The report reveals an improvement in the depth of occupier activity across Leeds and Sheffield, and showcases a star performance from the Technology, Media and Telecoms (TMT) sector, which has seen the highest number of transactions in 2018 so far. Channel 4’s decision to locate its new national headquarters in Leeds is hailed as “a major coup and testimony to Leeds’ growing reputation as a hub for the media industry”.
The number of deals in Leeds to the end of Q3 2018 is 5% above the equivalent period in 2017, with more emphasis on expansion as a driver for relocation over lease events.
Two deals topped 50,000 sq ft. Walker Morris’ pre-let 76,000 sq ft at 33 Wellington Place and HMRC took the remaining 60,000 sq ft at 3 Wellington Place, following its 378,000 sq ft pre-let at 7 & 8 Wellington Place in 2017.
The out-of-town market performed well with 18 deals above 5,000 sq ft, including Perform’s lease of 39,422 sq ft at Optim, White Rose Office Park and BUPA’s 23,715 sq ft lease at Kirkstall Forge.
But the report contains a warning that more speculative development is required with little in the immediate pipeline. Current total availability stands at 2.35m sq ft, equivalent to 2.7 years of supply based on average take-up. However, healthy absorption of good quality space over recent years has left occupiers with limited quality options, with grade A space now accounting for just 16% of the total supply. The situation is worse out-of-town.
The reduction of grade A supply is putting upward pressure on rental levels. City centre prime headline rent is expected to climb from £30.00 to £31.75 per sq ft before the end of 2018 and is expected to rise again in 2019.
Adam Varley, Director – Office Advisory in our Leeds office, said: “A lack of existing grade A stock could prove challenging for take-up in Leeds in 2019. Pre-lets may be the saviour, however, with DLA Piper widely known to be considering a consolidation move of up to 130,000 sq ft. The longer-term prospects are very encouraging. In tandem with HS2, the redevelopment of the train station will transform the South Bank area.”
In Sheffield, take-up to Q3 was 277,000 sq ft, with 2018 on course to exceed the annual average despite the absence of any major deals. The largest deals of 2018 were Spaces’ 25,000 sq ft lease at Acero and South Yorkshire Housing Association’s 25,000 sq ft lease at Rockingham Court.
Out-of-town activity has been relatively subdued, accounting for only 23% of 2018 take-up to Q3. The largest deal was Perkbox’s 6,500 sq ft lease at Albion House.
Since the beginning of 2018, supply has fallen 10% to 780,000 sq ft. This equates to 2.2 years of supply based on average take-up, down from 2.6 years in 2017. Grade A supply has fallen more sharply, standing at a historic low of 116,000 sq ft.
Number 1 Charter Square (26,000 sq ft), which forms part of HSBC’s new headquarters, is the only speculative scheme under construction, with completion in Q1 2019. More positively, the pipeline includes Sheffield Council and Queensberry’s second phase of the Heart of the City 2, a mixed-use scheme which could include 360,000 sq ft of office space.
The report shows that healthy demand and scarce grade A supply is driving strong rental growth, with prime rents expected to increase to £25.00 per sq ft during 2019, an 9% rise over 24 months.
Tom Burlaga, Associate Director in Sheffield office, said: “There is a growing sense that Sheffield is re-emerging as one of the UK’s elite regional markets. The city is now firmly on the radar of institutional investors. The next phase of Heart of the City will continue to drive the transformation of the city centre and, in the longer term, the arrival of HS2 in 2033 will further increase the attraction of the market.”
2018 is also primed to be a record-breaking year for Yorkshire’s office investment market, with £461.4m of assets transacted across Leeds and Sheffield to Q3; more than three times the total transacted during the whole of 2017 and the highest number of quarterly deals since the credit crunch. This has included seven deals above £20m, the largest being Brockton Capital’s purchase of the Pinnacle for £63m (6.5% NIY) in Q2.
While investor demand has led to prime office yields in Leeds moving closer towards their 2007 lows of 5.00%, there remains strong appetite for high quality, well-let stock, as evidenced by the depth of demand for Aviva's One City Square sale, reportedly under offer to APAM over £2m above asking.
Reflecting the high level of confidence felt by investors in the rgion’s office market, Sheffield has also risen to prominence following a number of big ticket deals including M&G’s £24m purchase of 3 St Pauls Place and the sale of Acero by Scarborough Group for £26.6m, on which LSH advised.
Luke Symonds, Director – Capital Markets at LSH, commented: "The volume of transactions in the Leeds and Sheffield markets is testament to the inherent growth potential of each. Investors are genuinely switched on to the Yorkshire region and, while political volatility may result in a degree of inertia, we are not seeing any negative impact on pricing.
“It is also encouraging to see strong interest in the Leeds out-of-town market this year, which offers attractive returns against a backdrop of stable take-up and restricted supply. Meanwhile, Sheffield is firmly in the crosshairs for office investors, as the emerging TMT sector drives rental growth and the positive impact of exciting schemes such as Heart of the City II come into view."