Dan Smith: How do we tackle dearth of quality city centre office space in Aberdeen?

The Aberdeen office market, much like in the rest of the UK, has seen a strong flight to quality among occupiers.

Firms are looking to attract and retain skilled staff post-pandemic, while also achieving their net-zero aspirations.

However, unlike many other regional UK office markets, Aberdeen has seen a dearth of recent office development. In fact, the last noteworthy schemes to be built were The Capitol, Marischal Square and Silver Fin building, all of which were completed in 2018.

Lowest Grade A vacancy rate on record

As a result, we are now seeing a reduction in the availability of best-in-class office space in the heart of the Granite City. Grade A city centre accommodation has a vacancy rate of just 2%, the lowest figure on record.

Despite this, exorbitant construction costs and ever more stringent regulatory requirements continue to call into question the viability of new-build stock. While this phenomenon is becoming more common throughout the UK, it is particularly prevalent in smaller regional markets like Aberdeen.

Comparatively low headline rents in these markets cannot sustain recent build cost inflation. What’s more, the push for greater leasehold flexibility and uncertainty surrounding market longevity are making office cost appraisals increasingly difficult.

With this in mind, how will businesses continue to find suitable space in Aberdeen city centre?

While there is still immediate availability within some of the best-in-class schemes for smaller, sub-20,000sq ft occupier requirements, current demand levels suggest it won’t be around for much longer.

Firms face choice of paying more rent or compromising on office requirements?

So, what happens next? Occupiers will need to accept paying rents at a level that will facilitate new development or comprehensive refurbishment, or else compromise on their sustainability requirements. The first of these two options is unlikely to be supported by any historical, comparable evidence.

However, with ESG (environmental, social and governance) front and centre for most corporate occupiers these days, paying higher rents is likely to be the more likely option for most.

Taking account of embodied carbon, the refurbishment of existing building stock is the most environmentally sustainable option. It also aligns far better with the Scottish Government’s National Planning Framework 4, which advises against demolition and redevelopment.

In the majority of cases, it is also anticipated that comprehensive refurbishment of Grade B buildings will be less expensive than a new build, making cost appraisals more palatable.

But refurbishments are still not immune to cost inflation and so rents will also need to move on to ensure development feasibility. In Glasgow, where there is greater Grade A supply than in Aberdeen, there have already been reports of rents for top quality refurbished space outpacing that of some new builds. The rationale here being an increased focus on buildings that are prime in terms of location and amenity provision.

This should present new opportunities for landlords with older properties, many of which are facing an uncertain future in light of looming ESG regulation and overall market contraction.

Almost all office demand is now centred around energy efficiency and amenity. Given the lack of development pipeline, this is a chance to push older, functionally obsolete office space back to the front of the queue.

Leap of faith

While a commitment to a costly refurbishment still requires a leap of faith, there are a growing number of examples across the city, including Blenheim House and 42 and 27 Albyn Place, where landlords who have undertaken works have successfully let space.

Looking ahead, as best-in-class supply continues to dwindle, we will see more such examples, with those making the jump undoubtedly capitalising on the lack of top quality stock.

Dan Smith is head of office at Savills in Aberdeen.