According to Knight Frank's 2015 Cardiff Office Market review, Cardiff is a city in demand which is attracting the attention of major occupiers, investors and developers.
Knight Frank's managing partner in Cardiff Matt Phillips states, "The recent decision by Legal & General to commit to the Central Square scheme in Cardiff - the largest transaction in Wales to date with a projected value of up to £400m - has provided another example of the growing recognition of Cardiff as a UK business centre. The scheme will serve to encourage other investors to invest in the Welsh capital."
He added, "Vibrant, amenity rich and well-connected workplaces are the key to Cardiff's further progression as a business location."
Matt Phillips said that local developers JR Smart and Rightacres had timed their commitment to the two major city centre speculative developments at 2 Capital Quarter and 1 Central Square extremely well.
"Their risk has been rewarded," he said. "Both buildings are due for completion in early 2016, with 60,000 sq ft of the 80,000 sq ft at JR Smart's 2 Capital Quarter, and - we believe - 120,000 sq ft of the 135,000 sq ft at 1 Central Square already likely to be taken.
"This is very good news for the City but it does mean that we are likely to have a shortage of new grade A accommodation until the next phases of development are undertaken. Therefore, there is a window for refurbishment opportunities over the next six to 12 months."
According to the Knight Frank research, office take-up to the end of the third quarter (Q3) of 2015 amounted to 303,002 sq ft, 24 per cent less than at the same point last year and largely constrained by the low availability of Grade A stock, which fell by 46 per cent in 2014.
"However, the level of new active requirements remains strong at 301,000 sq ft, nine per cent above the five-year average, meaning take-up should increase," he said.
The largest deal in 2015 was at 2 Capital Quarter where Public Health Wales had agreed terms on 51,652 sq ft. The move would enable the consolidation of several existing offices into the city centre.
While Grade A availability increased by seven per cent in 2015 to reach 107,000 sq ft at the end of Q3, availability remained significantly (31 per cent) below the five-year average of 156,000 sq ft. Grade A availability in the city centre remained particularly tight with only 6,250 sq ft at Number 1 Capital Quarter and 21,851 sq ft in 2 Callaghan Square being marketed.
The development pipeline, however, was strong with 254,000 sq ft currently under construction, 23 per cent above the five-year average.
As new buildings came to the market tenant interest was expected to increase, which would support rental growth. Knight Frank predicts prime headline rents will increase from £22.00 per sq ft as at Q3 2015, to £23 by the end of 2015 and £24 by the end of next year.
Reviewing the investment market, Knight Frank said investor appetite for good quality regional stock continued to strengthen, with a combination of relative value against the South East and a recovering occupational market resulting in yield compression for both prime and good secondary office investments.
Investor appetite for regional opportunities had grown considerably in 2015, and as a result activity in Cardiff had grown, although a lack of prime stock has limited transactions. As at Q3, investment volumes for the year amounted to £61m, on par with the five-year average.
Matt Phillips says, "With the Central Square acquisition by Legal & General completing in Q4 however, total investment in 2015 will reach the highest annual total for the city on record."
Prime yields had moved in by 15bps in 2015 to 5.75%. This was the lowest level since 2007 although still above the market peak of 5.00%. With investor interest expected to stay strong and the occupational market strengthening, Knight Frank forecast that prime yields would remain below 6% into 2016.
Key investment milestones in the year were led by the commitment from Legal & General to the £400 million Central Square regeneration scheme, in which the first phase of office development was expected to complete in Q1 2016, with BBC Wales relocating to Central Square by 2019.
"The Central Square success is the latest example of where significant progress on regeneration projects across the city has attracted the attention of major investors," said Matt Phillips. "This follows on from the regeneration of Callaghan Square and AVIVA's continued investment in the Capital Waterside Project. In addition, we expect to see strong interest for both No 1 and No 2 Capital Quarter when they come to market expected in 2016."
He also highlighted the sale in 2015 of Helmont House in June where the mixed use building, which sold for £34.6m, had attracted fierce bidding from UK pension funds and opportunity funds as well as overseas investors.
Looking ahead, Matt Phillips said: "To ensure that Cardiff attracts further inward investment and captures the attention of occupiers from growth sectors, the city must offer the right blend of workplace options, infrastructure and amenity. Achieving this will require a strengthening of connectivity both into and around the city. Development of new modern commercial space will follow.
"On a city level, this means engaging the principles of place-making. Development schemes should not be considered as standalone projects, but as contributing to a wider program of city improvement.
"Occupiers no longer consider real estate in isolation of its surroundings. The city and the immediate surrounds of the office need to be amenity rich, have strong cultural appeal and be well connected to the rest of the city and beyond," he said.
"Also, modern occupiers are seeking talent. The universities will therefore form a critical element to the future of the city. Too often, the 'home grown talent' cultivated in the leading universities has left the region in pursuit of career opportunities. Cardiff needs to do better at nurturing this important resource and ensuring that career paths are in place to retain 'home grown' talent within the region."
In addressing the limitations to progress, transport connectivity, restrictive planning, and limited employment opportunities, the civil authorities - with the support of modern development - would be positioning Cardiff for the next stage in its growth.
Matt Phillips summed up, "Cardiff is now increasingly recognized as a business location on the world stage. Only through building on the strong foundations already in place will the city continue to progress and secure the investment required for further growth. "