Aberdeen sees office demand grow despite declining oil price

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2014 saw a record year of office take-up in Aberdeen, despite the backdrop of a decline in oil production.

New figures from property consultant CBRE show that just over one million square feet of space – a record high – was acquired for occupation in the city in 2014.

This included two of the largest occupational deals in the UK, and pushed the energy sector’s share of take-up across the year to 84%. Since 2009, the industry has been responsible for 67% of overall take-up in the city.

The paper by CBRE suggests that Aberdeen’s transition from “North Sea oil town” to a global energy city will be key in reducing the impacts of a low oil price. The steady fall during the second half of 2014 saw prices dropping 45% below the levels of June 2014.

The firm notes that this is potentially a positive situation for many property markets, by supporting growth in the UK economy as a contributor to low inflation rates. However for Aberdeen, a city whose success is linked to the oil and gas sector, the outlook appears “more challenging.”

The growth in demand for office property in Aberdeen has occurred during a period where North Sea oil production has been declining. CBRE suggests that, therefore, the city has changed – while it remains dependent on the oil sector, it is not as reliant on the North Sea, due to the diversification of activities across a much wider area.

Derren McRae, managing director of CBRE in Aberdeen, said: “Despite falling production, the high oil price has allowed the sector in Aberdeen to become more innovative, in particular with regard to the science and engineering required to explore and extract oil from harder to reach, deepwater reserves.

“This widening and enhancement of Aberdeen’s skills base has also allowed its oil sector to diversify beyond the immediate confines of the North Sea, to provide world class expertise for the sector, working on projects as far afield as West Africa and Central Asia.

“In spite of a decline in indigenous production, the energy industry in Aberdeen has grown, leading to a surge in demand for office space and a rapid increase in prime rents. Indeed in 2010, whilst most of the UK was slowing emerging from recession, rents were already rising in Aberdeen. As a result of this shift in the status of Aberdeen, from a North Sea oil town to a global energy city, it should be cushioned from some of the short term impacts of a low oil price.”
The CBRE paper also says that the city’s past success in both attracting occupiers and catering for expanding businesses has put “significant strain” on the office market. It notes that, by the end of 2014, there was a substantial undersupply of office space in the city, which has driven capital and rental values throughout the last cycle.

Between 2009 and 2014, office capital values in the city rose an average of 6.1% per year. Over the same period, the values for offices in Edinburgh remained virtually unchanged.

At the end of last year, Aberdeen had just over 540,000sq ft of available office space, of which 5% was classified as ready-to-occupy Grade A space. The firm is predicting that any slow-down in take-up will allow for the return of a more balanced market, and says it has witnessed this beginning over the first months of 2015.

It also notes that the lack of Grade A office supply in the city centre has also led to the commencement of speculative development, which is mainly being funded by a number of major institutional investors.

Derren added: “The fall in oil prices will have implications for the Aberdeen office market. The exceptionally high levels of take-up that have characterised recent years are not likely to be repeated in the short to medium term and we expect the city’s office sector to return to a more normalised market.

“However, there are many reasons to remain positive about the market in Aberdeen. Current cost savings amongst occupiers follow many years of exuberance. Aberdeen’s position globally has changed, and the sector locally has benefited from the diversification that has emerged.

“Despite declining North Sea production – a trend that has been present for some years – Aberdeen has continued to perform strongly due to its world class cluster of oil exploration expertise. Looking ahead, demand is likely to be driven by companies seeking to maximise the efficiency of the real estate that they occupy as well as mergers and acquisitions potentially triggering requirements.

“For the first time in a number of years Aberdeen will see a new supply of speculatively developed city centre Grade A office space reaching completion from around the end of 2015. Interestingly these developments have, in the main, already secured long term institutional funding arrangements and are therefore not reliant on the need to refinance through sale or other means of more traditional short term construction finance.

“These developments are also interesting as they will offer occupiers, for the first time in some years, the opportunity to relocate to high quality efficient and flexible open plan floor plates within the traditional city centre. Given this combination of circumstances we can see a scenario whereby these developments may not just continue to secure top rents, but may also offer a platform from which current prime Aberdeen office rents could increase.”

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