A Happy Ending To Manchester's Office 2020 Take-Up Story?

Once upon a time, in a land far away ...

These should have been the opening lines to the Manchester Office Agents' Forum announcement of Q1 2020 take-up in the city's office market, because in the last few weeks reality has changed so profoundly.

Today the only thing that is certain is that nobody knows where the story goes next.

As the city's office market struggles to adjust, Bisnow asks if flexible leasing might be the happy ending?

Office take-up data for the three months to 1 April shows that Manchester began the year looking exceptionally strong and stable. 

The overall Manchester market total for Q1, embracing the three submarkets of the city centre, South Manchester and Salford Quays/Old Trafford, was 525K SF, a modest but welcome 3% uplift on the 508K SF recorded in Q1 2019.

City centre take-up was 307K SF, the third year in a row that Q1 has exceeded 300K SF, and a sign of rude health generated by lettings such as those at Bruntwood SciTech’s Circle Square development where a total of 67K SF was let in four separate deals to Northcoders, HPE, Accenture and Hilti, which signed the largest single deal of Q1, taking  43K SF.

One sure sign of robust occupier appetite is that secondary space was filling up fast, with Sopra Steria and Marker Study taking 53K SF between them at M&G’s Arndale Tower, which is now fully let.

The figures came with upbeat commentary about occupier demand (as yet) unaffected by the coronavirus lockdown, no evidence that deals in progress have been pulled, and mood-lifting claims about the “robust fundamentals” of Manchester’s city centre economy, which ought to ensure a swift and successful return once the lockdown ends. Limited supply of new and refurbished floorspace makes it likely that rents could top £40/SF once business-as-usual resumes.

“Underlying demand from major corporate occupiers looking to expand and relocate into the city will remain strong," MOAF spokesperson and JLL Director Richard Wharton said.

"When we return to normality, we expect that delivery of new-build and refurbished schemes will continue apace.”

Developers seem to agree. Ask is pressing on with plans for 260K SF of new offices on the First Street site that had once been earmarked for a Premier Inn hotel. Work on-site could begin later this year, React News reported.

This is despite the prospect that Q2’s take-up figures may not make it into six figures. If they do “they will be very low six figures” Savills’ Head of Manchester James Evans told Bisnow.

The decade-long rags-to-riches fairy story of Manchester's office market transformation has hit pandemic reality and landed with a thump.

Flex Leasing Goes Mainstream...

A consensus is growing that the Manchester office market will change dramatically in the immediate aftermath of the pandemic, and will shift in more subtle but significant ways in the years that follow. In short, occupiers will want less floorspace and want it on more flexible terms. But whilst the market will demand more flexible leasing, the flexible office sector will feel no benefit.

The immediate pressure for short-term leases comes from those facing lease events this year. The wisest move many of them can take is simply to stay put, hold tight, and revisit their property needs next year when things (might) be clearer.

“We’re seeing occupiers with lease events find ways to defer a decision, so they are talking to their landlords about staying put for another year and then they will decide what to do. Of course the bigger corporates have their plans and will probably stick to them, but for others short-term arrangements make sense now,” Evans said.

He also suggests that occupier requirements will shrink. “Obviously everything depends on how long and deep the recession is, but if we’re coming out of this in 12 months time, occupiers will think they don’t need as much space as they did now they have experimented with working-from-home and agile working. Senior people now have a sense of trust in their workforce about agile working. We’re already seeing occupiers saying we still want to do a deal but we think we’ll need 10-20% less floorspace.

“This doesn’t mean the death of the office, far from it, many can’t wait to get back to the collaboration ... but some Manchester occupiers will question how much floorspace they need.”

OBI Director Richard Lace has been having similar conversations with tenants. 

"Hopefully occupiers we're talking to will still move, but they may take smaller space," Lace said of immediate short-term requirements.

In the medium-term he agrees with Evans that flexibility will be ever-present in Manchester leasing. “There will be more demand for flexibility, shorter leases, maybe we’ll see core space on a more traditional lease whilst occupiers add extra floorspace on more flexible arrangements, something landlords will not like but they may have to get used to,” Lace said.

Yet it is worth noting that not everyone foresees an immediate impact on lease length. “We are continuing to transact and continue negotiations on office leases and the length of them are not being impacted by the current situation,” CBRE Northern Head John Ogden said.

...But Flex Providers Not Benefitting

It is an irony that at a time when so many Manchester occupiers demand more flexibility, there will be so little comfort for the new breed of flex floorspace providers. So says Evans, who predicts “blood on the streets” as the new economic reality catches up with flex and serviced office providers who have been regularly responsible for up to 20% of Manchester city centre take-up.

“The problem is that unless you buy into the voodoo of brands, the only thing they can compete on is price, and the moment you do that it's a race to the bottom," Evans said. "Meanwhile many of the occupiers of flex space think they don't need to pay for floorspace now they've realised they can work from home.” 

The answer might be that the big landlords who feel pressure to flex step in to take over serviced and coworking space, in the process cutting out the operators whose position, trapped between long-term costs and short-term cashcflow, is precarious.

“Some landlords have already dabbled, others have been seeking an entrance into the flex market for sometime. I think we'll see the big names, like L&G, M&G, Aviva, Aberdeden Standard, decide that rather than give their serviced office operator tenants a rental holiday, it might be easier just to operate the space themselves,” Evans said.

Analysis this week from UBS-AM Real Estate seems to support the focus on flexibility in the post-pandemic recovery. Only time will tell, they said, whether serviced office operator's can survive, given that both smaller businesses and large corporates will want to protect cashflow and will therefore find it easy and tempting to pull out of short-term arrangements at business centres. 

“The counterargument has always been that in a downturn, occupiers will actually seek more flexible space,” the UBS-AM analysis said, before adding: “This may be true over the longer term, but the inherent flaw in this argument is that at the point of downturn, most corporates are still tied into traditional leases which extend past the height of the downturn.”

They conclude that for both the flexible and traditional office markets the future is decidedly iffy.

“Take-up will fall away significantly in 2020, and while there is likely to be a recovery in 2021 if the downturn is V-shaped, as pent up demand is released back to the market, under a U-shaped downturn corporates are likely to remain cautious and renegotiate and downsize existing space.”

Today reading Manchester's Q1 take-up data is like a window into a forgotten world. Tomorrow, as the new post-pandemic reality dawns, an emphasis on flexibility could start a whole new story for the city's office market.