Large strategic deals lift a subdued market, but sentiment is softening in response to increased government restrictions.

Strategic real estate advisor Avison Young has released its quarterly Big Nine office market update for Q3 2020.

The increase in government restrictions and renewed caution towards office occupation has impacted occupier demand across the Big Nine cities. Transactional activity for Q3 amounted to 767,000 sq ft in the city centre and 546,000 sq ft out-of-town, well below the ten year quarterly average, although there was a noticeable improvement on the previous quarter.

The increase in take-up from Q2 2020 can be attributed largely to several significant long-term commitments to the regional markets, including Baillie Gifford pre-letting 280,000 sq ft at ‘The Haymarket’ in Edinburgh and Babcock taking 132,000 sq ft at Bristol Business Park. In addition, BT has recently agreed a 175,000 sq ft pre-let commitment to Four New Bailey in Manchester, which will fall into Q4 figures. Nevertheless, take-up activity continues to be dominated by sub-2,000 sq ft deals, which made up 57% of deals in Q3 compared to an average of 48% over the past ten years.

Some occupiers are postponing new deals in favour of short-term lease extensions and there are examples of some occupiers downsizing their requirements by up to 30%. As a result, a significant increase in grey space is likely to enter the market over the next few months.

Charles Toogood, Principal and Managing Director, National Offices Team at Avison Young, said:
"As a number of occupiers look to rationalise their portfolios, there appears to be a ‘flight to quality’, as businesses consider taking less but better-quality space. With the way we work so closely under the microscope over the last few months, we believe that the office environment is expected to become less about process and more about collaboration and innovation."

Investment sentiment in the Big Nine office markets gathered some momentum over the summer months. Total Q3 volumes amounted to £485 million, 13% below the ten year quarterly average but a considerable improvement on the previous quarter. However, the increasing government restrictions in the past few weeks have slowed momentum.

There were two deals over £100 million, the £133.3 million sale of 1-3 Lochside Crescent on Edinburgh Park and the largest city centre deal at 55 Colmore Row, purchased by German investor, Union for £105 million. Strong out-of-town activity follows a handful of deals around the £20 million mark agreed during Q2, including 2620 Aztec West in Bristol and Cobalt Business Park in Newcastle.

Deals in the pipeline indicate a solid start to Q4, including transactions at Quartermile 3 in Edinburgh and the sale of 1 Colmore Square in Birmingham to Oval RE, which completed for £86.75 million in October. However, while there remains a weight of money, sentiment has dropped, and some investors have delayed acquisition strategies.

Mark Williams, Principal and Managing Director, Regional Investment at Avison Young, said:
"Out-of-town investment has suited purchasers in the current climate, being more accessible and less dependent on public transport. However, city centre transactional activity picked up later in the quarter."

To read the full research update on Big Nine office markets (Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester and Newcastle), click here.