Has Aberdeen’s beleaguered office market turned a corner?

In the Granite City, oil is everything. The trend lines for office take-up and oil prices are virtually indistinguishable.

It’s no surprise, therefore, that the oil price crash last year pushed the property market into freefall. A barrel of Brent crude oil cost just $29.00 (£23.40) in January 2016 - the lowest since 2002 - and didn’t really recover until September, when it hauled itself up to a still paltry $50 a barrel.

Correlating with this was office take-up for the year of just 279,000 sq ft - around half the 10-year average and the lowest since 2009 - and according to Knight Frank, there were only 12 transactions of more than 5,000 sq ft.

The investment market was hit even harder. In 2014, investment reached £500m in the city, with UK institutions in particular keen to get their hands on offices let to large energy firms. Last year, a meagre £19m was invested in Aberdeen offices.

“It was an awful year,” says Eric Shearer, head of Knight Frank’s Aberdeen office.

However, there are now signs that the worst is over.

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Since the start of the year, there has been a renewed sense of optimism. Leasing deals in the first three months totalled nearly 200,000 sq ft and the sale of a 100,000 sq ft office building at the Prime Four Business Park to a US institution for £40m means investment has already doubled last year’s figure.

Can the momentum be maintained? Local property experts are certainly not getting carried away, after 2016 left the sector so battered and bruised.

One major issue that still needs to be addressed is the vast swathe of vacant office space left behind by oil firms forced to reduce headcount when oil prices tumbled.

“Our biggest problem is that we’ve got a huge oversupply of offices,” says Shearer. “The dynamics of the office market aren’t great - there’s huge supply and limited demand.

There aren’t many large occupiers who haven’t already done their big move; that’s why we were so busy between 2012 and 2015. Now, there are less than a handful of those companies that still have to do that move and in this environment they won’t. We’ve probably seen the end of 100,000 sq ft-plus moves for the next few years.”

Empty space

There is consequently close to 2.5m sq ft of office space on the market - a monumental figure when you consider that in 2014, firms were having to pre-let space because of a lack of availability. In such a competitive market, landlords are doing everything they can to tempt occupiers.

“You measure rent-free [periods] in years now, not weeks,” Shearer says. “It’s way cheaper than it has been and occupiers are being given huge incentives. You can get brand-new space with some pretty interesting packages.”

Mark Jones, director of leasing agency, offices, at Cushman & Wakefield in Scotland, agrees that the market still has “issues” - and the price of oil is the major one. Fluctuating prices make it difficult for firms to plan for their futures in the city, which affects decisions on office space, he says.

“There are questions over market volatility, so it’s not going to stay stable. In that environment, it’s going to be difficult for organisations to plan for the next two to three years.”

However, Jones is confident the market will make “slow gains” over the year, noting that investment and leasing activity is on the up. “I think sentiment has changed,” he says. “Up until the beginning of this year, it was very much about cutting costs across the board.

“I’m starting to get much more rhetoric now from companies about looking forward to expanding investment in the North Sea and stability around headcount. It’s definitely a change of mindset and I think it is the beginning of the turn of the marketplace.”

Energy companies are looking to invest in the North Sea again, perhaps buoyed by the recent discovery of the UK’s largest new oil field of the century near the Shetland Islands, which could provide one billion barrels of oil. “They are looking at their commitment to Aberdeen and the North Sea being more secure,” says Jones.

Edging back?

He predicts that companies that moved out of office space last year because of redundancies may slowly look to take that space back over the next two years. He points to a 77,100 sq ft building at Aberdeen International Business Park previously occupied by Aker Solutions, which vacated it last year.

“The building was built for growth and Aker Solutions has shrunk, so that’s on the market. But I suspect that vacant space will start to get sponged back in. That would be the first sign of a recovering market,” he says.

Shearer is also relatively upbeat. He expects a “gradual recovery” this year, with 20% to 30% more business across the board. Take-up should push past 300,000 sq ft, well down on the 10-year average, but “going in the right direction”, he says.

Investment is also likely to increase, he believes, prompted by the sale of office buildings such as West Campus, a 211,000 sq ft mixed-use office and industrial HQ development, which Knight Frank is marketing with an asking price of £38.75m. According to Shearer, it is already attracting interest from overseas investors.

Overseas money is expected to very much lead the charge. Paddy Ford, partner in the capital markets team at Knight Frank, says the UK institutions that were so keen on Aberdeen earlier in the decade because of its performance compared with other Scottish cities have largely turned their back on the city. Overseas investors, on the other hand, are attracted by the discount Aberdeen provides, in part because of the weak pound.

“West Campus is probably 200 to 250 basis points cheaper than the equivalent in Glasgow or Edinburgh, as well as offering length and security of income,” Ford says.

Vendors are also more willing to sell because the oil market has picked up. “There was reticence last year to sell anything because nobody knew what was happening,” he adds. “The feeling is now that the market has bottomed out. Some tenants are beginning to employ again, so there’s a little bit more positivity.”

Cautiously optimistic

Perhaps surprisingly, there are new offices coming on to the market, including Muse/Aviva’s 170,000 sq ft Marischal Square and Titan/BA Pension Fund’s 132,000 sq ft Silver Fin building, both of which have space remaining. There are also scheduled to be a lot of refurbishments, raising the quality of office stock.

“We’ve finally got the good-quality space that Aberdeen has never had,” says Derren McRae, CBRE’s managing director - Aberdeen. “We’re finally getting real London-quality, grade A offices into the city [in Silver Fin and Marischal Square].”

He adds that the availability of space means firms can move into modern space, out of the inefficient granite townhouse buildings that many occupy.

Much of the activity will be driven by smaller, more agile firms, he predicts. As the large energy firms scale back their requirements, smaller ones will step in to take their places by buying up North Sea assets for “more realistic prices”, he explains. This has already begun to happen - energy firm Siccar Point’s recent offshore acquisition prompted it to move from a serviced office to 7,000 sq ft of space at Kennedy Wilson’s H1 development.

“It is companies like that that we have to keep an eye on in terms of the next generation of operators in the North Sea,” says McRae. “They’ll work the North Sea assets more profitably than the bigger organisations. That’s where the growth will be in the energy sector.”

However, market churn does not constitute a recovery. As Knight Frank’s Shearer puts it: “We are incredibly busy at the moment, but being busy is easy; making money isn’t.”

So Aberdeen’s property market is pushing on after a painful year and there are definite shoots of recovery. But it is not out of the woods yet.

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