In 2014, the government and the leaders of Greater Manchester’s 10 councils agreed to a devolution deal, which determined that budget decisions worth at least £2 billion would be made by local leaders rather than those in Westminster. Shortly afterwards, the £6 billion health and social care budget was devolved to local leaders too, and as the run-up to the general election got underway, this devolution was brought up as an example of the Conservative’s ambition for a ‘Northern Powerhouse’.
The £8 billion Greater Manchester’s council leaders have access to looks to be the first step in Manchester’s devolution and the creation of the Northern Powerhouse – elected mayors will take on significant powers in the city, transport networks will be enhanced to reduce the time it takes for commuters to travel across the region and to the south, and town hall bosses have continued to call for increased fiscal devolution in order to receive a greater share of tax in the future.
Will Manchester’s office market be affected?
The impact of devolution is forecast to strengthen the Manchester office market by incentivising business and promoting investment in business real estate. A report by commercial property specialists Savills predicted that rents for prime office space in Manchester will be £37 per square foot in 2019, and that investors will use these strengthening rental prospects to increase their yield spread beyond London.
This is despite Savills saying it is “relatively sceptical” about the efficacy of the Northern Powerhouse for the northwest and northeast, and that Manchester’s “structural strengths” will hold more responsibility for any improvements to the city, rather than the government’s policy initiatives. For instance, from 2011 to mid-2015, a total of 57,000 jobs were created in Manchester – more than double the UK average – and that recent months have seen the North West create a larger number of professional service jobs than even Greater London.
The report found that demand for offices in central Manchester is “healthy”, with demand coming from both local and national businesses. The legal sector in particular has seen its requirements undergo a “marked increase”, and London’s law practices seem to be engaging in a process of “northshoring”, it continued.
As northshoring increases the viability of Manchester as a city for business, other professional services industries have shown growing interest in the potential of the region. This is encouraging speculative activity among commercial property investors.
Lack of new-build projects?
As is seen in the wider property market, the lack of stock and the decline in the number of new-build developments could dampen the potential growth of Manchester’s offices and the wider economy. While the city saw a large number of office development projects from 2006 to 2008, the rate of development slowed to a near-halt following the credit crunch and global economic downturn, and has not yet returned to form.
Less than 500,000 sq ft of grade A office space is now available in Manchester’s central business district – the lowest levels since 2007 – and there is only around 260,000 sq ft of top-quality office space in the city centre. However, devolution has enabled developers to begin a number of new-build projects, which are set to delover more than 1,000,000 sq ft of new office space in the next two years.
Therefore, there looks set to be a short-term increase in the rent prices for grade A Manchester offices, but as supply begins to pick up, headline rent prices should begin to stabilise. Despite this, availability for top-quality office space will still likely remain somewhat restrained, and prime rent values should continue to increase, potentially reaching as much as £37 per sq ft by December 2019.
As Manchester’s central economy was already demonstrating strength before the Northern Powerhouse initiative had begun, and as devolution brings additional power to the region, the outlook for the regional office market looks positive. Although substantial improvements to the city’s economy look unlikely, stability and strength looks set to continue, with the occupier base becoming more and more diversified and with more and more London-based businesses looking to relocate their headquarters to Manchester.
Alongside devolution, increased rates of corporate expansion and improvements to the labour market are boosting demand, and this is seeing office rents continue to grow. It seems that businesses are becoming increasingly confident in their financial position and are willing to pay higher premiums for the perfect office space.
Devolution has become an important part of the Conservative government’s fiscal and economic strategy, and is affecting areas outside of Manchester too, including major cities in the Midlands, Scotland and the South West.
These regional markets should see average rental growth figures of around 2.7% per annum – somewhat less than the 3.6% per annum forecasted rental increase for the industrial and distribution centre’s commercial space, but stronger than the 1.2% per annum growth forecast for high street retail premises.
As Manchester’s office space becomes increasingly lucrative for real estate investors, commercial property investment levels in Manchester look strong, and are among the strongest in the country outside of London. The main factor holding back transaction levels is the decline in the availability of quality stock, which is creating a great deal of competition among investors and could potentially dampen yields.
The data strongly suggests that a lack of available commercial property options in Manchester is creating issues for businesses and possibly stifling economic growth, but is creating a lucrative market for investors. As devolution comes into full play, the city’s leaders look likely to wish to promote new-build office developments to encourage more businesses to come to the city. Nonetheless, it seems that rents will not stabilise, office space investment will continue, and yields for investors will continue to shrink, in the short- to medium-term.
The next few years appear to be a good time for new entrants to the Manchester economy, as well as for landlords, but removing the entrenched difficulties some small and medium-sized enterprises have in paying for Manchester office space rents will be a more tricky process.