Government requirements and HS2 will fuel demand
We anticipate that the year ahead will be fuelled by Government requirements and HS2 related demand.
2017 is likely to see Central Government requirements translate into deals, primarily driven by HMRC's requirement, which totals around 250,000 sq ft, centring around the prime core.
HS2 received Royal assent on 23rd February and this will inevitably be a catalyst for demand for centrally located office space driving further inward investment and recruitment of a new workforce to the region.
While the true benefits of increased connectivity won't be felt until the link is up and running, there will be an immediate impact on the regional economy. This will arise from the placement of construction and consultancy contracts, related to HS2, within the city. The city has already seen Laing O'Rourke take 11,000 sq ft at 1 Victoria Square in 2016 and we expect engineering firms and consultants - off the back of HS2 - to be a dominant sector going forward.
Grade A supply continues to decrease
With increased demand anticipated this will have a marked impact on supply figures. Although Three Snowhill and Paradise are currently under construction, these schemes will not impact the supply figures until mid- 2019.
Major re-developments, such as the much anticipated 55 Colmore Row (160,000 sq ft), Corner Block (112,000 sq ft) and the Lewis Building (110,000 sq ft) will all help bolster the supply as we wait for developments to complete.
Out-of-town market picks up pace
Solihull and the M42 corridor has seen a resurgence over the last 12 months. The M42 corridor remains the most significant office market in the West Midlands outside of Birmingham city centre. We expect this to continue to pick up pace and popularity as we go through 2017.
Solihull has benefitted from the infrastructure improvements and growth of Birmingham city centre as an office location. While they are two distinct office markets, Birmingham and the out-of-town market have begun to compliment each other. With HS2 connecting the airport, the M42 and the city centre market, we expect this new infrastructure to truly combine these areas.
According to Savills 'What Workers Want' survey, employees want leisure and retail on their doorstep. Blythe Valley Business Park has listened to the needs of the worker and is creating a desirable mixed-use scheme, created by the mix of residential, retail and leisure.
Occupiers are now starting to widen their net and the lines between in-town and out-of-town will become increasingly blurred over the next few years, with certain sectors less concrete in their location preferences. A recent example being ACS (an IT software developer) taking space in Birmingham city centre last year when historically these type of occupiers would have been expected to focus primarily out-of-town.
Although the out-of-town market is experiencing speculative development for the first time in 10-years, there are still supply constraints, in both the city centre and out of town, which will help drive rental increases during 2017. The best space out-of-town has seen a sharp increase in headline rents (16%) between 2015 and 2016 and this is expected to continue as we go through 2017, albeit not as strongly.
Prime rents in Solihull are £23 per sq ft, which is currently at a marked discount to £32.50 per sq ft in Birmingham city centre. This gap is likely to narrow as new build supply and the development pipelines are restricted in both. We also expect the gap between refurbished and new build rents to reduce as top refurbishments are now hitting £30 per sq ft.
Investment - a strong start to 2017
In terms of investment volumes, Birmingham saw £433 million transacted in 2016. Although this is 46% down on the previous year it is still up 8% on the long-term average.
The first quarter of 2017 has already seen £300 million transacted, with the key deal being Hines and Moorfield's sale of Brindleyplace's 470,000 sq ft office space, purchased by HSBC Alternative Investments for £260 million. This generated a 6% yield. By the end of Q1 we expect almost 80% of the long-term average to have already been transacted.
Looking at investor types, the institutions made up 66% of volumes in 2016. This was heavily swayed by Three Snowhill. Overseas buyers, attracted by the weaker pound, made up 20% of volumes in 2016 and we expect this to increase significantly as we go through 2017.
Birmingham office prime equivalent yields currently stand at 5.25% where we expect them to stay during the first half of 2017.
Lack of stock will be the big issue this year. There will be a number of parties who would like to sell but with limited opportunities to re-buy, may end up stalling.