After Q1’s slow start, demand for office space has yet to outstrip supply, but developers and landlords should remain calm. Mark Wilding reports

It was July last year when oil and gas firm Nexen agreed a deal to occupy the entirety of Rockspring’s 82,000 sq ft Stanza development in Uxbridge. (

The deal seemed to confirm the fund manager’s good sense in pressing ahead with the scheme nearly two years before but, perhaps more importantly, looked like good news for developers building spec schemes further west across the Thames Valley.

Rockspring has been foremost among them, but the likes of Legal & General and M&G Real Estate have also made the leap. There was a feeling that a single letting of such a size surely represented a tipping point.

But nearly 12 months down the line and similarly sized trophy deals are in short supply. Without exception agents report that transaction volumes in the first quarter of 2014 have been disappointing. The market seems to have entered a kind of stasis, with a number of major requirements still unfulfilled and several key buildings either completed or in construction without a tenant signed up.

But the deals which are being done suggest both rents and yields are hardening. So are spec developers on the verge of a major payoff?

While the year has got off to an undeniably slow start, there are reasons to suggest this could be a minor blip in an otherwise positive story. James Finnis, head of south-east office agency at JLL, says: “Q1 has disappointed in terms of take-up statistics and the market on the face of it is not looking particularly healthy. But the reality is there remains a good pool of named demand and an awful lot of unnamed demand behind the scenes.” Major requirements include VMWare, Gartner and PepsiCo - all of which are understood to be seeking upwards of 60,000 sq ft.

The key issue at the moment seems to be a lack of urgency on both sides of the letting market. There are certainly major requirements out there but occupational demand is yet to hit a level where prospective tenants compete to win their first choice of building. As a result, they’re choosing to take their time. But a corresponding lack of supply of large buildings offering grade-A office space means landlords can be reasonably assured that a deal will come along sooner or later.

Luke Hacking, director at CBRE, says: “It’s quite an interesting development cycle. There was an oversupply for years. The balance seems right. With fewer schemes under construction, it’s a more considered approach than we’ve seen in previous years. Everyone hasn’t piled in at the same time.”

Bell Hammer has been involved with many of the spec schemes that have come forward in the region in the last two years. The firm was Rockspring’s development partner on Stanza and has worked with the fund manager on the 67,000 sq ft Tor development in Maidenhead ( In September last year it completed the 77,000 sq ft Abbey Gardens South scheme with Hermes in Reading. It’s also currently working with M&G Real Estate in Reading on the development of Forbury Place. With a first phase totalling 190,000 sq ft, it’s the largest spec office scheme being built outside London (

Joel Hawkins, director at Bell Hammer, is unworried by the relaxed attitude with which occupiers are treating their searches. “Letting your buildings within the first 12 months after they are finished is really what you’re trying to do and anything sooner than that is a big win,” he says.

“We did that in Uxbridge with Stanza. We’d like to have let the buildings during construction but that’s always the dream result. Anyone who’s doing spec office development should build in a period after completion to let it in and that should be 18 months. Letting them within 12 months is still comfortable.”

According to Savills director Jon Gardiner, the circumstances in which these spec schemes were brought to fruition mean the likes of Rockspring and Bell Hammer are in a good position to stand firm when it comes to commanding higher rents: “Not only have they delivered stock into the market at a time of limited supply, they managed to tender the buildings at very competitive construction rates and bought the land at very competitive levels,” he says.

“They’re not desperate to do deals. As a function of the fact they bought and funded them so well they have flexibility in terms of void rate post-completion. They don’t have to accept any old letting.”

Thames valley office space demand by sector Cushman&Wakefield

Equally, the fact that headline rents appear to be hardening will reassure landlords. Data from Cushman & Wakefield suggests the average headline rent across the region has recently pushed past £28/sq ft, up 4.2% on the preceding quarter and an increase of 5.3% year on year. Stanza went for £32/sq ft, while buildings in places such as Hammersmith are quoting up to £47.50/sq ft. Hugh White, head of national investment at BNP Paribas Real Estate, says: “These are not just new headline rents for this cycle, but new in these locations.”

With landlords sitting patiently as headline rents rise, the investment market is heating up. “There is little doubt that occupier caution is giving way to confidence” says Cushman & Wakefield associate partner Andrew Agnew. “With improving demand and a greater conversion rate, the gap between the occupational and investment market is likely to narrow throughout the year.”

Further speculative schemes continue to come online, but not in any great volume. Legal & General announced in August last year it was pushing the button on 70,000 sq ft Building Three at Lotus Park. Segro has just submitted a planning application for a 68,000 sq ft office to be built speculatively at 234 Bath Road on the Slough Trading Estate. But business unit director Gareth Osborn warns against seeing this as a bullish move. “We’re moving forward fairly cautiously,” he says.

234 Bath Road will be marketed both for single occupancy and to multiple tenants. “We haven’t done any office development in Slough for quite some time,” says Osborn. “We feel that the level of activity at the moment is reasonably encouraging. There are a few buildings in the wider Thames Valley area of 50, 60, 70,000 sq ft where people are holding out for a trophy headquarters letting. That’s a tough ask in the current market. But providing we have product capable of subdivision as well as a trophy letting we’re fairly confident.”

But Bell Hammer’s Hawkins is confident that the major lettings will start to be signed before the end of the year. “The requirements are coming,” he says. “They are taking a bit longer than one would really want. Right now there are enough requirements to meet the supply. There is a balance and we’ve got some form of equilibrium in the market.”

At some point, that balance will tip - and it looks likely it’ll be in the landlord’s favour. The next few months will reveal exactly how prescient the spec pioneers have been.