A resurgence in traditional industries is helping North East manufacturing surge ahead, and a booming tourist industry is competing with offices for space in the city centre. Chris Berkin looks at an area on the up
Britain’s manufacturing recovery jostles robustly with Prince George and a summer heatwave as one of the great surprises of 2013, and it is in many ways led by the North East’s private sector.
A recent pick-up in exports and a rosier corporate outlook for the engineering sector has sustained strong occupier demand in the North East, with industrial experiencing an impressive 126% rise in Q2 take-up to 610,000 sq ft, according to BNP Paribas Real Estate. Markit data says British manufacturing is growing faster than any other major economy, with the ONS estimating a 0.9% jump in Q2 2013 across the country.
The automotive sector’s success is driving industrial property – particularly what agents fondly dub the “Nissan effect”. The manufacturer has recently decided to produce its Infiniti model in the region, and has extended its Sunderland facility by 250,000 sq ft.
While retailers – who themselves are enjoying an e-tailing boom – still make up the greatest share of occupier activity, this is declining in favour of manufacturers. The advanced engineering sectors and a burgeoning export sector taking full advantage of rising costs overseas and newly lined European pockets is creating ripples of requirements for third-party logistics providers and suppliers.
However, much of this activity is below the national radar, with contract-dependent tenants opting for smaller, multilet buildings, ready on short notice and in choice locations. Take-up of industrial units upwards of 50,000 sq ft in the North East has subsided despite some notable requirements, with just 780,000 sq ft in H1 2013 compared to 2.6m sq ft in 2012, according to GVA research.
Others have built on Nissan’s vote of confidence in a headline-grabbing way, with supplier Vantec Europe taking a 422,000 sq ft prelet at Turbine Business Park; Clipper Logistics recently bought 350,000 sq ft at Wynyard Park; and BAE Systems has occupied a 340,000 sq ft production facility at Radial 64. Rolls-Royce took the remaining space at Radial for a new production plant, and engineers Reece Group bought BAE’s old Scotswood Road plant.
And more is on the way, with the Hitachi consortium out to tender on a facility to create a new fleet of trains at Newton Aycliffe in County Durham.
Sanderson Weatherall’s Richard Scott thinks the North-East industrial market is bucking the trend: “We have got high-end specialist manufacturers in the North East – the kind of stuff you can’t ship out to China. Offshoring is performing well, and there is a loyal and skilled workforce, winning more contracts. We have certainly not had the ups and downs of the office market.”
And though long-mooted requirements are beginning to see they have to move it or lose their options, speculative building remains some way off, even with up to a third of the funding provided by European grants, the Growing Place Fund and Accelerated Development funding in enterprise zones.
GVA industrial associate Danny Cramman says: “It’s still difficult to make the funding stack up, even if some of the funds are coming back into the regions. It is going to have to move towards a prelet market.”
Office development faces competition
As North East manufacturing leads the global race, office development prospects risk being eclipsed as build costs rise and competing sectors –which weren’t an issue in the last recovery in the early 1990s – increase the sums they pay for sites.
Office-to-hotel conversions have been mooted for Bridge Court on the Quayside and Baron House near Central Station, sparking uproar from existing operators who say the market has been saturated by more than six new hotels in 2012.
Even Silverlink’s Stephenson Quarter, heralded as bringing a much-needed 34,000 sq ft of Grade-A space to the market after a council intervention, is being anchored by a Crowne Plaza hotel.
“Whenever a building has become vacant or has a chance of redevelopment, the other uses are gazumping the office market,” says Storeys Edward Symmons’ Neil Osborne. “Supply is actually reducing as buildings are taken out of office use altogether to capitalise on the buoyant hotels and student accommodation markets.”
Newcastle city council chief executive Pat Ritchie takes an activist stance on addressing the viability gap. “I think it’s fair to say there are still viability issues. In some parts of the city, when you’re doing a bigger mixed-use scheme, we’re finding that to create private sector confidence the local authority needs to invest alongside.”
Though Ritchie accepts the erosion of office space by hotels and students as “part of the vibrant mix” of the city, she argues that Newcastle has the lowest overhang of grade-A space of any major city, and is considering further joint investments along the Stephenson model to kick-start development.
Instead, the out-of-town market is soaking up excess demand. Despite a large letting from PwC at Central Square, and rumours of Barclays taking 35,000 sq ft at Quayside, the squeeze on central office space from these new rival sectors – as well as the lure of tax advantages from out-of-town enterprise zones – is clear.
In-town take-up is rising, but in Q1 out-of-town deals made up more than six times the square footage of central leasings. More than 80% of North East grade A is on just two out-of-town business parks: Cobalt and Quorum in the North Tyneside enterprise zone.
GVA’s Tony Wordsworth says in town and out of town are “different markets”, but is optimistic that the advantage is tipping towards in-town landlords.
“We’re starting to see landlords’ attitudes on incentives firming up first. There’s a very tight supply line, and some of the funds and the property companies are just starting to look up North again, but it’s all dependent on supply coming through,” he says.
Serious requirements are set to sorely test this supply, including 50,000 sq ft for Worldpay, 26,000 sq ft for a US Telecoms company and around 100,000 sq ft for an unnamed call centre firm. Keeping up with the pack will be as much a test of private sector ingenuity as local and central government.
