Improving demand and a dwindling development pipeline have put pressure on office supply

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2024 marks a turning point for the UK’s regional office markets, with many heading towards an acute supply crunch, according to the latest Regional Office Report from Lambert Smith Hampton (LSH).

Improving economic conditions over the first half of 2024 have translated into robust take-up across the UK’s regional office markets. Q3 saw 2024 saw four deals over 50,000 sq ft, rising from a tally of just two during the entirety of 2023, the largest of which was BNY Mellon’s 196,000 sq ft lease at 4 Angel Square, Manchester, the largest regional office deal in four years.

2024 overall is shaping up to be solid year for take-up. Space under offer and likely to transact in Q4 indicates that take-up across the 15 key regional markets will hit circa 8.1m sq ft in 2024, improving by 11% on 2023’s total and only marginally below the post-pandemic best of 2022.

However, structural change continues to have a key influence on activity. The core Big Six city centre locations of Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester are on course to see combined annual take-up only 2% short of the ten-year annual average in 2024, while the 15 out-of-town markets are collectively on course to see take-up sink to a 15-year low.

Overall supply across the 15 centres combined continued its upward trajectory, rising 6% since the beginning of the year to its highest level since 2014. However, grade A space makes up only 34% of the total while prime space, characterised by high quality amenities and strong ESG credentials, makes up only 7% of total supply.

Deliveries of prime schemes have come almost exclusively in the Big Six, albeit aggressive take-up has left some with an acute shortage. Manchester city centre has only 94,000 sq ft of prime space available, while Birmingham leads with 542,000 sq ft, albeit a significant tranche is under offer.

Robust demand for this new generation of best-in-class buildings continues to drive impressive rental growth at the prime end of the market. Across the 15 key regional city centre markets combined, prime headline rents are on course to increase by 6.2% on average in 2024, accelerating from 4.5% in 2023 and the strongest in 18 years.

Reflecting heighted developer caution over the past two years, LSH’s research highlighted an acute lack of pipeline schemes to replenish high-quality supply. A flurry of completions in Q4 2024 leaves only 1.5m sq ft under construction, a third of which is in Manchester, while only circa 800,000 sq ft is deemed likely to commence construction speculatively in 2025, the lowest level of starts in the regional markets since the wake of the GFC in 2012.

The looming supply crunch is made more acute given accelerated rates of obsolescence stemming from tightening legislation on energy performance standards, with minimum standard set to rise to EPC-grade C by 2027. LSH’s analysis of the EPC register reveals that 54% of stock across the 15 key markets is heading towards non-compliance in 2028, most notably Leicester (74%), Nottingham (63%) and Bristol (62%).

Meanwhile, in the investment market, larger lot-sized deals made a welcome return in Q4, driven by improving sentiment and much-anticipated interest rate cuts. After a very subdued year to Q3, volume across the regions is expected to rebound to c.£650m in Q4, the strongest since Q4 2023 and closely in line with the five-year quarterly average. While prime yields have stabilised and competitive tension has seen a marked revival at the quality end of the market, pricing discovery continues for secondary assets, despite an already-severe correction over the past two years.

Peter Musgrove, Senior Director and Head of Regional Offices, said: “The regional office markets find themselves at an inflection point, with a recovery in occupier demand on a collision course with a severe lack of high-quality supply. Accordingly, rental growth has been strong, with occupiers competing to secure space amid an increasingly limited choice of prime options.

“An acute lack of anticipated development starts in 2025, as it stands, points to a serious supply crunch of high-quality space by 2026/27. However, with occupiers effectively being forced into more energy efficient buildings through legislation over the coming years, depressed secondary values provide investors with a huge opportunity to improve existing buildings to the required standard”.

Charlie Lake, Director, Senior Director – Office Advisory and Capital Markets at LSH, said: “While there is no doubting the improving sentiment in the investment market for quality assets, recent shifts in interest rate expectations are likely to delay short term expectations on yield compression. Meanwhile, with development starts looking relatively fallow in 2025, there is a clear opportunity to exploit historically low values through repositing to plug the development lag that will hit in 2025.

“The market bears all the hallmarks of a new cycle beginning to unfold. Alongside strong overseas demand, the government’s planned shake-up of the UK pensions environment points to a revival of in institutional activity over the coming years, which should help to rightfully restore regional offices as a core part of the UK investment landscape over the coming cycle.”

Download the Regional Office Market Report 2024 here →