LSH: reduced office take-up reflects flight to quality
Although the final figure for 2023 Newcastle office take-up was expected to come in around 25% down on the 10-year average, Lambert Smith Hampton’s office market report said grade A space had dominated the market.
Activity
In the Regional Office Report 2023, LSH said that grade A space has performed relatively well, accounting for 80% of take-up and the majority of deals at the time of compilation.
Notably, serviced office providers were behind the two largest deals, with Orega and Cubo acquiring 21,693 sq ft at 2 St James Gate and 20,358 sq ft at Bank House respectively, reflecting “a focus of demand on both quality and flexibility”.
Occupier consolidation is another key trend, said the firm, highlighted by Barclays’ relocation to Bank House, a deal that saw the bank shrink its physical footprint down from 34,000 sq ft to 4,607 sq ft.
While not included in take-up, LSH also drew attention to another deal that highlights the fact older office space won’t cut it in the current market, where demand for better energy performance and flexible floorplates are driving occupiers to newer or reimagined stock.
This was of course the sale of the 1990s-built 58,272 sq ft St Anns Wharf building on the Quayside to the Evans Property Group-owned Dakota, which now has consent to convert it to a 115-bed hotel.
Supply
LSH said that supply climbed slightly in 2023 due to increased grade B space entering the market, overall supply now equating to 2.4 years of average annual take-up.
Grade A space accounts for almost half of total supply, reflecting a flurry of completions in recent years, including The Helix, Strawberry Place and Motcomb Estates’ Bank House, the 121,300 sq ft building that completed in Q1 2023 and is already more than 50% occupied, with tenants including DAC Beachcroft.
LSH said that strong attention to ESG attributes has been a key part of the scheme’s success, with the success of the extensively refurbished 60,000 sq ft Portland House also benefitting from ESG investment.
Although the pipeline is described as relatively thin at present, igloo’s 34,400 sq ft Pattern Shop is approaching completion.
Rental outlook
While incentive packages are relatively generous, the delivery of high quality space at Bank House drove a step change in prime headline rents in Q3, said LSG.
Cubo’s deal for two floors was agreed at £32 per sq ft, representing a sharp increase on the previous benchmark of £28 per sq ft. LSH said: “This is likely to remain the benchmark throughout the next couple of years, however, until such time as new developments come online.”
The full LSH report is available online.
