Office + Industrial update September 2020
With Brexit falling into the background and clarity on the political landscape, 2020 was expected to be a relatively calm year in which occupiers could push forward and implement their strategies with some re-assurance. However, with the global spread of Covid-19 and the subsequent lockdown, focus has altered and there are now a number of firms re-assessing their strategies and re-aligning their business needs. The consequence of this is a large reduction in transactional activity in Q2 of 2020.
The full effects of the Coronavirus pandemic are yet to be felt with regard to market response, however early signs show that demand within the office sector is still present, albeit at reduced levels. Even with these unprecedented factors combined we still anticipate that take up for 2020 will marginally improve on 2019 however it will fall well short of the 10 year average.
Take up for the year 2019 was 68,627 sq ft across Watford which was down 76% on the previous year and 69% down on the 10 year average which currently stands at 224,200 sq ft. Brexit, and the market uncertainty caused by the political landscape, had a major role in this downturn as did restricted office options. This trend was also evident in wider market in the likes of St Albans and Hemel Hempstead.
Similarly, while demand locally is not fundamentality strong, Watford has a number of drivers that are helping to push up demand such as a lack of any new development and an already constricted supply, particularly of Grade A quality – Watford currently has circa one years’ worth of office supply, the lowest of any major office district in the wider area.
With the continued under supply of office stock and lack of new development of Grade A accommodation, headline rents continue to remain robust around the region. In central Watford, headline rents have risen over 10% in the last 12 months to circa £36.50 per sq ft.
Landlords are seeking to counter the reduced demand and robust rental levels by enhancing incentives. This has been illustrated by transactions at Croxley Business Park, Breakspear Park and The Maylands Building. Where known these terms reflect extended rent free period rather than reduced rentals with landlords keen to bolt in interest and to ease new tenants through a period of reduced utilisation of space. Most of these transactions reflect requirements generated prior to the lockdown.
The extent of demand in the later period of the year is difficult to gauge with many tenants unsure about the extent and style of their office occupancy in the short term. It is possible that suburban locations such as the Northern home counties commuter towns could benefit from a reluctance to require staff to use public transport. At this stage this is all dependant on how the Covid-19 epidemic and possible mitigation measures unfold in the coming months.
The economic outlook may also be different over the next few years reversing the shortage of space as companies go out of business, downsize or adjust occupancy to save costs. There are already signs of this on the office supply side.
Industrial stock levels across the patch remain tight. Hemel Hempstead has seen notable speculative development, the only other noteworthy developments are Panattoni Park in Borehamwood and Symmetry Park, Aston Clinton (Phase 1 now fully let). Supply therefore remains almost wholly dependent on churn, particularly in the sub 10k bracket which the new developments have largely not catered for. This could of course change as companies are weaned off furlough.
Enquiry levels have remained consistent. In Hemel Hempstead 2020 take up to date is 58,051sq.ft in 8 transactions. The largest transaction was the sale of 27 Maylands to CAE Technology. This building was owned by Luton Borough Council but due to the capital expenditure required to bring the building back up the Grade A standard and the re-letting risk the Council decided to sell. CAE are relocating from Watford. The largest single unit is Hemel is currently 22,000sq.ft, and this is under offer. There is very little coming through the pipeline as the two units on Prologis Park are DC1 150,000sq.ft pre-let to a data centre (currently on site PC Feb 2021) and DC234 (233,860sq.ft) is under offer on a pre-let basis.
St Albans has seen little activity, not due to lack of demand, but rather little supply, The North Orbital Commercial Park has secured two new lettings, with units of c7,000ft and 6,800ft being taken by Sovereign Recovery and City Traffic Management, both at rents comfortably in excess of £10.00psf. Welwyn Garden City has seen a couple of lettings of note, with Ocado taking yet more space in the town, most recently a unit of some 30,000ft on City Park. Borough Box, an on-line specialist food retailer experiencing growth and benefitting from the continuing trend to web ordering, has leased 10,000ft at Quadrant Park, at a rent close to £12.00psf.
A little further south, Borehamwood has seen two sizeable transactions, in each case freehold sales completed just before lockdown. The former Regianni building in Chester Road was purchased by CBRE Global Investors, who plan a comprehensive refurbishment and re-modelling and subsequent letting. A price of c£5.8m was reportedly paid equating to a capital figure of c£200.00psf for this building of around 30,000sqft. 3 Manor Point in Manor Way, a building of c15,000sqft, was sold to Clipfine at a price breaking back to around £240.00psf. It will be interesting to see how interest develops in Panattoni Park, where a unit of c36,000sqft was pre let to UK Networks, effectively kick-starting the scheme, and a further unit of c155,000sqft is under construction, capable of being sub-divided. Phase two has the ability to accommodate requirements up to c140,000sqft
Demand for freeholds remains strong, with a core of applicants simply not being prepared to lease, and prepared to wait for the right property. This is particularly the case in the sub 5,000sqft bracket, with recent examples being a unit of c3,000sqft in Kings Langley where a sale was agreed at close to the asking price only a couple of weeks after going on the market. Terms were also agreed for a small unit of 1,000sqft in West Watford in a similar time frame with an industrial investment close by generating significant interest, with a sale agreed substantially in excess of the guide, again within a very short time frame.