Office supply crisis looming in Birmingham 15.03.2011The absorption of office stock in Birmingham is the highest it has been for five years, fuelling fears of a looming supply crisis. According to Colliers International’s newly released Net Stock Absorption Survey, total occupancy across central Birmingham rose by 221,825 sq ft during 2010, leaving vacancy rates for the city at 18.4 per cent - the lowest for two years. In total, Grade A additions to overall stock over the past five years stand at 1.6 million sq ft, which represents about ten per cent of current total stock. The city saw significant growth over the last decade: 5.1million sq ft was added between 2000-2012, compared to 3.9million sq ft in the ‘80s and ‘90s combined. However, Birmingham is unlikely to see this kind of growth in new space again for some time. According to Craig Satchwell, a director and head of the office agency team at Colliers International’s Birmingham office, the completion of the Cube signals the end of the current speculative development cycle, with no new offices currently being built. If absorption of office space continues at the five-year average, the city is at risk of having little new Grade A stock to accommodate large requirements by 2013. Mr Satchwell said: “For the short-medium term, with the exception of Two Snowhill, there are few, if any, deliverable new build schemes in the central office core. “Proposed schemes such as Arena Development’s Arena Central and British Land’s 103 Colmore Row are predicated on pre-lets. However, with typical large Grade A lettings in Birmingham being 20,000 – 40,000 sq ft, both developers are likely to need a handful of these to have any hope of getting funding in the current market. “In the absence of funding for speculative office development landlords and developers need to look at opportunities to recycle existing stock to accommodate new inward investors to the city. However, given the limited pool of opportunities, this can only be a short-term solution.” Historically, schemes like One Colmore Square and 134 Edmund Street were all developed speculatively, and let during the build cycle. According to Mr Satchwell, those days, realistically, are gone for now. The acquisition of Calthorpe House by The Binding Site, and lettings to the Office for Legal Complaints at Baskerville House and Mazars at 45 Church Street, helped maintain momentum for the take-up of top quality space during 2010. With Deutsche Bank looking to supplement its existing 15,000 sq ft of space at Baskerville House with a further 20,000 sq ft, KPMG planning to create a further 100 jobs for its Midlands operations, and Rare Ltd, the Microsoft subsidiary, seeking 50,000 sq ft in a prime location, there is expectation of further positive absorption in the first half of 2011. It is not just Grade A stock that is in short supply. Good quality Grade B space is also being absorbed at an aggressive rate. Mr Satchwell said: “As a proportion of the wider office market, good quality Grade B space, the majority of which is targeting rents of £16-20 per sq ft, accounts for just eight per cent of available space. With current availability around 223,000 sq ft, it won’t take much for this to start diminishing. “In contrast, lower quality Grade B / C stock (sub £15 per sq ft) has seen an aggressive rise in availability, and reducing take-up. This reflects an overall trend of tenants opting for higher quality accommodation.” Despite the strong absorption rate, rents remained stable during 2010, at around £27.50 per sq ft for Grade A accommodation. However, with Grade A shortages becoming more pronounced and as occupiers continue to soak up existing quality stock at the likes of 11 Brindleyplace and Colmore Plaza, over the next 24 months rent rises are inevitable. Colliers predict that rental growth will return in 2012, with prime rents potentially reaching £30 per sq ft by 2013.