CBRE research reveals Scottish office market performance in second quarter of 2023

28/07/2023
Angela Lowe (CBRE Scotland)

LEADING real estate advisor CBRE has released its latest figures on the Scottish office market during the second quarter of 2023.

Commenting on the Scottish office market prospects, Angela Lowe, Head of Advisory and Transactions at CBRE Scotland, said: “The role of the office has changed over time to maintain alignment with occupier requirements, as the way we use the workspace evolves. The movement from cellular offices to flexible and agile formats has reduced the average space requirement per employee, and hybrid working is challenging historic norms in working practices. Occupiers focusing on talent attraction and retention are considering a range of flexible, amenity-rich spaces to curate the optimum user experience. But of course, in tandem with these trends, demand for office space ultimately continues to be driven by the wider economic environment.

“Future growth for office real estate is largely determined by demand metrics such as GDP growth, working age population, access to highly-skilled workers and forecast office-based employment. All of these fundamentals could impact office demand and subsequent size of the occupier footprint in the next decade in Scottish cities. Meanwhile, markets with sufficient development or capacity to refurbish second-hand units will be able to capitalise as trends in ESG and design exacerbate demand for quality space.”

GLASGOW

Take-up for the Glasgow office market totalled 95,809 sq ft in the second quarter of the year, which is up almost 30% from the first quarter of 2023, showing the market is steadily improving throughout the year. This brought the total take-up for the first half of the year in Glasgow to 169,874 sq ft. Whilst down on the same period in 2022, the number of deals remains steady, demonstrating that occupiers are still taking space albeit on a reduced size basis.

Notable transactions in the second quarter included a 12,008 sq ft letting to We Are Luxe Ltd at St Vincent Plaza, representing the largest deal of the quarter, 10,424 sq ft at 6 Atlantic Quay to Iomart and 7,294 sq ft to Wizu Workspace at 2 West Regent Street. The sub 5,000 sq ft lettings market dominated once again with 49,302 sq ft acquired across 34 deals.

Overall supply is down on last quarter, with 2.58m sq ft of office space now available within the city. Crucially though, best-in-class Grade A space remains at a premium. Out of all the office space currently available in the Glasgow market, only 75,943 sq ft of it is considered prime, new build Grade A, representing just 2.94% of all Glasgow office supply.

Prime rents remained steady at £36 per sq ft in the first half of the year. With occupiers continuing to seek buildings with strong ESG credentials and amenities that attract staff back to the workplace, it is expected that much of the future demand will be for newer Grade A space. This will result in prime office rents within the city rising to £39.50 by the end of the year. This positive rental growth will be amplified by the lack of new development coming out the ground, in addition to continued rising construction costs and inflation.

Martin Speirs, Associate Director from CBRE in Glasgow, said: “Despite a fairly lukewarm start to the year, it is clear that Glasgow still has a lot to offer occupiers, as evidenced by the 41 firms that took space within the city in the last quarter. However with a shortage of Grade A supply, coupled with financial pressures, much of the space being taken isn’t as large in size.

“Encouragement should be taken from the fact that the number of lettings remains fairly high and that many smaller businesses are setting up operations within Glasgow. Undoubtedly, the city’s offering of a highly skilled and educated workforce, paired with modern, affordable workspace that suits the needs of today’s office occupiers, continues to attract new entrants and investment into the city.

“We are entering an interesting time in the Glasgow office market with Grade A supply continuing to decrease and demand for best-in-class space remaining. Occupiers understand the importance of having not only high-quality office space, but space that offers their staff, and their business, the focus on ESG that is being demanded at board level.”

EDINBURGH

Edinburgh had a strong second quarter of the year with a total office space take-up of 174,458 sq ft, which is a significant increase compared to the previous quarter and 29% above the Q2 average. This brought the total take-up for the year in Edinburgh to 298,398 sq ft.

The flight to quality trend continues to be prominent in the Edinburgh office market, with Grade A office space accounting for nearly 40% of the total transactions during the quarter, amounting to 73,576 sq ft. Significant deals included the sub-letting of 28,000 sq ft of space at 2 Freer Street to Analogue Devices. Global sports betting, gaming and entertainment provider Flutter secured the entire 59,000 sq ft building in the Fountainbridge area in 2021, however, never occupied the full building. Another significant transaction was the pre-letting of 20/21 Charlotte Square to Hampden and Co, the private bank secured the double townhouse spanning 9,322 sq ft.

During the second quarter, there was a total of 52 transactions, bringing the year’s total number of deals to 90. As with Glasgow, the majority of transactions occurred in the sub 5,000 sq ft market in both the city centre and out-of-town areas, totalling 42 deals. While there was a high number of new letting transactions, re-gears also played a significant role in shaping the office market, accounting for 62,280 sq ft. This indicates that due to limited supply, occupiers are choosing to stay in their current locations.

The serviced office market in Edinburgh continues to operate at nearly full occupancy, particularly for top-tier offerings. As a demonstration of that, serviced office provider Cubo secured its first venture in Scotland in Q2 with a 14,500 sq ft letting at 40 Princes Street on a 15-year straight lease.

Prime rents in Edinburgh have been increasing over the year, primarily due to the limited availability of new Grade A developments and the demand for high-quality spaces driven by factors like ESG considerations and employee wellbeing. Currently, prime rents stand at £43 per sq ft, but further growth is anticipated in the second half of the year.

The vacancy rate for new Grade A office space in the city centre is incredibly low at just 0.31%, indicating a severely limited supply. Overall supply once again crept up in the last quarter, with 1.75m sq. ft of office space now available within the city. However, Grade A new supply is down on last quarter showing that demand for quality space remains prominent.

Daryl Baxter from CBRE in Edinburgh, said: “The Edinburgh office market remains strong with take-up totalling 298,398 sq ft so far this year and a high level of demand remaining for the best possible space. The market has also seen a high level of regears as occupiers delay making a longer-term commitment because of both uncertainty over future space needs and the lack of current Grade A availability.

“The flight to quality has been heightened in Edinburgh by sharply diminishing supply and a limited pipeline. With occupiers increasingly focused on employee satisfaction and how the space contributes to their environmental targets, it’s the best buildings that have attracted the strongest interest with reduced focus on rent. Occupiers of scale know that to secure the best space they have to move quickly and early. Another factor placing upward pressure on new-build rents is rising build costs which will undoubtedly have an impact across the development pipeline in every market.”

ABERDEEN

In Aberdeen, take-up of office space for the second quarter of the year totalled 54,584 sq ft, reflecting a slight increase on the previous quarter’s 54,009 sq ft figure and bringing the total for the first half of 2023 to 108,593 sq ft. 

The largest deal of the quarter saw energy services company Genesis relocating its office headquarters from an out-of-town office in Westhill to 26 Albyn Place in the west end of the city.  The 14,100 sq ft office has been extensively refurbished by landlord Tilestamp achieving an EPC A rating in the process.  As with Glasgow and Edinburgh, the majority of transactions appeared in the sub 5,000 sq ft market showing whilst there is still activity and demand, occupiers are taking less space.

Encouragement should be taken from the city’s continued falling office availability, with supply now sitting at 2,516,097 sq ft, down 5% from the previous quarter. As always, Grade A space within the city remains in shorter supply with approximately 209,362 sq ft, just 8% of the total space, as the requirement for best-in-class space continues within the Granite City. 

Amy Tyler, Associate Director, CBRE in Aberdeen, said: “We’ve witnessed a relatively subdued start to 2023, however we’re anticipating some larger lettings in the second half of the year.

“Albyn Place has experienced a renaissance in 2023 with Genesis joining Rosen and MODS Management who have also recently relocated to the street, all to traditional office buildings which have benefitted from significant renovation, demonstrating there is occupier demand if landlords are prepared to invest in high quality refurbishment of prime west end buildings.”

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