grade A supply fell more rapidly, down by as a result of a number of Grade A lettings. There was little change to the development pipeline with no new starts in Q3. 21 Queen Street which is expected to deliver 38, sq ft speculatively in 213, remains the only scheme under construction. Prime rents remained stable in Q3 at 26. per sq ft for the best space, however Grade A rents in the city centre range from 2.- 26. per sq ft. Rents for Grade B space in the in-town market range from 15. - 2. per sq ft. Prime yields drifted outwards to 6. in Q3. Just one office investment transaction was recorded in Q3. Leeds based property company, Town Centre Securities, acquired 6-7 Park Row for 7 million, reflecting a yield of 8.4. Figure 17: s sq ft 8 7 6 5 4 3 2 1 Figure 18: Supply and vacancy rates s sq ft 1,6 1,4 1 1 1,2 1% 1, 8 6 4 2 % Supply (lhs) Vacancy rate (rhs) Figure 19: Prime rents and rental growth 1 27 1 1 26 1% 25 24 23 % 22 - - 21 Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 2: Prime yields Prime yields 1 year average 2 year average per sq ft Source all Charts: Jones Lang LaSalle
1 On Point UK Office Market Outlook Q3 212 Manchester Summary statistics Q3 12 Figure 21: 1,4 (s sq ft) 172.5 +22. +22. 1,2 Supply (s sq ft) 2,384-2.1% -9.9% 1, Vacancy Rate (%) 1. -2bps -12bps Prime Rent ( psf) 3..%.% U/C (s sq ft) 147..% n/a Investment market Q3 12 s sq ft 8 6 4 2 22 23 24 25 26 27 28 29 21 211 212 Cap. Value ( psf) 48-4.% -4.% Investment Vol. ( m) 23.2 +12-83% Prime Yield (%) 6.2 +25bps +25bps Figure 22: Supply and vacancy rates 3, 1 Market overview 2,5 1 totalled 172,5 sq ft, up 2 compared to Q2 212 but down 2 on the 1 year quarterly average. Availability continued to gradually decline. Prime city centre yields moved out 25 basis points to 6.2. s sq ft 2, 1,5 1, 5 1% After a solid start to the year, Manchester experienced a steady volume of activity in Q3 although there were just two deals over 1, sq ft. Activity continues to be largely lease event driven. The largest deal in Q3 involved the acquisition of 24, sq ft at Aldine House by Futureworks. Occupiers continued to focus on refurbished space which accounted for around 8 of deals in Q3. Looking ahead there are a number of active requirements in the market including Costain (6, sq ft) and Egencia (14, sq ft), however take-up for 212 is likely to remain below average levels. Prime rents remained stable at 3. per sq ft. In town Grade A rents were also stable, in the region of 25.-3. per sq ft. Incentives remain tenant favourable with around 3-36 months achievable on a 1 year term dependent upon grade, type, characteristics and location of the building. It is however anticipated that incentives will reduce shortly particularly for the more attractive stock. There was little change to the development pipeline. Development activity remains constrained with anticipated start dates for a number of schemes being further postponed. There is currently 53, sq ft of space under construction, of which just 147, sq ft is due to be delivered speculatively. Given the lack of finance we are likely to see few new wholly speculative starts, although we can expect refurbishment of existing stock. Prime yields moved out to 6.2 in Q3. There were just two investment deals in the city centre in Q3. The most significant deal was the sale of Churchgate House & Lee House to Dunedin Properties for 23 million. The sale was backed by American private equity firm Angelo Gordon, demonstrating the continued interest in UK property from overseas investors. % Supply (lhs) Vacancy rate (rhs) Figure 23: Prime rents and rental growth 1 32 1 1% 3 28 26 % 24-22 - - 2 Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 24: Prime yields Prime yields 1 year average 2 year average Source all Charts: Jones Lang LaSalle per sq ft
On Point UK Office Market Outlook Q3 212 11 Western Corridor Summary statistics Q3 12 (s sq ft) 817 49.1% 35. Supply (s sq ft) 12,896-1.9% 7.3% Vacancy Rate (%) 14. -3bps 1bps Prime Rent ( psf) 28.25 +1. +6.9% U/C (s sq ft) 718-8. 1.3% Investment market Q3 12 Cap. Value ( psf) 435 1. 6.9 % Investment Vol. ( m) 231.9 45. -45. Prime Yield (%) 6.25 % 25 bps 25 bps Market overview Year-to-date take-up one third higher compared to first nine months of last year Grade A supply continues to fall in West London Thames Valley average rents fall marginally Leasing activity in the Western Corridor continued to improve during Q3 with the year-to date total standing at 1.5 million sq ft. in Q3 was boosted by two deals; IMG Worldwide at 5 Longwalk, Stockley Park (114, sq ft) and Huawei Technologies at 3 South Oak Way, Green Park (139,24 sq ft). The Service Industries were the most active sector during Q3 (4 of space taken), followed by Manufacturing (3). Annual take-up is expected to be in line with the 5-year annual average of 2.2 million sq ft. The volume of named active demand increased to 3.4 million sq ft during Q3, providing a solid base for 213. Supply continued to stabilise over the Western Corridor as a whole but the level of Grade A space continues to be eroded. The Grade A vacancy rate for the West London sub-market has fallen to just 2., the lowest level for circa 1 years. The development pipeline remains constrained. During Q3 Aberdeen Asset Management started on site at Pine Trees, Staines (57, sq ft) and SEGRO with E², IQ Winnersh (5, sq ft) but there is otherwise limited speculative starts over the next s. The average prime rent for West London stands at 32. per sq ft up 12.3% y-on-y. Prime rents in the Thames Valley fell for the first time since Q2 21, with a decline in Camberley seeing average rents fall by. to 24.5 per sq ft. We expect rental growth to remain focussed on the West London market and town centres in the Thames Valley. Activity in the investment market strengthened during Q3 with 232 million transacted across eight deals, bringing investment volumes for the year to date to 445 million. Unlike last year, the Western Corridor is yet to see a 1 million+ investment sale but Chiswick Park is currently on the market for 8m. Prime yields have moved in to 6.2. Figure 25: s sq ft 3,5 3, 2,5 2, 1,5 1, 5 Figure 26: Supply and vacancy rates s sq ft 14, 12, 1 1 1, 1 1% 8, 6, 4, 2, % Supply (lhs) Vacancy rate (rhs) Figure 27: Prime rents and rental growth 1 1% 3 28 26 % 24 - -1% 22-1 2 Rental growth (y-on-y) (lhs) Prime rent (rhs) Figure 28: Prime yields Thames Valley prime yields TV 1 year average West London prime yields WL 1 year average Source all Charts: Jones Lang LaSalle per sq ft
12 On Point UK Office Market Outlook Q3 212 Edinburgh Summary statistics Q3 12 (s sq ft) 157.6-35. +6. Supply (s sq ft) 1,747 +8.% +21. Vacancy Rate (%) 7.3% +5bps +13bps Prime Rent ( psf) 27..%.% U/C (s sq ft) 213.9.% +12. Investment market Q3 12 Cap. Value ( psf) 45.% -4.% Investment Vol. ( m) 3. n/a n/a Prime Yield (%) 6.2 bps +25bps Market overview totalled 157,6 sq ft in Q3, with just two deals over 1, sq ft. Overall supply increased slightly but Grade A availability in the city centre remains constrained. Prime rents were stable at 27. per sq ft, but we expect growth in the short term driven by Grade A supply shortages. Figure 29: s sq ft 1,4 1,2 1, 8 6 4 2 Figure 3: Supply and vacancy rates s sq ft 2,5 1% 9% 2, 1,5 1, 3% 5 1% % Overall supply increased in Q3, driven by the release of second hand space back onto the market. Grade A supply however remains constrained with very limited new grade A space currently available. This is likely to exert upward pressure on rents for this segment of the market. Elsewhere prime rents remained stable at 27. per sq ft. Supply (lhs) Figure 31: Prime rents and rental growth Vacancy rate (rhs) 3 29 28 The development pipeline was unchanged in Q3 with just 213,9 sq ft currently under construction speculatively across three schemes. Occupiers faced with dwindling choice in the city centre may begin to seek good quality alternatives out of town. In particular Edinburgh Park could become more compelling as a location given the tram extension scheduled to complete in 214. % - - - 22 23 24 25 26 27 28 29 21 211 212 27 26 25 24 per sq ft Despite a strong start to the year the market tailed off slightly in Q3. totalled 157,6 sq ft, down 9% compared with the five year quarterly average. Despite this, take-up for the first three quarters of 212 totalled 67, sq ft, up 31% compared with the five year average for Q1-Q3. Nevertheless, the market continues to suffer from a lack of larger deals with the majority of transactions, around 91%, involving units of less than 1, sq ft. Prime yields remained stable at 6.2. Investment volumes totalled just 3 million in the third quarter, however Calton Square is currently under offer for around 55 million. Figure 32: Prime yields Rental growth (y-on-y) (lhs) Prime rent (rhs) 22 23 24 25 26 27 28 29 21 211 212 Prime yields 1 year average 2 year average Source all Charts: Jones Lang LaSalle
On Point UK Office Market Outlook Q3 212 13 Glasgow Summary statistics Q3 12 (s sq ft) 64.5-37. -3.% Supply (s sq ft) 1,89 +7.% +12. Vacancy Rate (%) 11. +8bps +12bps Prime Rent ( psf) 27.5.%.% U/C (s sq ft). n/a n/a Investment market Q3 12 Cap. Value ( psf) 44.%.% Investment Vol. ( m) 66.2 +68-13.% Prime Yield (%) 6.2 bps bps Market overview Overall supply increased 7.% in Q3, as space which had been vacated gradually came back onto the market. was subdued, down 3% compared to the equivalent period in 211. Investors showed continued interest in the Glasgow office market, with volumes totalling 66.2 million in Q3. Figure 33: s sq ft 1,2 1, 8 6 4 2 Figure 34: Supply and vacancy rates s sq ft 2, 1 1 1,6 1% 1,2 8 4 % Leasing activity slowed in the third quarter with just 64,5 sq ft let, 4 below the 1 year quarterly average. There continued to be a lack of larger deals with just one deal over 1, sq ft. The most significant deal in Q3 involved the acquisition of 1,57 sq ft at 1 Cadogan Square by Teleperformance. The market was also characterised by a lack of Grade A activity with no Grade A lettings recorded in the third quarter. for the year to end Q3 totalled 288, sq ft, up slightly compared to the equivalent period in 211 but well below average levels. Looking ahead it is therefore unlikely that take-up for 212 will surpass the 1 year average of 496, sq ft. Overall supply increased in Q3, with Grade A supply increasing by around 1 as a result of 72,4 sq ft of space becoming available at 151/155 St Vincent Street in the CBD. Despite this, Grade A vacancy rates remain relatively low at just 3.. Supply (lhs) Figure 35: Prime rents and rental growth 1 1% % - -1% 22 23 24 25 26 27 28 Rental growth (y-on-y) (lhs) Figure 36: Prime yields Vacancy rate (rhs) 29 21 211 Prime rent (rhs) 212 3 25 2 15 1 5 per sq ft The development pipeline remains switched off with nothing currently under construction. Despite this, there has been greater interest in the market amongst potential developers. Office investment transactions totalled 66.2 million in Q3 across two deals. Union Investment acquired 1 George Square for 6 million reflecting a yield of 6.2 and Barclays Bank sold 38 Cadogan Street to Eton College for 6.2 million. Prime office yields were unchanged in Q3 at 6.2. 22 23 24 25 26 27 28 29 21 211 212 Prime yields 1 year average 2 year average Source all Charts: Jones Lang LaSalle
14 On Point UK Office Market Outlook Q3 212 Definitions Floor space acquired for occupation by lease, prelease, freehold or long leasehold sale in the City Centre (unless otherwise stated). All deals are included with the exception of Western Corridor and Bristol where a 1 sq ft threshold is applied. Cardiff includes City Centre and Cardiff Bay. Supply Floorspace on the market and available for occupation. It includes space that is under offer. Under Construction Speculative development of new building or substantial refurbishment where construction activity is ongoing. Demand New enquiries logged on a quarterly basis, over 2, sq ft for London and the South East and over 1, sq ft for the regional markets Prime Rent The Jones Lang LaSalle view of the highest rent achievable for a hypothetical 1, sq ft unit of Grade A space in a prime location, without any adjustment for incentives. Business Sectors Broad business sectors are classified as: Banking & Finance: Banks and other financial institutions Professional Services: Accountants, legal, management consultants etc Service Industries: Advertising and PR, broadcasting, internet services, printing and publishing, software houses and data processing, telecommunications services, transport, retail, leisure etc Manufacturing Industries: Pharmaceuticals, computer hardware, electronics, construction, mining, engineering, food and drink etc Public Administration & Institutions: Central and local government, institutions, charities, quangos, health and social etc
On Point UK Office Market Outlook Q3 212 15 Business contacts Jeremy Richards National Offices Bristol +44 ()117 93 5745 jeremy.richards@eu.jll.com Chris Hiatt National Offices London West End + 44 () 2 7399 5323 chris.hiatt@eu.jll.com Regional offices John Mulholland Bath +44 ()1225 32418 john.mulholland@eu.jll.com Jonathan Carmalt Birmingham +44 ()121 214 9935 jonathan.carmalt@eu.jll.com Ian Wills Bristol +44 ()117 93 5746 ian.wills@eu.jll.com Rhydian Morris Cardiff +44 ()29 272 62 rhydian.morris@eu.jll.com Cameron Stott Edinburgh + 44 ()131 31 6715 cameron.stott@eu.jll.com Andrew Pearce Exeter +44 ()1392 42932 andrew.pearce@eu.jll.com Mike Buchan Glasgow +44 ()141 567 6623 mike.buchan@eu.jll.com Jeff Pearey Leeds +44 ()113 261 6236 jeff.pearey@eu.jll.com Chris Prescott Liverpool +44 ()151 242 66 chris.prescott@eu.jll.com Chris Mulcahy Manchester +44 ()161 238 6228 chris.mulcahy@eu.jll.com Simon Taylor Newcastle +44 ()191 279 11 simon.taylor@eu.jll.com Matthew Smith Nottingham +44 ()115 98 2123 matthew.smith@eu.jll.com Jason Webb Southampton +44 ()23 838 5611 jason.webb@eu.jll.com James Finnis Western Corridor +44 ()2 8283 2534 james.finnis@eu.jll.com
Research contacts Karen Williamson UK Research +44 ()23 147 1197 karen.williamson@eu.jll.com Vicky Heath UK Research +44 ()117 93 5738 vicky.heath@eu.jll.com Jon Neale UK Research +44 ()2 787 558 jon.neale@eu.jll.com Marketing contacts Sam McMillen UK Marketing +44 ()2 7399 5964 sam.mcmillen@eu.jll.com UK Office Market Outlook Q3 212 OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends. www.joneslanglasalle.co.uk Printed on recycled paper COPYRIGHT JONES LANG LASALLE IP, INC. 212. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.