The saying goes "less is more", and that appears to be the mantra being adopted by companies taking offices in Edinburgh this year, with lease agreements larger than 25,000 square feet proving rare.
Tech firm Analog Devices’ agreement to take circa 28,000 square feet on a sublease from US gaming firm Fanduel at 2 Freer Street remains the largest letting of 2023, with Scottish Water Business Stream’s sublease of 25,600 square feet from insurer Aegon at 1-3 Lochside Crescent the next largest.
Along with smaller leases, a turn to office-to-hotel redevelopment is growing in Edinburgh. With room prices at a premium and offices less in favour, investors are looking at alternative uses for some of the city's prime located workspaces.
CoStar travelled to Edinburgh to discuss the lack of chunky office deals with local property experts, and to ask whether the city is getting the real estate mix right to continue to attract global businesses to the capital of Scotland.
Low Stock
Edinburgh office take-up in the third quarter “remained steady”, CBRE data shows, as 164,281 square feet was transacted, down slightly from the second quarter’s 172,580 square feet. The office leasing total for the year to date is 460,801 square feet, bettering last year’s sum at the same stage by 26%.
Beverley Mortimer, associate director at CBRE Edinburgh, says the figures reflect a city that is “faring better than other regional office markets”, adding that office occupancy levels are also “getting better” after the return to work from COVID. The market's issue, however, is available space.
"In the city centre and the central business district, there just isn’t any stock and there is a lack of the best stock. At the moment, we have a 0.53% vacancy rate for new Grade A office space in the city centre. People want the best space and there is this big push on ESG and sustainability.
“But we don’t have a lot of stock and we don’t have a lot of development pipeline because landlords are not as willing to build speculatively, and the cost of construction and borrowing has gone up. To make the sums stack up, the rents have to be a lot higher than what is likely to be achieved."
Another significant event in the Edinburgh market this year was investor Abrdn's decision to vacate its 108,000-square-foot headquarters at 6 St Andrew Square. Most of the firm’s staff have relocated to the nearby 1 George Street, in an event that has freed up a significant chunk of office accommodation in the city centre.
Prime rents in the city are said to have reached £43 per square foot, a jump of about 25% in the last five years, according to CBRE, which says they are expected to rise again before the end of the year. Mortimer says tenants are less sensitive to rent increases for best-in-class spaces but continue to count the cost of the pandemic.
“What COVID has done is forced occupiers to reassess their workplace needs and allowed them to take less space, in a lot of cases, because they have more flexible and hybrid working. There’s a real focus on collaboration space and a lot of people are opting for flex space. The market is getting busier, but things have definitely changed, and you need to go with it."
Flexing Muscle
Cubo is one firm that has taken advantage of the growing demand for flexible office space in Edinburgh. It took 17,764 square feet at 40 Princes Street in April, its first venture into Scotland, having already established workspaces in Birmingham, Derby, Nottingham and Sheffield since 2020.
Cubo CEO and co-founder Marc Brough tells CoStar News that the location of its Edinburgh pitch, above one of the city’s liveliest streets, was the main selling point in its selection process, and says the space within the building is “flying”.
“Edinburgh was always on the cards due to the lack of service space in the city," he says. "We take institutional leases, not management agreements, which are not the preferred option in the city as demand is so tight. So, the little competition in the city put it on the radar."
"The key for us is always the member experience, we always want the best building in the best location. The view out the window explains why we are here, rather than in the West End. You couldn’t get a better view and it’s right outside Waverley train station.”
Brough says the group hopes to achieve full occupancy by the end of the year, adding it is now on the hunt for a second location in the city. He says its selection will ultimately come down to availability.
“If we could take another 20,000 square foot in this building, we would. If miraculously there was another building that fronted Princes Street with 35,000 square foot, would we take it? Absolutely.”
Arrested Development
In addition to a lack of current best-in-class accommodation, Edinburgh's office development pipeline is slim.
Avison Young data shows there is 136,509 square feet of speculative space available and due to complete in the rest of 2023 across Edinburgh One, New Clarendon House, and 22 Charlotte Square. CBRE Investment Management’s 30 Semple Street development will add a further 57,000 square feet, but not until June 2024.
It means that the fight for quality in the city is very much underway, with agents observing that occupiers are issuing their requirements "significantly in advance" of their lease events to secure the best properties. Development is also limited by the city centre’s UNESCO World Heritage site status, as well as the current tricky economic conditions.
With space tight in the centre, development has extended into the suburbs. Edinburgh Park is one such location providing office accommodation outside the city centre, positioned close to South Gyle. Having opened in the mid-90s, one of the site's enduring strengths is its transport links, with air, rail, tram and road all options.
“The city is a global conservation area effectively, and that’s always been the challenge,” says James Thomson, partner in Cushman & Wakefield’s Edinburgh offices team. “You can’t really knock it about too much and you don’t have the option that you have in many other cities to move into industrial hinterland because there isn’t any.
“As a result, you’ve seen it evolve and push into the Exchange District, which was a redevelopment opportunity. You’ve also seen it push into Waverley Valley, where the Scottish Parliament has gone and Edinburgh City Council has gone, and into one-offs like, like Quartermile and most latterly Haymarket."
Development continues at Edinburgh Park, where local firm Parabola opened its 1 New Park Square scheme in April. The building provides circa 53,000 square feet of offices, as well as hosting a bakery and gastrobar on the ground floor. A 150-person conference room and a padel tennis court complete the site's amenity offer.
1 New Park Square is part of a wider plan to deliver more than 800,000 square feet of offices across the former farmland, along with 1,800 new homes. Marsh McLennan was secured as the building’s first tenant in April, with tech firm Element taking a 16,000 square foot chunk in October.
‘It’s in the Services'
Thomson uses the building as an example of how developers are homing in on schemes with features like high-quality end of journey facilities, “light and bright” office floors and events space to win tenants’ business.
He adds: “It’s also about how you run it. It’s not just managing a building, it has to provide a proper service, with a hotel-style concierge approach and perhaps working much harder to engage with the tenants to make sure that they’ve got things to entertain them. It’s in the construction, it’s in the services, it’s in the presentation.”
At the beginning of October, Irish hotel operator Dalata bought 28 St Andrew Square from Aviva Life & Pensions UK for £12.5 million. The operator plans to convert the former Trustpilot offices into a 150-bedroom hotel as part of a wider £48 million strategy. Queens, a Tristan Capital Partners fund and hospitality group, then acquired 9-10 St Andrew Square with plans to bring forward a “budget boutique” hotel.
The two deals, comprising circa 80,000 square feet of prime offices located real estate, reflect the return of a trend in the Edinburgh, where offices make way for the city's booming leisure industry. Cushman & Wakefield’s head of capital markets in Scotland Stephen Bibby says the adaptability of the city’s offices make them a safer bet for investors compared to similar buildings in other locations.
“The underwrite for an investor is so strong because that mobility of use actually takes care of itself from an investor point of view. It’s quite an old city, but it’s quite modern in the way that people want development to happen as well, so it’s a compelling argument to investors.
“A lot of people believe in Edinburgh longer-term because of all of the underlying value and the other factors… If you go to somewhere like Glasgow, there is more challenge in terms of how people see the occupier base going forward.
“Edinburgh doesn’t have those kind of issues [around the occupier market], plus you could just turn it into residential, or built-to-rent, or something where you are really going to be able to drive value out of it.”
Bibby’s comments are backed up by Knight Frank analysis of the Edinburgh market which shows that £596 million of commercial property has changed hands in the year to date, up on the £555 million in the whole of 2022.
Challenging Times
Stephen Walker, deputy head of asset management at Abrdn, says the office market is "challenging" for investors at the minute with other sectors, such as residential and industrial, representing more predictable markets, as companies continue to evaluate their need for workspace and the ESG agenda grows stronger.
"I'm personally still pretty long on offices in the long-term for the right stock in the right place, but there is a lot of uncertainty at the moment around return-to-work numbers and refurbishment and ESG requirements that make offices a more challenging place to be.
“I think we will see lots of offices that won’t be offices going forward and, therefore, a section of the universe will convert to residential or hotel or some form of alternative. It is a challenge, but I do also think there are opportunities in the office market.”
Walker adds that offices will always have a place in central Edinburgh due to the city's international appeal, but insists that those who are “thinking further in advance” about the needs of occupiers will fare better at navigating these uncertain times.
He uses the firm’s New Clarendon House refurbishment on George Street as an example of how Abrdn is setting up its stall to continue to satisfy the occupier market in the city, focusing on ESG and emerging tenant demands.
“It’s a comprehensive refurbishment, circa 34,000 square feet, over seven floors. The building will be Net Zero carbon emissions, fully electrified and entirely powered by renewably sourced energy. We’ve also removed all of the car parking spaces and replaced them with changing facilities and 76 bike racks".
The building also has a Brompton electric bike hub, with tenants able to use the eight bicycles free of charge in what the firm says is a first of its kind for the city. He adds: “We’re also driving for a 5-star NABERS rating, BREEAM Excellent, EPC A, and Platinum WiredScore, so that building is ticking a lot of boxes and is a good example of how we think of offices at the moment".
In the Mix
Although some of Edinburgh’s buildings are getting a new lease of life through big hotel redevelopment investments, its custodians must maintain sufficient office accommodation in the future, say Chris Cuthbert and Nick White of real estate agency CuthbertWhite.
They describe Edinburgh’s "Golden Rectangle" as “white-hot” in terms of leasing, insisting there are still plenty of parties interested in offices in the centre of the city to warrant the development and refurbishment of workspaces. But they acknowledge the difficulties with making the sums add up for builders.
Cuthbert says: “Our biggest issue in Edinburgh right now is the fact that not enough is being built. If we could have half of what Glasgow has got sitting available, then it might feel a bit fairer. But we don’t and Edinburgh has always suffered from certain sized bandings and buildings.
“There needs to be a lot more planning control over keeping the mixed environment. It’s a mixed-used Edinburgh city centre, that’s what makes it brilliant. There are lots of people living on this street, working on this street, drinking on this street and eating."
Looking ahead to the future, Cuthbert argues the city and its council should be protecting its office accommodation to ensure Edinburgh’s success as one of the UK's leading cities for business. But some redevelopment will be needed, where it makes sense, he adds.
"I think the planners need to say, ‘we need to protect some of these office buildings', and not have them turn into particularly hotel use and serviced apartments. It should be on a case-by-case situation. Some office buildings no longer work that well as office schemes and we understand that there are times when that switch makes sense.
"But, if it continues like this, the very definition of a central business district will be put into question."
'Appropriate' Office Space
Responding to concerns around the blend of the city's real estate uses, Edinburgh City Council's planning convener, Councillor James Dalgleish tells CoStar News in an email, offices continued to be an important part of Edinburgh's real estate jigsaw, but environmental factors were playing a key part in what the city could do with buildings.
He said: "We recognise the value of appropriate office space in the right locations in Edinburgh as part of the mix of uses which contribute to a thriving and successful capital city, including the centre. Our planning policies support this as we look for the provision of new office space as part of the mix of uses in larger developments.
"Demand for office space is always changing both in terms of space and specification. Environmental considerations are also an increasing concern and it is not always possible to retrofit some older buildings."