Aberdeen commercial property on the rebound

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The annual market activity report issued by property firm Knight Frank indicates that the Aberdeen and north east economy has cause for guarded optimism with improving prospects in the commercial property sector.

With the worst of the downturn now past and most rationalisation programs seemingly complete, occupier activity showed steady improvement in 2017.

Oil is the city’s main growth driver, and in early March, Brent crude was trading at around the US$64.00 a barrel mark up by 16% on a year earlier. Price stability would offer certainty to oil firms operating in Aberdeen, and allow them to plan for the future. This improves the chances that companies with upcoming lease expiries might initiate searches for new office space.

Office take-up reached 468,000 sq. ft. by year end, a total that, although 18% below the 10-year annual average, reflects a 68% increase when compared to 2016.

The reported rise was underpinned by three large deals. The largest of which saw 138,500 sq. ft. taken by oil firm Total at West Campus, Westhill. The second largest letting saw Somebody Cares relocate to John Wood House in Aberdeen. In May, independent oil and gas company Chrysaor took over 47,700 sq. ft. at The Capitol on Union Street for its North Sea headquarters.

Many occupiers took advantage of “the tenant friendly” market conditions throughout 2017 to re-negotiate the terms of their existing lease with their landlords (nervous about potential long void periods and large empty rates bills) on more favourable terms in return for extending or renewing their lease duration.

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In terms of supply, levels have remained at over 2.5 million sq. ft. over the course of the year with no signs of this figure reducing significantly in the short term.

City Centre offices continue to dominate supply, accounting for 43% of the market allocation. Marischal Square was the last of the new developments to reach practical completion in December 2017. Other prime city locations, such as The Capitol building at its next door neighbour Silver Fin are also performing well.

The bulk of the Grade ‘C’ space (over 558,000 sq. ft.) is no longer “fit for purpose” and should be considered for re-development or alternative use.

In 2017, prime headline rents held firm at £32.00 per sq. ft., albeit occupier incentives remain particularly attractive. Rental values are expected to come under pressure in 2018 driven by a continued supply and demand imbalance.

The investment market also saw signs of improvement, with office investment volumes for the year at £98.8m, the highest total achieved since 2014.

The Aberdeen market did witness an increase of 419% when compared to the cycle low of 2016, largely propped up by two significant sales: Total’s occupancy of West Campus at Westhill; and the 105,594 sq. ft. office let to Lloyds Register by developer Drum Property Group at Prime Four Business Park.

Knight Frank Aberdeen partner Eric Shearer said: “Sentiment in the industry is cautiously optimistic, however despite the oil price reaching a high of $67 per barrel at the close of December 2017, there will inevitably be a significant time lag before we witness a tangible improvement in the occupational market.

“We are seeing healthy enquiry levels for Grade A city centre offices that will “soak up” some of the new build and refurbished stock.

“The offer of favourable pricing when compared to regional competitors, in addition to signs of an improving occupier market, is slowly beginning to fuel renewed investor interest.

“Over the longer term, the removal of a number of secondary office buildings from the market can help occupancy rates and market recovery.

“The sale of Denburn House on Union Terrace within the City Centre for conversion to a hotel / aparthotel is one of the early examples of such with an expectation that as sellers reduce their price expectations further redevelopment of offices will become viable.”

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