Pictured above: Philippa Pickavance of Drivers Jonas Deloitte

Drivers Jonas Deloitte Research has released its 2010 Office Trends research - a view of what's in store for the office markets of London, Birmingham, Manchester, Leeds, Edinburgh and Glasgow.

Anco Booysen, senior researcher at Drivers Jonas Deloitte, expects London to lead the occupational market recovery with double digit rental growth forecast for the City of London, and while the UK investment market will continue to see yield levels harden, she warns it may not be an entirely smooth ride to occupational market recovery for any of the other key cities.

The report highlights that rental growth is unlikely to be seen in any of the regional key city centres in 2010. Occupier demand is expected to stay weak and the high levels of Grade A availability will take some time to reduce.  

In Birmingham, 2009 saw office availability rising alongside investment transactions but both tenant demand and take-up levels fell. Key features of the regional marketplace during 2009 were:

• Prime rents fell by £2 in Birmingham during 2009 to £28.00 per sq ft. By the end of the year rent-free incentives had increased on a ten year lease with no break. However, the rents ranged from as low as £23.00 to as high as £28.00 per sq ft for Grade A office space.

• Almost 550,000 sq ft of developments were delivered during 2009, which equates to twice the average annual delivery.

• Take-up levels dropped 31% from their 2008 record high to 657,000 sq ft, 100,000 sq ft below the average ten year take-up. As in 2008, the three largest deals accounted for nearly 45% of the year's total take-up volume. However, the majority of deals were under 5,000 sq ft in the city, similar to what was also found in Manchester and Leeds i.e. a few large and many more smaller deals.

• Occupier demand was predominantly driven by local and government bodies, for example 196,000 sq ft of Grade A office space is currently under construction at Birmingham Science Park in Aston for Birmingham City Council and the Highways Agency is taking 56,000 sq ft at The Cube.

• Investment transaction volumes increased by 18% year-on-year with £256 million transacted.

• Three large deals contributed to more than a third of the total transacted, with institutions being the most active purchasers.

• Prime yields in Birmingham at the end of the year stood at 5.85%, a hardening of 115bps over the year.

Demand for office space in Birmingham during 2010 is predicted by Drivers Jonas Deloitte Research to remain weak and to be largely driven by Government bodies and occupiers with imminent lease expiries or breaks. Current Grade A vacancy levels are in excess of one million sq ft with rental levels forecasted to fall by 3% in the first half of 2010. Prime yields will continue to harden and should reach 5.5% by year end.

Drivers Jonas Deloitte's outlook for the Birmingham market in 2010 includes:

• Grade A vacancy levels expected to remain high.

• A shrunken development pipeline with just 147,000 sq ft expected to complete during the year, less than half the average annual supply. Furthermore 40% of this stock has pre-let agreements in place.

• No office developments currently scheduled for completion in 2011, with just one scheme (Two Snowhill) still set to complete in 2012. The majority of Two Snowhill has been pre-let to Wragge & Co solicitors two years ago. The period of low completions over the next few years should allow for the current high availability levels to decline in the medium term, once market conditions improve and demand returns.

• Banks and lenders are expected to be the most active sellers as they repair their balance sheets with institutions driving the purchasers' market as they have cash to spend.

Commenting on the Birmingham market, Philippa Pickavance, of Drivers Jonas Deloitte said: "The key lettings transactions for 2009 were the Highways Agency move to The Cube and Amey's move to 45,900 sq ft of space within Colmore Plaza.  The majority of other take-up in Birmingham City Centre was under 5,000 sq ft. Out of 110 deals, 76 were under 5,000 sq ft. 

"Predictions for 2010 are that it will continue to be a tenants/occupiers market with supply out-stripping demand in all sectors from Grade A space through to a raft of varied secondary accommodation.

"However, there are huge opportunities for occupiers to upgrade their accommodation when previously they may have ruled out a top quality product on the grounds of cost.  Many of these products are now within their range with reduced rents and increased incentives. I believe any company with a 'lease event' such as a lease end or break in the next two years, should seriously consider bringing property to the top of their business agenda as there are good deals to be brokered." 

So, there is mixed news for investors with falling yields but weak fundamentals in the occupier markets meaning falling rents, and market conditions remaining positive for those occupiers that can take advantage of the wide choice available at lower rental levels.  Occupiers seeking new space in the region will have a real opportunity to strike advantageous deals in the coming months, as already seen in London.

Booysen warns: "It may not be a smooth ride to recovery for the key cities occupier markets - it is difficult to see where expansionary demand for office space will come from in the weak economic conditions.  In addition it is widely expected that public spending will be cut whoever wins the election and markets heavily reliant on public sector occupiers might therefore experience a further bump on the road to recovery".

"Despite this, as the UK economy slowly returns to positive growth, market sentiment improves, and more importantly, the levels of available supply reduces and is not being replaced by new development, developer and investor confidence will grow. The data shows that the regional office development pipeline has now been turned off and only Manchester and Birmingham will see the delivery of any new office space this year. Indeed, Birmingham is the only regional city with anything due for completion post 2010 with one (part pre-let) scheme being delivered in 2012. This period of unprecedented low completions across all the regional cities will allow supply levels to be corrected and rental levels to stabilise and increase in the more active markets, but only once demand picks up."

"And whilst there remains the threat to investor returns of rising gilt and interest rates and the worry that the UK's credit rating may fall we believe that prime yields will continue to harden across the UK's key office city centres due to strong investor demand for the limited amounts of good quality product."