February 26, 2015
Bristol property owners may soon get the answer to the question: how can we keep last year’s momentum going?
The office market in Bristol was booming last year and for the first time in a decade more than 1m sq ft of office space was let. In the final quarter alone there were more than 400,000 sq ft of lettings, including KPMG putting 45,000 sq ft under offer at Skanska’s speculatively-built 66 Queen Square, and a prelet by PwC at Salmon Harvester’s Two Glass Wharf for a record rent for Bristol of £28/sq ft. But after such a busy 2014, there are now fears that demand and supply are too far out of balance and the market could stall.
Lack of supply
As Property Week revealed last month, a flurry of office requirements totalling 140,000 sq ft have been launched in the Bristol market since the New Year. Engineering giant Babcock has instructed Lambert Smith Hampton to find 25,000 sq ft in the city; legal firm Foot Anstey, advised by ETP Property Consultants, is seeking 20,000 sq ft of office space; and online take-away specialists Just Eat, represented by GVA, have a 15,000 sq ft requirement.
But after last year’s frenzy, these occupiers are now coming up against a supply shortage, particularly those with large requirements. The problem is compounded by the fact that 15% of city centre supply is earmarked for conversion to residential under permitted development rights, says Ian Wills, a JLL director. Although there is an expectation that some owners will ultimately decide to keep their buildings as offices, it is not much consolation for those looking for space now.
Take law firm TLT, which has offices in the UK’s main cities, and having outgrown its secondary accommodation at One Redcliff Street wants to move into a 100,000 sq ft site. Its lease expires in three years’ time and managing partner David Peter is remaining tight-lipped about its plans. However, as there is nothing of the required size currently available, it may have to take a prelet, with likely destinations including Bank Place, the Carlyle Group’s development site in Temple Way, or Glassfields, a 400,000 sq ft Royal London Asset Management development, also in Temple Way, that has been mothballed since 2008 but may get underway this year. TLT is remaining quiet on its plans, with managing partner David Pester declining to say whether it will take a prelet before TLT’s lease expires in three years’ time.
The search by French energy giant EDF, which is set to build Hinkley Point nuclear power station on the Somerset coast, also illustrates the scarcity of stock. As revealed by Property Week in December, EDF is understood to be eyeing the remaining space at Palmer Capital and Cubex Land’s Bridgewater House at the £150m Finzels Reach scheme. Bridgewater House is one of the few buildings that can meet EDF’s requirements because there is nearly 78,000 sq ft available, with Barclays and accountants BDO installed in a small part of the space. The 110,000 sq ft building would be fully let if the deal for 77,938 sq ft over four floors goes through.
EDF has not had an easy ride in its search for new offices. The energy firm has been on the hunt for space in the South West since its Hinkley Point C plan was approved by the European Commission in October. The firm had previously been considering 65,000 sq ft at Key Point at the Aztec West Business Park on the outskirts of Bristol but was gazumped by TSB, which took the space while EDF was awaiting EU approval.
Development pipeline
Rorie Henderson, Salmon Harvester Properties development director, says EDF also looked at Two Glass Wharf, Temple Quay, where construction completed earlier this month, in time for PWC to move into 40,000 sq ft of the 100,000 sq ft development in July.
“EDF talked to us and were impressed with what they saw,” says Henderson. “We were the first choice because we were the best building, but we didn’t have enough space left.”
Henderson is now negotiating with other tenants to take part or all of the remaining 60,000 sq ft, where the quoting rent has risen by £1 to £29/sq ft.
Josh Roberts, a director of Bridgewater’s owner, Cubex Land, refuses to comment on the potential deal with EDF because the company only has an option until the Hinkley Point project gets the final go ahead, following a challenge to the EU’s approval.
But if EDF does complete the line-up at Bridgewater House, it will influence Cubex Land’s decision on the development mix at the Temple Plot in the Finzels Reach scheme. Last year, Premier Inn took a prelet there and Cubex still has to decide whether the rest of the space will be filled by 95,000 sq ft of offices or 130 flats.
The success of Two Glass Wharf and Bristol’s £2/sq ft rise in top office rents augurs well for Three Glass Wharf. Bristol council resolved to grant Salmon Harvester consent in December for the 110,000 sq ft development. Henderson says the developer has three options to enable work to begin on Three Glass Wharf – either a third-party funder will come on board, Salmon Harvester could seek funding from its partner NFU Mutual, or it could finance the development from its own resources.
If the development comes forward, Salmon Harvester may end up competing with the Commercial Estates Group, which is in the process of asking its tenants to leave the two buildings at 111 Victoria Street so they can be demolished. The Commercial Estates Group has planning consent for offices totalling 240,000 sq ft on the site.
Nick Lee, Commercial’s development manager, who is leading the project, says one of the two buildings is already vacant and estimates that both will be demolished and the site ready for development by the end of the year.
“We are working on the basis that we can secure a prelet between now and completion,” he adds. “We looked at the supply side and decided that the time was right to turn an income-producing asset into a development site.”
Lee says Commercial, which is not quoting a rent, is chasing all prospective tenants with requirements, and has had its confidence boosted by the fact that last year KPMG leased 52,000 sq ft at 66 Queens Square and PWC took 40,000 sq ft at Two Glass Wharf.
Creative sector
The kind of tenants Commercial is chasing – such as lawyers and accountants needing grade-A office space – is only part of the Bristol story. The city that gave a platform to Banksy, the graffiti artist, and the animated characters Wallace & Gromit also wants to show that it is a natural home for creative companies.
Some public bodies and private developers are already working on schemes to address the needs of young companies in the creative sector. A £4m government grant has enabled investment vehicle Invest in Bristol & Bath to double the size of the Engine Shed, Brunel’s grade-1 listed terrace leading to Temple Meads railway station, for instance. For six years, the Engine Shed housed the failed British Empire & Commonwealth Museum, until it closed in 2008. In 2013, Invest in Bristol & Bath turned the Engine Shed into flexible quirky space for start-up companies. Matthew Cross, head of inward investment at Invest in Bristol & Bath, hopes to persuade sovereign wealth funds and pension funds to invest £7m in Engine Shed Two. “Some of the companies we have been talking to have found it challenging to find property,” he says. “We have a pipeline of requirements of people who want to be in Bristol because they know it is the right area for them.” Cross cites the example of Just Eat, the online takeaway service that completed a £1.5bn flotation last year. Just Eat was in Engine Shed One, but has launched a 15,000 sq ft requirement because staff working on its IT systems are expanding from the original 20 to a projected 200.
Across the road in Temple Gate, Bristol council is developing plans to transform the derelict George & Railway Hotel into a space for creative firms. Meanwhile, London-based Verve Properties is set to complete the restoration of the Brew House, in Temple Way, in April. The former brewery, which had been converted to multi-let offices and branded as Company House, was thought to be one of Bristol’s most difficult buildings to let when Verve bought it 15 months ago.
Verve director, Ashley Nicholson, says the previous owner had failed to interest tenants – even at £5/sq or £6/sq ft – which is why Verve only paid £700,000 for the 26,000 sq ft listed building, which dates from 1850. Nicholson says he now has prospective tenants prepared to take 10-year leases at rents starting at £17.50/sq ft, rising to £19.90/sq ft on the upper floors.
Verve, best known for converting the Paintworks in Bath Road, Bristol, into a mixed-use development, is decorating the Brew House with murals of flowers on the wall. Even the ladies’ lavatory will be decked out to give the impression that it is a health spa. An entire basement will have no natural light, but Nicholson says it could be a recording studio and adds that the development in the solid stone building will bring “shades of Shoreditch” to Bristol. “There is no other building in Bristol that provides this kind of space,” he says.
So, while the office market in Bristol may not hit the same heights as last year, Brew House at least demonstrates space for the creative sector is coming forward. But what the city now needs is for the rising rents to prompt mainstream developers to dust off their plans and start building the much-needed grade-A space.
Author: Property Week