A surplus of prime and secondary office space is expected to become available in Hamilton over the next two to three years, while a number of businesses will move from their existing premises into new facilities at the same time.

That is the forecast by Scott Powell and Graham Smith, commercial representatives from Coldwell Banker Bermuda Realty, who were speaking at the Hamilton Rotary Club's latest meeting held at the Royal Hamilton Amateur Dinghy Club yesterday, estimating that about 650,000 square feet of new supply will come on line this year through to 2011, allowing for a substantial inventory absorption.

But Messrs Powell and Smith added that over the past year demand for office space in Bermuda had been declining, with a fall in the level of new exempt company registrations through 2008.

However, they pointed to market research, which indicated that this trend should reverse in the second or third quarters of 2009 in line with expectations of an increase in the amount of new incorporations as investors look for good profit prospects in new start-ups.

Furthermore, they predict that growth of local service providers for these firms should lag slightly behind international business expansion as demand for their services ramps up through the latter part of this year and into 2010.

Mr. Powell gave an overview of the commercial real estate supply market, acknowledging that the public was naturally cautious about the future of the sector in light of the current financial crisis and fall-out and its impact on the Island, but adding that office space and the land on which it is built would remain a limited commodity.

He said that it was taking longer than usual for landlords and tenants alike to decide on upgrades, moves or even setting up their first office in Bermuda, but while the mood was cautious, transactions were still taking place, above all, developers needed to have new tenants to fill their premises in order to secure financing for their project.

"Expansion of the office supply in most cases, but not all, requires financing," he said. "A critical component among the lenders' conditions, is a prerequisite to obtain legally binding agreements to lease anywhere from 50 percent to 65 percent of the new space in advance as a trigger for construction funding.

"So; no tenants, no building. Or put another way, no demand, no supply."

Mr. Powell said that the Bermuda market's historic annual absorption rate was between 125,000 and 175,000 sq ft per annum, which may not allow all projects ready to be started to proceed at the same time, but generally those that are currently being built were occupied sufficiently to service the development debt load.

Owner-occupied or self-financed projects, such as the new Argus headquarters on Wesley Street, HSBC on Front Street and Washington Mall Phase 3 on Church Street, were also going ahead to boost the sector.

Mr. Smith then spoke of the demand side of the business, claiming it was steady, while not overwhelming, with continued inquiries from overseas companies, as local international service providers were also a demand factor at the moment.

He said the biggest demand was for smaller spaces of approximately 500 to 3,500 sq ft, with a handful of larger prospective tenants looking for spaces greater than 5,000 sq ft.

Most of the demand from the US came from the fund management, private investment and insurance industries, according to Mr. Smith, while internally, it was generated by some companies looking to shrink or downsize into smaller spaces, allied to the fact that several re/insurance firms had predicted a good year in terms of profits and had plans to expand on the Island in 2009 due to high rates and diminished market capacity.

"So despite all the daily doom and gloom, our market intelligence indicates that there still appears to be good demand for Hamilton, especially Front Street, harbour view space, provided that the space has good natural light, is available on long leases, competitively priced and the floor plates are in the 3,500 to 5,000 square feet range and they are close to parking lots and amenities like gyms, restaurants, shops, etc.," he said.

He warned tenants who adopted a "wait and see" approach in anticipation that the market would change to their benefit, that they might miss out on good new office space opportunities, while stressing the importance of maintaining a good landlord/tenant relationship.

Meanwhile, landlords with space on the market over the next year or so might have to accept a similar level of rent to those achieved a year or two years ago, as the market has flattened out, with lower demand and less propensity for tenants to fork out large sums of money for extravagant leasehold improvements presently, cautioned Mr. Smith.

"This should create slightly higher vacancy rates than we have become used to, especially in lower quality buildings, as some tenants look to reside in newer, more sophisticated 'green type' buildings that are more energy efficient, have more natural light, views, generators, gyms, showers, etc.," he said.

"The upside of this, with substantial office developments coming on line in the next two to three years, Bermuda is well-positioned to capitalise on new and existing company growth as the worldwide economy starts steady growth again through 2009 and beyond."

Mr. Smith predicted some empty retail space becoming available on Front Street later this year due to the dramatic fall in tourism retail sales over the past two years.

"Through this challenging time it is our view that it will be vitally important for Bermuda to enhance, through creative international marketing strategies and sensible domestic policies, its reputation as a place where mainstream international companies feel completely comfortable doing business."