Headline rents for office space in Liverpool have finally passed £25 per sq ft but they will need to go higher before the Holy Grail of new grade A space is a reality, one expert tells LBN. Tony McDonough reports

Liverpool has seen no new grade A office space built in and around its central business district (CBD) for more than a decade – and there is no sign of an immediate shift.

According to Ian Steel, principal at Avison Young in Liverpool, rising build costs and higher interest rates have added further obstacles to the prospect of new development around the CBD.

For several years the main barrier to new grade A build in Liverpool has been headline rents. Typically they have lagged other regional cities in the UK. This is important for potential speculative investors as the higher the rent the greater the return on investment.

Earlier this week Avision Young’s latest Big Nine survey offered good news in that respect. It reported that headline rents in Liverpool had hit £25.50 per sq ft in the final quarter of 2022 – a rise of 16% on the previous quarter.

However, this is still lower than all but one of the other nine regional markets outside London. In Manchester headline rents are £40 per sq ft. Consequently the city sees frequent development of grade A space.

Ian said: “One of the big issues with new development (in Liverpool) is that the funding market is very difficult at the moment.

“Even with a pre-let in place, there are a number of other obstacles – build costs have increased, interest rates are up. Investor demand had been for prime offices with strong ESG (environment, social and governance) credentials.

“Headline rents have to rise to a minimum £28/£29 per sq ft – ideally £31/32 per sq ft. And obviously you need to secure longer term leases – 15 years or more on a sizeable pre-let.”

It is these factors that have meant new office developments in and around Liverpool’s CBD have failed to materialise in recent years. The last grade A office space to be built, at St Paul’s Square, was supported by state funding.

It will be pointed out that new space has been built across the city centre in the Knowledge Quarter. The Spine opened in 2021. 70,000 sq ft, around half, is occupied by the Royal College of Physicians.

Now plans are afoot to start work on a second adjacent office building called HEMISPHERE. As welcome as these schemes are aimed mainly at the science/tech sectors.

As Ian points out, the financial and professional services sector mainly prefers to be located in the CBD or on the waterfront.

In recent years new buildings have been proposed for Prince Dock in Liverpool and Waters and at Pall Mall. But they are yet to materialise. The latter was due to benefit from a BT pre-let but the communications giant put that on hold post-pandemic.

And the pandemic always casts a shadow of uncertainty across the office market. Although there has been a return to office working to some extent, the growth in hybrid working that surged during the pandemic remains a big part of the picture.

Ian explained: “What has tended to happen is that we have seen people coming back to offices but you now have this hybrid approach. People aren’t in five days a week, they are in for three days a week.

“As a result many companies are reviewing their occupational requirements and footprints. The majority seem to be downsizing slightly and there is a flight to quality.

“They are looking for better space with more emphasis on health and wellbeing and ESG credentials are right at the top of the list.

“As of thumb if an occupier is relocating they are looking for around 75% of their current footprint. Howler, there are other companies that are expanding.”

High quality refurbished space is coming onto the market. There is considerable excitement at the transformation of the Martins Bank Building in Water Street. This scheme will bring a much-needed 140,000 sq ft to market.

Refurbishments such as this and at other locations including St Paul’s Square, Princes Dock, Atlantic Pavilion, 20 Chapel Street, Exchange Station, No 1 Old Hall Street and the Plaza, all help with what is called the ‘churn’. This is demand from occupiers already in the city who are looking to relocate.

But the big prize of a large letting from a blue chip company or Government agency can only be helped by the provision of new space. Other cities have it, Liverpool doesn’t. And that puts it at a competitive disadvantage.

“Grade A space is important because it drives the market and it attracts inward investment and new occupiers to the city,” added Ian.

“The majority of the demand is for space in the commercial district and on the waterfront. And of course you have the Baltic district now where you get the creative businesses who are looking for space that is less traditional.

“Supply is at its lowest level. However, where tenants have downsized or relocated landlords have got space back. They are refurbishing space and will bring that space back to the market this year.

“That is a short-term solution to the problem. Martins Bank Building will provide 140,000 sq ft of top quality space. If we could get a pre-let, or maybe two, at either Liverpool Waters or Pall Mall, then you have a scheme coming out of the ground.

“We have fallen behind the other regional cities in that respect.”