Capital's office supply 'not keeping up to expectations'

By Jim Dow

FORECASTS of office supply for Edinburgh could be well off the mark, with less being delivered than is anticipated, according to research by Jones Lang LaSalle.

JLL says the supply of Grade A office accommodation will continue to fall until 2009, when three major new offices are due for completion.

Nonetheless, the positive JLL spin is that the Edinburgh office market will be on a par with the likes of Milan, Stockholm and Madrid from next year, with a series of new developments completed and more benign rental increases.

The turnaround will see Edinburgh and most other markets across Europe move towards more balanced market conditions, or possibly conditions favouring tenants, over the next five years.

Ben Reed, director of JLL in Scotland, said further rental growth is expected in the Edinburgh office market, although this is predicted to slow. The current vacancy rate is pegged at below 5 per cent and this is expected to continue to fall over the next nine to 12 months before a series of Grade A new offices is completed in the city centre.

He added: “The key for any company or organisation is to plan any relocations well ahead of the lease expiry so that they can take advantage

of opportunities in the market. In current times of economic uncertainty and subdued growth, we will see the real estate market beginning to turn in favour of tenants.”

Although rental costs are still projected to grow in Edinburgh, JLL anticipates a marked slow-down in the rate of growth compared with 2007.

Across Europe, uncertainty in financial markets fuelled by the credit crunch has brought significant revisions to forecasted rental growth and vacancy rates.

JLL has revised its European aggregate growth forecast downwards from 4 to 3 per cent for 2008 – significantly lower than the 10.7 per cent rental growth registered in 2007. The easing rental pressures will be particularly evident from the beginning of 2009, given that there is likely a time-lag before the full effects of the credit crisis will be reflected in the occupier market.

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Rental growth is expected to pick-up again in 2011 and 2012 but is not expected to reach the growth levels experienced in 2007.

Reed says a greater challenge might await larger occupiers seeking space solutions beyond 2010 as there is a real possibility that lower levels of supply than currently forecast will be delivered into the Edinburgh market.

He continues: “There is inertia building in the development market due to significant increases in construction costs challenging the economics of development, coupled with a more expensive development finance market.

"Concerns over the rigour of lending criteria and an increase in rates of return needed by lenders may well stymie development over the next 12-18 months, calling the viability of the medium-term development pipeline further into question."