A report on Southampton’s office market issued by CB Richard Ellis (CBRE) shows that although city centre activity was limited in the first half of 2010, there was an increase in activity at Solent Business Park.
Increasing numbers of deals may be forthcoming driven by lease breaks and expiries, which combined with a shortage of Grade A stock and little or no development, are expected to encourage occupiers to take advantage of favourable lease terms on offer.
Supply and Rents
At the end June 2010 total availability was 26% higher at 711,700sq ft compared to 564,400sq ft at the end of 2009. This increase was driven entirely by secondhand space which now accounts for 76% of total supply, whereas although Grade A availability remained unchanged in the first half of the year, it now only accounts for 24% of supply, down from 31% six months ago.
Prime rents across Southampton remained unaltered at £19.00psf and rent free periods are also unchanged with occupiers likely to receive between 18-24 months rent free on a 10 year lease. Although there might be a small fall in secondary rental values given the increasing volume of space available, it is unlikely that Grade A rents will fall below the current level.
Out of Town Activity
Out of town activity has improved with two deals completing on Solent Business Park. Atmel took almost 17,000sq ft at Cutter House at a rent believed to be around £14.50psf. As a result Serenity Holidays moved from Cutter House, taking 11,000sq ft at the refurbished 3700 Parkway at just under £10psf. The business park still has some 357,000 sq ft of available space which equates to 28% of the total office stock.
Investment and Yields
2009 was a strong year for investment with £117.7m of completed transactions during the year. The first half of 2010 saw reduced activity with one major deal completed; Southampton City Council acquiring the freehold at One Guildhall Square for £25m, reflecting a yield of 5.7%. The Council had previously committed to a lease on part of the 73,000sq ft building with the remainder being occupied by Capita Business Services.
Investor appetite in 2009 was stimulated by a high prime yield which at the beginning of the year reached 7.75%. As prime product was limited and much sought after, there was a swift downward adjustment of 100 basis points year-on-year. Prime yields have continued to harden and currently stand at 6.25%.
Looking ahead, CBRE regional managing director James Brounger commented: “While there has been a low level of take-up during the first half of the year with occupational activity limited to smaller transactions, there are a number of companies showing a desire to relocate that could well create a higher level of take-up over the next six months. The investment market is also likely to see several larger deals with more supply to the market, meeting what has been a relatively steady demand from a wide variety of investors.”