Concerns are rising about the availability of high-quality office space in Manchester. Experts have noted that the city could face a critical shortage of Grade A office spaces. Meanwhile, demand remains high, but new constructions are nowhere on the horizon.
Current Market Situation
Property experts have raised concerns about a potential ‘pinch point’ in the supply of Grade A office spaces in Manchester. Recent analysis shows that while the demand for office space in Manchester remains high, there are no new commercial buildings set to begin construction.
Manchester has experienced the highest year-on-year rental growth among regional cities, with a 13% increase, reaching £45 per square foot (psf) in the second quarter of 2024. Prime rents have surged by 20% since the pandemic began, highlighting the growing pressure on the office market.
Developer Challenges
David Porter, head of Knight Frank’s Manchester office, highlighted that no new projects are planned to start in the city centre. Even if a project began soon, it would not be completed until 2027. This delay could lead to significant supply issues for Grade A office spaces in the coming years.
Porter mentioned that some proactive landlords, like Bruntwood, are initiating high-quality refurbishment projects. These refurbishments aim to meet environmental sustainability goals and cater to the ongoing demand for high-quality spaces.
He also noted that the economic growth of the city is closely linked to the demand for city centre living. Limited office space could negatively impact business expansion, which in turn could affect residential demand.
Economic Factors
The rising costs of debt and construction present a dilemma for developers. These factors are affecting the investment value of assets, as seen with a shift in investment yields from below five per cent to higher rates.
Despite these challenges, there is still strong occupier demand. Existing companies wish to expand their floor space, and new companies are looking to move to the region. This ongoing demand ensures that the North West remains a highly desirable location.
To address the supply-demand imbalance, some experts predict a return of the traditional pre-let agreements. Companies may start signing contracts before construction begins to secure their desired spaces.
Future Projections
Rental prices are expected to rise further to bridge the viability gap. Current prime rents at £45 psf are anticipated to reach £50 psf and beyond within the next year. This could make office spaces more costly for businesses.
One potential solution involves local authorities stepping in. Similar to the Greater Manchester Residential Fund, a fund for commercial projects could support urban regeneration and alleviate some of the market pressures.
Porter remains optimistic, stating, ‘The office is not dead – it very much continues to thrive.’
Data Insights
Key data indicates that Manchester saw improved occupier activity in the first half of 2024, with take-up reaching 504,885 square feet. This is a 29% increase compared to the same period in 2023 and 14% above the five-year average.
The professional services sector has been a significant driver of this demand, accounting for more than half of all leased spaces. Within this sector, serviced office providers made up 46% of the total take-up, with Cubo being the largest leaseholder at No.1 Spinningfields.
Grade A office availability in the city centre stood at 712,231 square feet by mid-2024, marking a 29% annual increase. This figure is also eight per cent above Manchester’s five-year average.
Construction and Vacancy Rates
At the midpoint of 2024, 584,109 square feet of office space was under construction in Manchester’s city centre. Among this, around 105,500 square feet was already let, and about 276,000 square feet was under offer.
This leaves approximately 203,000 square feet, or 35% of the space, available for lease. The development is spread across four new-build schemes, with delivery expected within the next 12 months.
Once these ongoing projects are completed, there are no significant developments on the horizon. This further intensifies the concern about the impending shortage of Grade A offices.
Investment Trends
Investment volumes in Manchester’s office market were modest in the first half of 2024, totaling £44.3 million. This is eight per cent below the same period in 2023.
The largest transaction involved Trinity Bridge House, acquired by a private investor. Prime office yields remained steady at 6.75%, reflecting a year-on-year outward shift of 100 basis points and a 175 basis points shift since the pandemic began.
Looking Ahead
The challenges facing Manchester’s office market are significant, but proactive measures and strategic planning could mitigate some of the issues. With the city’s strong demand for both commercial and residential spaces, solutions will be crucial in maintaining its growth and appeal.
In summary, Manchester’s office market is at a critical juncture. While high demand persists, the city’s supply of Grade A office space is under severe pressure. With limited new construction on the horizon and rising rental costs, proactive measures and strategic planning are essential to mitigate these challenges. The future of Manchester’s commercial and residential growth depends on addressing these issues promptly.