Confidence returns to the commercial market

The effects of the low oil price environment since mid-2014 continue to be felt in Aberdeen’s commercial property market. The majority of oil companies and service companies have rationalised their cost bases considerably in order to realign their overheads with reduced activity and turnover.

The market has slightly improved, with both office and industrial take-up this year matching last year’s performance. The modest recovery has led a growing number of analysts to suggest that the worst of the downturn now appears to be over.

Office take-up remains steady

The first three quarters of 2018 witnessed around 270,000 sq ft of office take-up in Aberdeen. The level by the end of the year is expected to match the 405,000 sq ft take-up during 2017. Take-up this year has included a large number of smaller transactions, which portrays a more healthy market that is less susceptible to fluctuation. However, we are unlikely to see a sizeable increase of take-up in the medium term, due to the reduced presence of larger office requirements.

There is significant oversupply across the city, extending to around 2.8m sq ft. This is a legacy of the considerable amount of new build and existing office space that was introduced to the market in 2015/2016, just as demand from oil and gas sector occupiers tailed off, following the oil price drop.

Industrial market

There is relatively more confidence in Aberdeen’s industrial market. At around 548,000 sq ft, take-up during the first three quarters of 2018 is on target to match the 600,000 sq ft figure from 2017. In a similar trend to the office market, the majority of demand is at the smaller end of the market. Deals done on larger buildings of high quality are at rents close to the level experienced prior to the market downturn, albeit heavily incentivised. Overall, we are finding that those occupiers with lease events in 2019/2020 are shopping early for space in order to secure a good deal now.

The industrial market is also dominated by occupiers with connections to the North Sea oil and gas exploration and production sectors. However, it has not witnessed the same levels of oversupply as the office market. Industrial accommodation has mostly been retained in order to enable continued functionality of the operational side of the businesses. Nonetheless, supply has increased over the last two years, reaching around 2.2m sq ft. However, as with the office sector, it is important to note that there are only a handful of high quality industrial buildings across the city available for immediate occupation.

Outlook

Looking ahead, the market remains weighted heavily in favour of the occupiers, who are most likely to utilise existing space prior to going to the wider market with any new requirements. Moreover, there remains an oversupply of available commercial property of all size, use and specification. But this includes a number of dated buildings that are functionally obsolete and unlikely to be reoccupied. The supply of high quality accommodation remains constrained.