The Manchester office market has witnessed strong levels of both occupier and investor demand in recent years, with large corporates increasingly looking to the city which boasts a talented labour pool, growing population and significantly lower occupational costs in contrast to the UK’s capital.
This year was due to be one of exceptionally strong growth for the Manchester office market, with 1.8% growth in office-based employment expected, equivalent to adding 9,000 new office workers to the market. Since the outbreak of COVID-19, we have downgraded the forecasts to 0.1% growth. Whilst this is disappointing, it still represents growth within the context of an extremely challenging economic backdrop and an out-performance on the UK average.
In the immediate short-term, the office market is likely to be disrupted by COVID-19, with occupiers prevented from conducting tours of buildings. We have developed creative solutions including virtual viewings, but these blocks will limit take-up in the near term, perhaps lasting until the end of Q3. Large occupiers driven by lease events have a longer-term outlook and have remained active within the market despite the disruption.
However, for smaller occupiers, or those whose requirements are based on expansion, requirements have been put on hold. Following the Global Financial Crisis, deals in this size band dropped to a historic low of 187,500 sq ft in 2009, against the long-term average of a 350,000 sq ft and a decline of 36% on the previous year. While the market is set to see a similar decline of smaller deals, the emergence of north shoring, in which large corporates have moved operations out of London, has resulted in an increasing amount of larger deals, with recent levels of 100,000 sq ft transactions outpacing the long-term average. We expect to see this trend continue with London-based occupiers looking to reduce occupational costs.
Diversity of occupiers has increased in Manchester since the GFC with an increased presence of creative industries and consumer services sectors, now responsible for over 30% of the market compared with only 5% in 2007. Flexible office providers have taken a significant amount of space in Manchester over the last three years, accounting for 9% of total take-up. We expect a drop in this figure but the demand for flexible space from corporates is increasing with a further 100,000 sq ft of space required over the coming years.
Grade A space in Manchester is becoming increasingly constrained, with 50% of the development pipeline already let and an additional 1m sq ft of Grade A requirements in the market. This, coupled with significant rental growth over the past 10 years, has resulted in many refurbished schemes matching or quoting higher than Grade A rents. We expect this to put upwards pressure on the refurbished market while prime rents stagnate, and greater incentives are offered.
While the trends defining the future of work are still developing, it is clear that Manchester is well placed to weather the storm.