Underlying picture remains fairly resilient 

September 14, 2017

Specialist commercial property writer Chris Dobson reflects on recent trends in the sector

Economic and political uncertainty clouds the commercial property outlook in the North East, says RICS (Royal Institute of Chartered Suveyors) in its Q2 UK Commercial Market Survey. Rent expectations remain solid for industrial property but declines are expected for office and retail space.

Simon Rubinsohn, RICS chief economist, says the commercial property market has enjoyed a good run and that: “It is hardly surprising that we are now seeing a flatter trend emerge in the responses to the survey which chimes both with recent economic news flow and the political environment.”

Industrial space is still the most sought-after commercial property in the region, with over 29 per cent of respondents seeing a rise in demand for such property during Q2.

A closer look at the industrial sector shows take-up of logistic and industrial units over 50,000 sq ft across the North East region totalled 755,582 sq ft in the first half of this year, down 5 per cent on the previous half year, but 33 per cent up on the same period last year, according to Knight Frank.

Simon Haggie, partner at the industrial agency, says the largest transaction was a 461,128 sq ft letting of a riverside complex at Hadrian Yard to Smulders in February.

He comments: “Transactions in the larger size ranges have been extremely scarce in general, however, mainly due to the lack of modern stock rather than the lack of activity in these size ranges. The on-going Brexit discussions and the snap General Election have unsettled the market and as a consequence businesses are adopting a wait-and-see approach before committing to any new investment.”

Rental evidence for new buildings is difficult to find because there has been very little development over the last ten years. UK Land has recently completed a series of smaller units on the Team Valley Trading Estate and let an 11,000 sq ft unit for a rent of £8.10 per sq ft to Adept Fasteners and a 26,000 sq ft unit to All Good Ltd for a rent of £7.45 per sq ft.

Simon adds: “It is clear that Team Valley commands strong rents based on both its excellent location and the quality of industrial units being developed.”

Nick Atkinson, director HTA Real Estate, says the automotive sector remains strong and steadfast, principally hinged around Nissan, but not exclusively so: “Suppliers in the North East are supplying other car manufacturers but Nissan, of course, has the biggest bearing, which is particularly pertinent since it announced its two latest models – new Qashqai and the X-Trail, which has never been manufactured here.”

Looking to the end of the year and into the next, what are the strengths of the region? Nick believes it’s “definitely the skilled labour supply, lower labour costs and cheaper cost of land,” adding that “skilled and available labour supply is more abundant here than in the Midlands, which has become a competitive and saturated labour market”.

Office take-up across the North East for Q2, which reached nearly 130,000 sq ft, was better than expected, says the recently rebranded North East Office Agents Forum (NEOAF) comprising the leading office agents, BNP Paribas Real Estate, Bradley Hall, Cushman & Wakefield, Gavin Black & Partners, GVA, Knight Frank, Lambert Smith Hampton, Naylors Chartered Surveyors and Sanderson Weatherall.

Take-up across the region and in Newcastle’s city centre totalled 129,291 sq ft compared to 186,544 sq ft for the same period last year, a difference of 57,253 sq ft.

“But arguably it is a hard comparison as the same period last year was the second-best performing second quarter over a five year period and it included the 35,000 sq ft Convergys letting and 20,000 sq ft Leeds Building Society at Cobalt,” says Patrick Matheson, partner at office agency Knight Frank.

He adds: “Speaking to a number of agents at the NEOAF meeting, though Q2 numbers are down there is a significant amount of space under offer at the moment. If this all completes, there could be a bounce back next quarter. To a certain extent this also points to the issue we are facing about how long it is taking for deals to move from initial enquiry to contract.

“As there is no new Grade A space available, the market awaits progress on Legal & General’s recent planning application for the first of its Grade A office buildings at Newcastle Science Central. The 100,000 sq ft office building will create modern workspace for over 1200 people in the science, technology and knowledge sectors.”

Meanwhile the 60,000 sq ft Beam office building, Vaux, Sunderland, where Knight Frank and Naylors are joint agents, is currently coming out of the ground with a positive level of interest.

Greg Davison, partner and head of office agency at Cushman & Wakefield says the underlying mood is more upbeat: “With several transactions not quite making the Q2 figures and a number of good requirements in the market, we anticipate Q3 may be more reflective of our market.”

He adds: “As in a lot of regional cities, availability is tightening, but, in particular, Newcastle does not currently have any new Grade A development coming out of the ground; this is putting increasing pressure on occupiers who are looking to move as the number of options available to them contracts.

“In the interim, there are several high quality refurbishment schemes taking place, including Central Square South and Stockbridge House, that will deliver around 60,000 sq ft before the end of the year.”

CoStar data shows that net absorption has outpaced new deliveries of space each year since 2013. Consequently, the vacancy rate has dropped to its lowest level since the financial crisis.

Lambert Smith Hampton’s Michael Downey says: “With less than one year’s Grade A supply current available across the city centre, Landlords are refurbishing existing Grade B stock in order to satisfy occupational demand.”

He adds: “We expect supply to continue to tighten, albeit at a slower rate than anticipated. Grade A sublet space is beginning to return to the market as businesses look to reduce their size requirement, minimise occupational costs and utilise modern working practices.’’

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