After a very difficult period, UK office markets showed an improvement in the second half of 2009. Despite a deeper economic recession than in the early 1990s, the office downturn is likely to be less deep and prolonged this time. Nonetheless, recovery is set to be uneven, with central London re-emerging this year, and some regional centers much slower to return to growth.
The recovery that is taking place in office occupier markets brings a range of challenges and opportunities:
· It remains a tenant's market. Occupiers face the widest choice and the most attractive rents and incentives for years, though signs of recovery suggest that this may not last for long.
· The performance gap between the capital and the rest of the country will widen in the upturn, with central London experiencing the earliest reversal of fortunes and leading the office market in 2010, driven by the financial sector.
· Demand will remain under pressure outside of London as these markets are more exposed to the public sector squeeze, though central government relocations and bank de-mergers could still provide opportunities.
· The worst of the fall in office rents is over. London is likely to be the only market to see prime rental growth in 2010, though it will be several years before recent declines (of -35% on average) are reversed. In the regions, the correction has been milder (at -10%) and growth will take longer to return.
"We are witnessing a two-speed recovery," comments Andrew Burrell, Office Research Partner, "The capital's specialization in high-value-added, globally-traded services means its economy is more volatile than the rest of the UK, but it also ensures it grows more rapidly over the cycle. So after a deep trough, the rebound in London offices is most vigorous".
He added "Outside of London, take-up was led by the public sector in 2009. This trend cannot continue post-election, as the new government is forced to slash spending. Larger cities with diverse occupier bases, such as Bristol and Manchester, remain best placed for recovery - others may struggle."
King Sturge is releasing the 10th edition of its annual UK Office Property Markets report. The survey covers 20 key UK locations, providing a review of the past year's activity and predictions for each regional market. In the report King Sturge's in-house Research team provides city-specific data for office rents and take-up together with investment analysis and commentary from the firm's regional network.
Source: King Sturge