What’s Next For Birmingham?

Rupert Young joins city observers Neil Rami, Marketing Birmingham, Phil Carlin, Seven Capital and Ian Cornock, JLL to talk infrastructure, investment, skills and devolution.

Birmingham’s office market had a spectacular start to 2015, but what happens next? Ian Halstead finds out from two of the city’s leading commentators.

There is still chatter in the market as to the influences which saw some 520,000 sq ft of office accommodation taken up in Birmingham’s city core between April and June; the best quarterly performance since the heady days of the Thatcher-Lawson boom way back in 1987.

The most obvious was HSBC signing for 212,000 sq ft at Arena Central, but the work done by Marketing Birmingham in highlighting the city’s merits, an increasingly buoyant regional market, the value offered by comparison with central London, and the wider economic recovery are equally evident and often cited.

However, one of the canniest observers of the regional property scene reckons the biggest influence on the 40 office transactions in Q2 – and a driving force for the rest of 2015 and in years to come – was Birmingham’s ability to deliver Grade A space which can match the best London has to offer.

Rupert Young, development director of Nurton Developments, believes the quality of the city’s Grade A schemes have been steadily improving in recent years, judged by design, fit-out and public realm, and says the next generation of office projects will set a new high.

“All the other influences which are mentioned undoubtedly have an influence, and of course, without the HSBC letting, the record couldn’t have been broken, but the most crucial aspect which drives office lettings now is the quality of the space which prospective tenants or investors see before them,” he says go now.

“For a long time, London definitely had the edge on Birmingham and the other major regional centres, but now we have started to deliver London-quality buildings; at Snowhill and Colmore Plaza for example, and Paradise and 103 Colmore Row will follow that trend.

”Location is always critical, but tenants also want great reception areas, high-quality fit-outs, large floorplates, flexible lease structures, and a scheme which has a certain physical presence. Now the city is meeting all those needs.

”The first phase of Paradise, for example, will deliver around 320,000 sq ft of Grade A space, with 20,000 sq ft floorplates which will be very attractive. At the same time, Birmingham’s secret is that it can now offer London-quality space at regional rent levels.

“Prime rents will soon be back up to around £32 psf, but even if they rise to £35 psf over the coming year, that’s still tremendous value by comparison with London, and of course rents do need to increase to pay for high-quality buildings.”

Young is equally certain in rebutting suggestions that the headline-grabbing HSBC deal created a blip on the league table of office lettings.

“If you look back for five or even ten years, take-up in the city core market is pretty consistent, ignoring the impact of the economic crash, with between 600,000 and 700,000 sq ft of Grade A changing hands each year,” he recalls.

“Before HSBC, we had other major relocations in Deutsche Bank and HS2 Construction, and I expect a fourth this year, which would be unprecedented for any regional city. Birmingham is now consistently attracting deals of this size because it’s become a genuine destination for relocation and investment.

“Equally though, the sign of a sustainable office market is its ability to generate strong internal demand. Before the major relocations happened, Birmingham’s market was largely driven by existing occupiers moving between schemes, and that’s still the case in terms of transaction numbers.

“It’s a very healthy sign for the city, when you see lots of firms taking 2,000, 3,000 and 4,000 sq ft, because they are the growing firms. For sure, some will fall by the wayside, but the others will prosper and expand, and create employment and wealth.

“The big deals on big floorplates of Grade A space always catch the eye, but we’re also seeing major refurbs of Grade B+ space on big floorplates, and Grade B space for smaller occupiers, alongside an infrastructure offer which has finally started to really mature, with New Street and the Metro extension.

“When you put everything together, and you also have the quality of space to offer, it’s no surprise that Birmingham’s office market is setting records, and I wouldn’t be surprised if 2016 turned out to be a better year than 2015.”

Jon Carmalt, JLL’s head of office agency in Birmingham, isn’t going quite so far, but is equally bullish about prospects in the months and years ahead.

In particular, he expects the renaissance in the pre-let market to strengthen swiftly, and considers it likely that two significant such deals will be unveiled before the year-end.

Carmalt also highlights the number of major refurbs underway, which will add serious chunks of quality space to the core market in the next couple of years.

“Bruntwood’s refurbishment and expansion at 2 Cornwall Street certainly catches the eye, as do IMI Properties’ plans to spend £30 million at 55 Colmore Row, and the work Brockton Capital is undertaking at the Mailbox,” he says.

“We’ve also seen Legal & General pay around £87m for 1 Colmore Square, so they’ll be refurbishing the floors which are empty there, and I’m sure they’ll give the reception area a decent facelift, to increase its external appeal.

“Further down the size scale, Freshwater Group is refurbishing 10 Temple Street and Ardstone Capital is about to start refurbishing Phoenix House, which will be very welcome for the small and medium-sized tenants looking for space in the CBD area.

“It’s a good job these refurbs are happening too, because the amount of available Grade A space continues to decline in the city centre. Our H1 research indicated that the vacancy level had fallen from 2.6% to just 1.8% by the end of June, and the year-end figure will be even lower.

“The research also showed that prime rents were up by an average 5.3% year-on-year, and with very limited supply in the short-term, they will continue to edge up. Even so, they’re barely back to the level which we saw before recession, so there are no signs yet of possible over-heating.”

One recent office letting caught Carmalt’s attention, which saw the giant US corporate, Jacobs Engineering, take almost 20,000 sq ft of Grade A on a single floorplate at Nurton’s 2 Colmore Square scheme.

“We’ve all been expecting that companies will move to the city centre in due course because of the presence of HS2 Construction at Two Snowhill, so it is a reassuring sign that such a major player in rail infrastructure took space, and predicted that it would be creating hundreds of jobs in the city,” he says.

“Jacobs is a very powerful global brand, and I suspect its commitment to the city and to HS2 will be the catalyst for other engineering companies to consider coming here.

“Yes, in the very short-term there are some concerns about occupier choice, but when you look at the good quality space coming through in terms of refurbishments and the new build schemes that are now underway, I can only see the office market continuing to progress.”

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