Whilst office ‘Take-Up’ in Manchester was over 1 million sq.ft. in 2019, just 100,000 sq.ft. of extra office space was physically occupied that year. So, what is really going on in terms of office Supply and Demand?
A headline from Business Insider back in April 2019
Unfortunately, ‘Take Up’ figures tell you relatively little about the state of Supply and Demand. It reminds me of the situation back in the summer of 2008, when a financial prospectus described the Royal Bank of Scotland as a successful global bank with a turnover of £30 Billion a year. What the document failed to mention of course, was that the Bank was technically insolvent having suffered a loss of £41 Billion. If you bought shares in the bank at that point, you have my fullest sympathy!
Commercial property consultants love to talk about ‘Take Up’. You might hear them say that 2019 was another record year in Manchester with ‘Take Up’ hitting over 1 million sq.ft. for the sixth consecutive year. Sounds good doesn’t it particularly, if you are a leasing agent on a glitzy new office tower in Spinningfields.
Don’t get me wrong, I am not saying that Manchester’s office market is about to collapse. All I am saying is that when assessing the health of a property market, try and avoid being taken in by the ‘Take Up’ figures. They might sound impressive, but they will not tell you whether the market is booming or in free fall.
Source: Co-Star Database, 20 January 2020.
One of the most useful statistics we use when measuring the performance of an office market is something called ‘Net Absorption’. This tells us from one year to the next, just how much extra office space is being physically occupied compared to the period before taking into account all space vacated, demolished, converted or newly constructed.
For example, the graph above plots annual Net Absorption in Manchester’s Core Office Market in the 10 years from January 2010. It shows that Net Absorption has averaged approximately 100,000 sq.ft. per annum. Given that jobs growth has run at about 1%-2% per annum over this period and that there are around 100,000 private sector employees working in the city, these numbers are no surprise.
The point is that if your job is to promote the funding, leasing or selling of office buildings, Net Absorption figures of 100,000 sq.ft. per annum don’t sound quite as exciting as ‘Take Up’ figures of 1 million sq.ft. for six consecutive years.
The problem comes when tenants start to panic because they have read newspaper headlines that state that office ‘Take Up’ is hitting record new levels. These headlines might naturally lead some to conclude that they should be agreeing to pay higher rents when in fact, the reverse might be true! Think back to the RBS scenario. The headline figures therefore have the potential to mislead. This can create distortions in the market which isn’t great, as least not for the business tenant or the unsuspecting property investor or lending institution. We’re back to RBS again!
If you would like advice on the office market and how your business can navigate it successfully, please call Martyn Markland on 0161 457 1422 or email him at mm@tenantag.co.uk.