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Deals Deficit: Is Something Wrong With The Birmingham Office Market?

Q3 data shows the Birmingham office leasing market appears to be slowing, with the year-to-date take-up totalling just 477K SF.

"Subdued" is the official verdict of the authoritative Birmingham Office Market Forum. Others might use stronger language.

So has the office market stalled? And where have all the deals gone?

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3 Arena Central (second from left) in the Arena Central master plan

Data published this week by the Birmingham Office Market Forum proved what everybody already knew: that it had been a quiet summer. The third quater office take-up figures showed 28 deals amounting to 159K SF. The largest single deal was 36K SF (the government, at Norfolk House).

Add the Q3 total to the slow first half total of 318K SF and the year-to-date take-up is just 477K SF, the third lowest of the last decade.

There are four potential explanations, according to the brokers and leasing experts who spoke to Bisnow.

1. The Big Deals Are Coming In Q4

"I've always said this year was going to be backloaded," Cushman & Wakefield partner Scott Rutherford said. "We saw a moderate first two quarters with the big difference from last year being there wasn't a big deal in the third quarter like there was in 2017 when the Government Property Unit took 240K SF."

"But there are big deals coming. We know there's one of 100K SF that could land in Q4, and there's a medium-term requirement for 100K SF for the Commonwealth Games."

Toting up the midsize deals of up to 20K SF, and hoping the larger deals conclude before Christmas, means as much as 400K SF could transact in the fourth quarter, Rutherford said.

WeWork are now searching for 60K SF advised by JLL, Estates Gazette reports, and more deals are imminent.

"Irwin Mitchell might act on a 40K SF requirement, we've another firm looking for 23K SF, so this will be a back-end year, and I think the leasing market will sort itself out after an undboutedly muted first three quarters," Rutherford said. "Maybe reaching last year's total of 1M SF would be pushing it, but 2018 will be well in line with the 10-year average."

2. The Figures Tell A Good News Story, Not A Bad News Story

Put the Q3 figures in context and the data shows a market that has grown more robust since last year, CBRE Director Will Ventham said.

"The gut reaction to the Q3 figures would be to say there's a sudden downturn, but look a bit deeper and I don't think that's right," Ventham said.

The data bears this out. The first two quarters of 2017 were appreciably slower than the first two quarters of 2018 (248K SF compared to 318K SF). And if you exclude what Ventham calls the "once in a lifetime" 240K SF Government Property Unit (HMRC) deal, then Q3 also compares well with 2017 (160K SF compared to 159K SF in 2018).

Add this up and so far 2018 is slightly outperforming 2017 once the effects of the mega-deal are excluded.

Ventham's conclusion is that the 2018 data is evidence of a market that has deepened and broadened, including a growing weight of unshowy but solid grassroots deals.

"Look at the figures realistically, without the distortions of the big deals, and it shows there is real strength," he said.

Ventham has no doubt that the 600K SF of new Grade A speculative floorspace which arrives on the market in late 2019 will readily find a market.

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3. Maybe This Is The Fault Of Serviced Offices?

The scale of expansion in the serviced office sector is hard to ignore. New research from Lambert Smith Hampton, also published this week, pointed to what it calls a “meteoric” rise in the number of serviced offices in the city over the past 12 months. In that period serviced office operators have committed to more than 200K SF, the equivalent to 19% of total take-up. This is the largest proportion of take-up of all the Big Six regional cities and compares to just 6% in Manchester, 5% in Leeds and 7% in Bristol. In Q2 LSH let 38K SF at Somerset House, Temple Street, to BE Group, a new serviced office entrant to the Birmingham market and one of the year's largest deals so far.

"If you look at the volume of deals in Q3 it was 28, and normally we would see 33-35 transactions, so that's a drop in volume that may have gone to the serviced offices, I don't know," Lambert Smith Hampton Birmingham Head of Office Advisory Alex Tross said.

"We've had a less than stellar year for office take-up, but it is still in line with the 10-year average, and whilst I'm not convinced it had a large impact, it is possible deals are going to the serviced sector instead of the traditional leasing market," Tross said.

Tross does not think too much blame should be placed on the serviced sector today (deals are small, he said, and many operators have taken space but not yet opened for business). However, he predicts it will have a longer-term impact.

4. Occupiers Are Doing More Thinking

Late 2018 will certainly be featuring in the economic and political history books, and whilst it is fascinating (or horrific) to live in stirring times, this is not necessarily good for business forward-planning. Several of our commentators pointed to slower decision-making by occupiers and according to Knight Frank partner Jamie Phillips, slower decision-making could be part of a mix of accidents helping to knock the Birmingham office market slightly off its peak.

"The market genuinely isn't that bad. We have 200K SF under offer, and there's more happening, but this is the first year in several years that we have not had one big headline deal whether that is the government, or HSBC, or the BBC or NetworkRail," Phillips said.

"There are big deals circling Birmingham, and enquiries are not down, but we are seeing occupiers involve themselves in more due diligence work ahead of deals than we've seen before. Occupiers are also pausing to think about new ways of working, like collaborative working or combining offices or consolidating staff from London, and that kind of strategic thinking takes time."

Phillips concludes that far from being a sign that the Birmingham office market has a problem, it is a sign that occupiers are taking it extra seriously.

To join the debate at the Bisnow Birmingham State of the Office Market event on Thursday 6 December register here.