“Demand is strong despite pockets of oversupply”, writes Daniel Thomas

The commercial property market in the Thames Valley was the most visible victim of the dotcom bust in the region.

Endless rows of empty glass office buildings in the business parks down the M3 and M4 motorways, built partly to satisfy the once voracious office requirements of the technology giants, have stood as a warning to developers over the past seven years.

Office lettings in the key Reading market, for example, went from a record high of 1.6m sq.ft at the peak in 2000 to 153,000 sq.ft just two years later, according to Thames Valley property agent Campbell Gordon.

But since 2005, there has been a recovery in the office market in particular, with take-up last year matching some of the years during the late 1990’s boom.

 Last year, there was a respectable 772,000 sq.ft of office space let in the region.  Rents now range from £22 per sq.ft in Brentford to £36 per sq.ft in Chiswick, and are generally seen to be climbing in most areas for good quality office space.

There have been a number of large deals in recent months, including Yell’s 153,000 sq.ft leasing of Kier/Invista’s Reading Central development, while the next few months are expected to see Reckitt Benckiser take big new office at Resolution, JER Partners and Blackstone’s London Gate development in Hayes.

Duncan Campbell, of Campbell Gordon, says that demand for new office space is still rising, partly because locally-based companies are expanding, mainly in the IT, pharmaceutical and business services sectors.

These deals could help push 2008 take-up above the five-year average, according to agent King Sturge, its most recent Thames Valley report says that availability at the end of the first quarter was 5.3m sq.ft, suggesting a vacancy rate of 8.8 per cent compared with 10.7 per cent in the same period last year.

But there is still many vacancies in offices in the area, standing at roughly 14.1 per cent, or 1.6m sq.ft, in the Reading market alone, according to Mr Campbell, and much more development is planned.

And there is more uncertainty now about the next few years, with initial signs of a fall in enquiries and worsening market sentiment as the economic outlook weakens.  The worry is that 2008 could be the top of a far from impressive upward cycle if the problems affecting the City of London market ripple outwards.

Chris Hiatt, head of national offices at agents Jones Lang LaSalle, points out that the first quarter of this year exceeded the 2007 first quarter, and he says pre-lets will be a big feature in future because of the lack of stock.

But take-up is slower due to an extended decision making process, he warns, and there has been a fall in demand levels.

“It is slower out there as everyone is being super-cautious,” says Mr Hiatt,  “But demand is being generated by rationalisation, consolidation and sustainability.”

There are still packets of oversupply, in particular on certain business parks, he says, although a shortage of good offices exists nearer London owing to a period of slower development since the late 1990’s boom.

“Last year soaked up a lot of the best space so there is a lack of quality space in certain areas,” he says, “particularly the town centres.  Urbanisation is a trend, which means the business parks could suffer.”

But Tim Davis, development director of PRUPIM, which owns the large GreenPark office park next to Reading, says demand is still strong.  PRUPIM is developing four buildings on the park, one of which has already been let, in spite of empty buildings still leased to Cisco.

“It has been good for the past 18 months and still looks good going forward.  The fundamentals – of improving access and amenities, and low, availability – are still there,” he says.

Mr Davis admits, however, that there are worries over a sustained downturn in the economy.  “There is a clear correlation between the Thames Valley market and the global economy as many of the occupiers are either from the US, or conduct business over there”.

The positive trend in the office occupational market has not been matched by investment activity in the past 12 months, in spite of rents being a key driver behind values.

As with most of the UK, property values have fallen sharply across all sectors in the area, coming off over-inflated prices last summer.  The good news is that institutional funds, which make up much of the ownership of buildings in the area, are no longer forced sellers.

What happens next to occupiers will be key to the investment market.  If demand falls, then there could be further falls in the investment market