City desperately in need of more new office space to meet demand, reports Tony McDonough

LIVERPOOL’S efforts to attract blue chip tenants to its central office core is threatened by a shortage of new, top-quality space.

Last week the local market received a boost when it was revealed that the UK Borders Agency was on the verge of signing up for around 200,000 sq ft across several floors of The Capital building.

The Capital, formerly owned by insurance giant Royal & Sun Alliance, was purchased two years ago by Downing for £51m – a Liverpool city centre record.

Since then Downing, Merseyside’s biggest commercial property owner, has spent more than £10m refurbishing space not occupied by Royal & Sun staff into high-quality office accommodation.

The firm insists the standard of the space puts it on a par with any brand new – or grade A – space in the Liverpool market.

Clearly this has been enough to impress the UK Borders Agency, but other potential blue-chip tenants may be harder to please.

Liverpool does have a significant amount of good quality refurbished space available.

Downing’s Capital, Bruntwood’s the Plaza and UK Land’s Exchange Flags complex are all proving popular.

Bruntwood is also creating quality accommodation at the Cotton Exchange and 1 Dale Street and Kenmore is bringing 70,000 sq ft to the market at 1 Tithebarn Street.

But over the next two to three years, the city is facing a possible dearth of new grade A space.

Earlier this year, Merseytravel signed up for 140,000 sq ft at the new Mann Island development. That just leaves the remaining space at 20 Chapel Street and around 40,000 sq ft at 5 St Paul’s Square.

The next phase of St Paul’s, if it goes ahead as expected, will bring another 109,000 sq ft to the market.

That will help the situation but if Liverpool is to attract major investment on an ongoing basis then more will be needed.

There are a number of obstacles to the creation of new space. The credit crunch has made bank funding devilishly difficult to secure and would certainly not be advanced without a significant pre-let.

The general economic downturn has meant there are now fewer requirements in the market and the recently introduced tax on empty properties is also a major hindrance to developers.

Following the completion of the Merseytravel deal in April, CB Richard Ellis agent, Nick Rice, warned the local office market could “go to sleep” if more grade A space wasn’t forthcoming.

He added: “The Merseytravel deal is obviously very significant and is good news, but at the same time it has taken away a potential source of new supply for the city.

‘The concern is that once the remaining space at 20 Chapel Street and St Paul’s Square is filled, then there will be no brand new space available.

“It is vitally important that we see the construction of new office space in Liverpool so we can ensure there is a supply line from 2011 onwards.”

Mr Rice urged developers to talk to economic development bodies Liverpool Vision and the Northwest Development Agency with a view to gaining assistance.

The Mersey Partnership (TMP), Merseyside’s main inward investment body, believes the recession presents an opportunity for Liverpool as financial services firms occupying expensive office space in the City of London may be looking for cheaper alternatives out in the English regions

Mike Taylor, director of enterprise and investment at Liverpool Vision, says efforts by regeneration agencies to attract investment could be jeopardised by a shortage of space in the coming years.

He said: “There’s a chicken and egg situation with commercial property.

“The new sales team in TMP is doing a great job and much better than before.

“They are dealing with a pipeline of projects. If half of them come off, this city doesn’t have enough quality office space.

“There are at least another four serious opportunities like Maersk to take Grade A office accommodation. That’s why we are committed to phase three of St Paul’s.

“The city isn’t just about low cost. It’s about the range of knowledge and cultural assets the city has. But the cost base is 20-30% lower than other cities.

“That’s why businesses are looking at Liverpool as a real opportunity for investment.”

One of the city’s most experienced commercial agents, Chris Hennessey of Edmund Kirby, sees no easy answer to the problem and says Liverpool may now be back in the position where gap funding is needed to get things moving.

He said: “It is crucial for the future success of the city that potential occupiers have a range of space to look, from grade A to high- quality refurbished and grade B. The problem is if we can’t match the offer of other cities, then we will lose out on investment and jobs.

“Some tenants will be happy with refurbishments but there are companies who have a strict policy of only moving into grade A space and you have to have a product to offer them. Many companies now have strict corporate social responsibility policies and a green agenda which means they will insist on high environmental standards in any building they occupy.

“There are three things deterring developers from creating new space in the city.

“The first is the credit crunch and the lack of funding available from the banks. Unless you can guarantee a pre-let of at least 75% of the space then you are unlikely to get the money.

“Secondly, because of the downturn there is a lack of larger requirements in the markets. There are requirements out there but potential occupiers are also taking longer to make up their minds and they are driving a hard bargain.

“Thirdly, you have the tax on empty properties which is such a stupid piece of legislation which I am amazed hasn’t been repealed.

“If you put up an office building and you don’t fill it straight away, then you face paying tax of £6 per sq ft. I think that is outrageous.”

Liverpool Commercial District Partnership (LCDP) was set up to drive forward the interests of the city’s commercial core.

LCDP chief executive Paul Rice believes there are some small signs of recovery in the UK commercial market and says it is vital Liverpool is ready when the upturn comes.

HE ADDED: “We have good-quality space in the city, in both new and refurbished properties, but it’s vital that we continue to refresh our supply if we are to maintain our momentum.

“If a large inward investment enquiry for new grade A space was to be received at the moment, we might struggle to satisfy this demand, so a key measure of our success in this area will be the ability to provide large single footplates.

“While there is undoubtedly still a long way to go before we see confidence completely return to the commercial property sector, there is certainly a feeling that recovery is on the horizon, so we must ensure that we’re ahead of the game when the phones start ringing again.”