27 January 2022/ rent_office_guide

The Big Six: What’s next for the regional office markets?

Over the course of the last two years, a lot has changed for the big six regional markets of Manchester, Birmingham, Edinburgh, Glasgow, Leeds and Bristol. As businesses move away from having one HQ and explore regional, hub-and-spoke premises for their business, the future looks bright for the office market outside of London.

Despite the unwelcome return of Covid, investor and occupier activity in the UK’s big six regional office markets - Manchester, Birmingham, Edinburgh, Glasgow, Leeds and Bristol – hasn't faltered.

A strong recovery

As the UK’s Covid restrictions came to a (sadly temporary) end, businesses started to move away from their temporary, fully remote operating models. Many looked to secure office premises that would facilitate a move towards a longer-term hybrid approach, and this was reflected in the number of new leases being signed. According to data we’ve compiled, July 2021 was the busiest month since October 2019 for occupiers locking in new office space.

Some of the big six have seen impressive growth over the last year, with Bristol’s office rental market growing by almost 4% and Birmingham’s by nearly 3%. In contrast, London’s has contracted by around 2.5% and the spread between vacancy rates between the big s6ix and London has narrowed to a ten-year low of less than 1%.

It's clear that more businesses are recognising the benefits of regional bases rather than keeping their entire operations in London, or choosing to base themselves outside of the capital altogether.

Small businesses lead the charge

If we had to sum up the overall trend across the big six in one word, we’d go for nimble. Smaller businesses are accounting for much of the activity in the rental market, as their size means they have a greater choice of premises. More businesses are also exploring new ways to use office space, with the proportion of flexible workspace leases rising from 11% to 13% of all new take-ups.

Big companies are being more cautious and there is less availability for those looking to secure significant spaces. However, as more prime spaces look set to come onto the market over the next year, and with impressive deals for significant floor space being reported across the big six, global enterprises are beginning to get in on the boom too.

Rising numbers of occupants

At the beginning of the pandemic, some hastily cried that it would signal the end of the office, but the data is showing these predictions were vastly overblown. Oxford Economics’ initially gloomy predictions on office-based employment were revised in July 2021 and now predict that it will rise, particularly across the big six locations, over the next year.

The number of vacancies may suggest that businesses are not returning to the office, but the figures are being skewed for a number of reasons. Multi-national businesses have reduced their office footprint in some regions and high numbers of new builds being completed mean that vacancies are soon predicted to reach a four-year high. Rent is also predicted to decrease over the next few years due to the influx of space, but the overall trend is upwards over the next decade.

Quality is rising

Lots of businesses have realised that an excellent office space is crucial in encouraging staff away from the convenience and comfort of their homes. Coincidentally, prime office spaces have been redefined over the last few years, with the standards of the very best buildings rising even higher than before. But it’s not just flashy features that tenants want to see.

Facilities and features such as outdoor terraces are allowing people to come together in a way that is safer and more inspiring than sitting around a boardroom table. Additional things that are in high demand are natural spaces, such as roof gardens, that allow employees to truly decompress, as well as spaces where health and wellness can be nurtured in downtime.

Out-of-town business parks and city-centre locations will be equally attractive, as many people are looking for spaces with great facilities as opposed to just a prime location.

Green office premium

Sustainability is another key focus for those who are moving into new, premium space across the big six. However, to cover inflated construction costs and the price of fulfilling certain ESG criteria, rents could rise even further. This is something of a concern for operators and owners of older office space, who may need to carry out extensive renovations to bring their buildings up to the standard tenants now expect.

Bigger companies have a more clearly defined strategy, but businesses of all sizes across the big six and beyond are tuned in to the concerns. The only caveat is around cost and potential return, which may be a stumbling block to getting shareholders on side with more expensive, yet more sustainable, spaces.

Investment is still strong

The picture for commercial property investors is positive too. Across the big six markets, the amount invested in office space rose by 170% year-on-year from October 2020 to ‘21. The interest in these regional rising stars is so great that they generated a higher investment turnover over the last five quarters than booming US markets. Bristol and Edinburgh in particular attracted more investment than New York, London, San Francisco, Seattle and Los Angeles.

While rental yields have ‘softened’ for some investors, they still remain impressively high. And as more prime property enters the market over the next year, investors will need to move quickly to snap up their share of these modern, excellently equipped properties.

Understanding the future of the office

If you’d like to find out more about what the future holds for the UK’s offices, check out our other tenant guides for more insight.