Manchester’s office market is currently facing a significant challenge. Experts have identified a ‘pinch point’ for Grade A office supply in the city. Despite a rising demand for commercial spaces, no new buildings are under construction.
The city’s commercial sector is experiencing a rapid growth. Meanwhile, the delay in developments is causing concerns about a shortage of high-quality office spaces by mid-next year. Therefore, this impending drought in office supply could have far-reaching effects on the local economy.
Pinch Point for Grade A Office Supply
Manchester’s office market is facing a significant challenge. Experts have identified a ‘pinch point’ for Grade A office supply in the city. Despite rising demand, no new commercial buildings are currently under construction.
Data from Knight Frank reveals that demand for office space in Manchester has increased beyond pre-Covid levels. However, without new developments starting onsite, the city will face a shortage of high-quality office space by mid-next year.
Impact on Rental Growth
Manchester’s rental prices have seen remarkable growth. The city recorded the highest year-on-year rental growth among regional cities at 13%, with prime rents reaching £45 per square foot in the second quarter of 2024. This represents a 20% increase since the pandemic began.
David Porter, head of Knight Frank’s Manchester office, highlighted that even if new developments were to start now, they wouldn’t be completed until 2027. This delay is expected to cause a further squeeze on the already limited supply of Grade A office spaces.
Landlords’ Response
Landlords are taking proactive steps to address the shortfall in Grade A office spaces. Companies like Bruntwood are initiating high-quality refurbishment projects to attract tenants.
These refurbishments are designed to fill the gap in the market and meet tenants’ environmental sustainability goals. They are also a response to the continued high demand for premium office spaces in the city.
Interlinked Growth of Commercial and Residential Sectors
The shortage of office spaces isn’t just a commercial issue; it also affects residential growth. David Porter commented on the link between city centre living demand and economic growth. He noted that a lack of high-quality office space could hinder business growth and, by extension, reduce demand for residential properties.
The dilemma for developers lies in the rising costs of debt and construction, which affect the investment value of new projects. The increased cost pressures make it challenging to launch new developments.
Nevertheless, Porter emphasized that demand remains robust. Both existing companies looking to expand and new businesses attracted to the city see Manchester as a desirable location.
Return of the Pre-let Market
One notable trend emerging due to the supply-demand imbalance is the return of the traditional pre-let market. Companies with lease events in the coming years are signing contracts before construction begins.
Signing pre-let agreements allows businesses to secure the best available spaces that meet their requirements. This strategy is expected to become more common as the supply of high-quality office space tightens.
City Centre Availability and Development Pipeline
At the end of the first half of 2024, the availability of Grade A office space in Manchester’s city centre stood at 712,231 square feet. This is an increase of 29% compared to the previous year and 8% above the five-year average.
Following the completion of major projects like Havelock and 4 Angel Square, the vacancy rate for Grade A space rose to 4%. However, with 4 Angel Square under offer, the rate is expected to drop to 2.9% once the deal is finalized.
Currently, around 584,109 square feet of office stock is under construction in the city centre. Of this, approximately 105,500 square feet have been let, and 276,000 square feet are under offer, leaving 203,000 square feet available. There are no significant new developments in the pipeline beyond these.
Investment Trends
Investment volumes in Manchester’s office market were relatively modest in the first half of 2024, totaling £44.3 million, which is an 8% decline compared to the same period in 2023. The most noteworthy transaction was the purchase of Trinity Bridge House by a private investor for an undisclosed amount.
Prime office yields have remained steady at 6.75%, marking an outward shift of 100 basis points year-on-year and 175 basis points since the start of the pandemic.
Future Outlook
Looking ahead, there are concerns that the lack of new developments could stifle Manchester’s economic growth. David Porter suggested that local authorities might need to step in, similar to how the Greater Manchester Residential Fund has supported housing projects.
Porter emphasized that despite the current challenges, the office market is not dead. “The office is not dead – it very much continues to thrive,” he remarked, suggesting a resilient outlook for Manchester’s office sector.
Key Data Highlights
Manchester saw a notable uptick in occupier activity in the first half of 2024. The take-up of office space reached 504,885 square feet, which is 29% higher than the same period in 2023 and 14% above the five-year average.
The professional services sector was the primary driver of this demand, accounting for more than half of all leased space across 36 deals. The largest letting involved the serviced offices firm Cubo, which took nearly 60,000 square feet at No.1 Spinningfields.
Service office providers made up nearly 46% of the total professional services take-up, underscoring the growing demand for flexible office solutions in Manchester.
In summary, Manchester faces a looming crisis in its office market due to a shortage of Grade A office supply. With no new constructions on the horizon and rising demand, the city’s economic growth may be impacted. Landlords and developers must act quickly to address the supply gap and meet the needs of businesses.