‘Perfect storm’ as office demand set to outstrip supply

● Technology and professional services firms drive strong market in Edinburgh

Continued rising demand for office space across Edinburgh coupled with a lack of new developments coming on stream means a “perfect storm” is brewing in the capital’s commercial property market this year, according to property experts.

The warning came after latest figures showed take-up of space by technology firms and professional services practices contributed to a buoyant end to 2016.

According to figures from consultancies Knight Frank and JLL, the capital saw takeup of office space above the ten-year average last year despite the uncertainties caused by Brexit. Significant deals in the final quarter of 2016 included Ernst & Young taking space at Atria One and ST Microelectronics letting premises at Tanfield.

But industry experts are warning that although demand for Grade A office space in particular will be strong, a lack of supply will bring additional pressure on rents.

Simon Capaldi, associate at Knight Frank, which estimated some 760,000 sq ft was taken during 2016 compared to a ten-year average of 630,000 sq ft, said the figure could have been even better had many businesses not adopted a “wait and see” approach in response to economic and political uncertainties.

“With a number of deals carried over which should conclude in Q1 or Q2 of this year, it should be a strong start to 2017,” he predicted. But he warned there now a “perfect storm brewing”, as supply levels near ten-year lows and demand continues to grow.

“A significant number of lease events are approaching, which could create a spike in new requirements in the next 18 months. The result will be rents moving upwards for some property types, particularly at well-located, Grade A offices with larger floorplates; while incentives are likely to come down at smaller units.”

“It’s set to be a challenging period for occupiers: some could find they are squeezed out of the city centre by rising costs.”

Craig Watson of JLL said Grade A developments coming to market are “few and far between” with only one due for completion this year, at Quartermile 3.

“Next year will see the completion of Semple Street in May and the Mint Building in summer which should act to alleviate some pressure. A key trend which we’re already seeing is a demand for refurbished property, with One Lochrin Square coming to market in Spring 2017 and Greenside later this year.”

Watson also believes that issues such as Brexit will change the approach of occupiers. “Businesses are finding it increasingly difficult to plan ahead for new recruitment and with doubts mounting around the future processes regarding the employment of EU nationals, lease flexibility will be high on the agenda for many occupier deals this year,” he argued. He said decisions were also taking longer following the Brexit vote.