The ability to guess when a market has reached hit its lowest point is just as important as guessing when it has peaked, as the firm that invests at the bottom will make the most money in the ensuing upturn. Last week, developer Blackfriars placed its bets by signing a contract for what it says will be the only major speculative office block to start in London this year, a £67m scheme designed by architect-cum-television star Will Alsop (see page 26). Blackfriars reckons its completion will coincide nicely with an upturn in the commercial market in 2006.
Brave or foolhardy? Nobody can be sure. But the developer's decision to press ahead despite the lack of demand for office space seems to encapsulate a new optimism among developers. One large office and retail client estimates goes so far as to estimate that the market reached its lowest point in June. "We have done many more viewings in the past couple of months or so," he says.
I don’t think people are just talking up the market. They are reflecting a new feeling out there
Andrew Muncey, Gleeson managing director
And the market is suddenly abuzz with talk of the big commercial jobs that are back on track – have you heard the one about the whopping £200m job planned for the City of London by Royal Bank of Scotland? "There's lots of secret squirrel stuff that is about to come out that we are on pain of death not to divulge," says one construction manager. Another consultant talks about the large speculative office in Manchester that is back on the scene after the client had delayed it for two years. Then there is the steady flow of biggish office projects coming through, such as the fit-out of the Barclays tower in Canary Wharf and premises for Morgan Stanley, Ananova and Sky.
The exuberance of the developers must be set against the background of some pretty grim statistics for construction output. Experian Business Strategies, which writes Building's "Tracker" articles on the state of the market, reported last week that there had been a 15% year-on-year fall in commercial orders between the second quarters of 2002 and 2003, and a 13% drop in the industrial market in the same period. The RICS this week described business confidence in both sectors as "feeble", especially in the South-east.
The last quarter has shown positive signs, especially in the office market. Enquiry levels picking up – from a rather low base
Milan Khatri, chief economist, RICS
There is no question that the industry downstream from the developers does not share their mood. But at the same time, their perceptions are changing. One contractor who has been bemoaning the state of the commercial sector for two years is suddenly more chipper. "It feels a bit busier right now – certainly busier than it has been for a while," he says. Vince Clancy, partner in QS Turner & Townsend concurs. "We are seeing signs that the commercial market is starting to recover," he says.
Clancy adds that this recovery is likely to become apparent in the near future, as corporate clients are presently making decisions to rent more space, and demand is likely to grow in the retail sector. "If you had asked me six months ago I would have said it's still flat. A bit of demand is now coming back."
Andrew Muncey, managing director of Gleeson, is another industry watcher who has picked up positive vibes in the past few weeks. He has monthly meetings with agents about an office scheme the firm is putting up in Watford. "There was a sense of increased activity out there," he says. "There is some movement in the office sector. I don't think the agents are just talking up the market. They are reflecting a bit of a new feeling that is out there."
The prize for the most enthusiastic contractor goes to Steve Elliott, managing director at Overbury, the fit-out arm of Morgan Sindall. He reckons the market will be in an upswing as early as next year. "The second half of 2004 will surprise us. It will be a lot better than people think," he says.
Further proof of a pick-up in activity will come from the RICS' quarterly commercial survey, which is due out next week. Although he remains cautious, Milan Khatri, the institution's chief economist, has seen the figures and thinks they make for pretty good reading. "It's too early to say there is any real strength in the market," he says. "But the last quarter or so has shown some positive signs, especially in the London office market. Enquiry levels are starting to pick up – admittedly from a rather low base."
Khatri attributes the more positive vibes to the recent rise in the stock exchange. "There is quite a bit of confidence for financial services firms," he says. "They are holding off from firing people and are even raising the number of staff. There are positive indicators out there."
Yet nagging doubts still remain that the mood switch is just that: a psychological change rather than one borne out of hard facts or schemes. Some sceptics question the new optimism. One doom-monger – the director of a medium-sized project manager who doesn't want to be identified for fear of accusations of talking the market down – is less than sure that the market has turned. "I can see no green shoots yet."
He thinks that the return of confidence is 18 months away, as many big financial clients are still delaying making decisions on office accommodation. "There are no signs of anything in the commercial sector. You hear stories but that's exactly what they are, stories. The market in commercial office is still very, very fragile."
And the developer who said the market had reached the bottom of its cycle in June also treats the talk of an upturn with some caution. "We've got to get rid of space that's still available," he warns. "It probably won't be the end of next year until we see proper new development. It needs a few deals in the next few months to prove that the feeling is correct." And just to muddy the waters a little more, Khatri adds that much is dependent on the state of the global economy.
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