Office take-up in the UK's nine leading regional city markets for the second quarter of 2023 dropped 4% on first quarter and was 19% down on the 10-year average. However, cities like Newcastle and Edinburgh performed well as they both registered prime rental growth, Avison Young data shows.
A "subdued" market saw leasing activity total 1.63 million square feet in the second quarter 2023, the lowest since the first quarter of 2022. Take-up for the first quarter 2023 was 1.69 million square feet in comparison. Around 943,000 square feet of the second quarter total was let in city centres, while 686,000 square feet was transacted out of town.
Highlighting trends in its quarterly update of regional office activity, the agency said in its Big Nine report that best-in-class space "remains in high demand and short supply" across city centres and continues to drive rental growth. The big nine are Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester and Newcastle.
Volumes of city centre deals 25,000 square feet or larger have fallen and now account for just under a quarter (22%) of transacted space, compared with an average of 40% in the five years before the pandemic. The professional services, financial services and government were the most active players in the regional occupier market over the last 12 months, together accounting for 59% of take-up.
Of the cities, take-up was largest in Manchester, standing at 448,514 square feet, as it made up more than 25% of the national total for Q2 2023. Birmingham's take-up total was 218,578 square feet, the second largest total of the nine cities.
Manchester also saw the largest leasing, as Seda Phramacuetical Development Services took just over 37,000 square feet at The Lakehouse in Cheadle. Birmingham had the second largest deal of Q2 as flex space operator Re-Defined circa 36,000 square feet at Louisa Ryland House.
Everflow's lease of 29,000 square feet at the Traynor Hub was the third largest of the quarter, and the biggest deal in the Newcastle market, while Analog Device's 28,000 square foot letting completed the top four largest regional deals.
Take-Up Levels
Newcastle was the only location to achieve take-up levels above its 10-year second quarter average, growing 9%, as it registered 214,795 square feet of deals. This was also a 20% jump on its take-up for Q1 2023. Take-up was stronger in the out-of-town market, which was 15% above the 10-year average, whereas the city centre was 8% below.
The Everflow deal at Etaireia Investments's T2 Traynor Hub in County Durham was the most notable, where it has reportedly signed a 10-year lease. Morrison Data Services’ also took 23,280 square feet at Cobalt One.
Professional services, consumer services and financial services were the core sectors accounting for 67% of major deals, while prime rents increased to £29 per square foot in the North East city, 5.5% up over the last year.
Edinburgh and Leeds performed best out of the city centre markets, reaching 12% and 5% above their averages. Overall, take-up in city centre markets was 21% below the 10-year average, while out-of-town markets were 14% below across the UK.
Edinburgh's take-up in Q2 was stronger than most Big Nine cities, despite being 11% below 10-year average levels. Its city centre had a particularly strong quarter, up 12% on the 10-year average, whereas the whole Big Nine was 21% down.
Analog Devices' 28,086-square-foot lease at Vastint Hospitality's 2 Freer Street was Edinburgh's largest. Other significant deals of Edinburgh's Q2 included touring company Rabbie’s £42.50 per square foot prime rent-setting lease of 6,292 square feet at 22 Rose Street, and flex provider Cubo’s 14,644 square foot space at 40 Princes Street, owned by Redveco UK.
The 22 Rose Street deal means that Edinburgh has the highest annual prime rental growth rate of any city at 9%, compared to the Big Nine average of 3.8%.
Peter Fraser, Avison Young's Edinburgh office director, said in the report: "We continue to see strong levels of demand, especially from the financial and professional sectors, the majority of which is below 5,000 square feet.
"Constrained supply of best-in-class city centre space continues to place upwards pressure on prime rents, and as a result we expect a steady increase in out-of-town activity. The recently completed Leith and Newhaven tram line will also help to stimulate demand across the city moving forward."
The Big Nine’s total availability rate increased slightly this quarter to 8.5%, continuing the general levelling-off seen over the past year. Edinburgh and Liverpool remained the tightest markets for total and grade A supply, both under 1% for Grade A office availability, while Glasgow and Birmingham had the highest rates of vacancy.
Investment
Turning to the national investment, transactions totalled £283 million across the Big Nine in Q2, up 67% on Q1, but still 48% below the 10-year Q2 average. Bristol and Glasgow registered the highest transaction volumes in the quarter, together accounting for half of total activity.
The key transaction of the quarter was Halo in Bristol, which sold by Tesco Pension Fund to CBRE Investment Management for a 5.61% net initial yield, translating to a price of around £73 million. Anther notable transaction involved 191 West George Street in Glasgow, which was sold by NFU Mutual to Corum Asset Management for £36.2 million, or a 6.4% yield.
The report highlighted a reduced presence of overseas buyers compared with Q1, as purchases from UK institutions comprised 43% of the total, followed by UK propcos at 35%. Just 14% of deals involved overseas investors.
Each of the Big Nine cities’ prime yields softened by 25 basis points in Q2 to an average of 5.96%, ranging from 5.75% in Manchester, Edinburgh and other core cities to 7% in Liverpool. At the close of Q2, Avison Young said £596 million of assets were available across six of the Big Nine cities where data is available, up 186% from £208 million last quarter. An additional £245 million was under offer.
Analysts said they expected transaction volumes to increase in Q4 2023 "at the earliest", with many owner reluctant to sell into the market. They added: "More assets are now becoming available, often off-market, although there remains a significant gap in pricing expectations between buyers and sellers.
"Over the coming quarters, cash-rich buyers will be seeking opportunities to buy at lower prices and eventually set a pricing floor. We will also see growth in value-add acquisitions of secondary assets driven by minimum energy efficiency standards and the changing profile of occupier quality requirements."