The Leeds office market got off to a cracking start this year with a prelet and a chunky deal pushing first-quarter take-up to a higher level than that seen in the first six months of 2012.
It is a much-needed fillip for the market but two good deals don’t necessarily add up to wholesale recovery. Agents are wary of bullish talk; so what kind of shape is the Leeds office market really in?
First we have to look at the take-up figures in context. The KPMG prelet at 1 Sovereign Square and the Dart Group (Jet2) letting at the Mint accounted for more than half of the take-up in the first quarter, which totalled 234,000 sq ft according to EGi Research. As we went to press Yorkshire Building Society announced it was taking 76,000 sq ft at Highcross’ Broad Gate, which will help the Q2 take-up figures.
KPMG’s 61,000 sq ft prelet was one of several long-standing requirements in the Leeds market. Names such as DAC Beachcroft, Squire Sanders and Sky have been regularly appearing on active demand lists. But will they follow KPMG’s lead?
“Take-up can mask the reality of the marketplace,” says Jeff Pearey, head of Jones Lang LaSalle’s Leeds office. “Some big take-up figures might look successful, but the market revolves around what supply is there.”
New-build grade-A stock availability in the city centre has dropped from 10.6% of the total at the beginning of 2012 to 8.25% for Q1 2013, according to EGi data. Most of that space is in one building, Broad Gate, which up until the Yorkshire BS deal had 125,000 sq ft available (see panel).
And while demand plus a lack of supply would normally equal tenants rushing to grab what space they can, the economy barely avoided a triple-dip recession last quarter and it is still a tenants’ market.
“Tenants weigh up the cost of staying put versus moving to a prelet,” says Richard Dunn of Sanderson Weatherall. “Existing tenants are given incentives to stay and would get a fabulous deal on existing new space, but with prelets you have to pay more and sign a longer lease.”
While staying put for five years avoids fit-out costs and dilapidations, new space could save money in the longer term, adds Dunn. It is a dilemma at a time of economic uncertainty. The flip side, says David Aspland of Carter Jonas, is that until occupiers can be persuaded to pay higher rents, new development remains unviable and unfundable. Incentives on existing grade-A space can be as much as 18 months to two years rent-free on a five-year lease: “Developers can’t offer incentives other than that the tenant is getting a new building; existing landlords are offering massive incentives to stay and we have got to get over that. New-build developers can’t compete with existing stock.”
One advertisement for the longer-term savings of newer space is CBRE. The firm moved into refurbished offices at Toronto Square last month. Director of office agency Jonathan Shires says: “We are paying £5 [per sq ft] more, but have a year-on-year saving because the office is cheaper to run.”
This is grade-A refurbished space, not brand new, and a growing sector for the city (see below).
With the Mint nearly fully let following the Dart deal and Broad Gate with just 49,000 sq ft left it could signal a turning point. The hope is that, faced with diminishing options, those with requirements will be forced to make a decision.
Leeds is riding high on the back of the opening of Land Securities’ major retail development Trinity Leeds and the city council’s new arena is due to open its doors later this year with Elton John headlining. There will be office cranes on the skyline as KPMG’s building gets under way and MEPC kicks off – 10 Wellington Place having secured a partial prelet to law firm Shulmans and others rumoured to be close to signing.
Whether there will be more cranes and more deals this year depends on occupier confidence and whether they feel short-term savings are better than short-term costs.
Predictions for office take-up this year
“I think we are going to break 500,000 sq ft in take-up this year, it will be the first time we will break the 10-year average. There is 480,000 sq ft of here-and-now named requirements and only 400,000 sq ft available.”
Andrew Shires, CBRE
“For the past few years we have seen steadily improving take-up. I think 2013 will be better than last year, but it won’t be back to the good old days. Take-up will be somewhere between 400,000 and 500,000 sq ft with the upper end dependent on one of the big prelets.”
Richard Dunn, Sanderson Weatherall
“Q1 take-up was undoubtedly a blip and I see no reason why it should be any different to last year.”
David Aspland, Carter Jonas
Prelets and deals to watch out for
Walker Morris, whose name had been floating around the market as a potential prelet, is staying put. But who else is potentially in the market for big chunks of space in Leeds?
CBRE says there is 480,000 sq ft of active demand, but these are the names on everyone’s lips:
BSkyB
The broadcaster is in three different buildings and is a prime candidate for consolidating into one location. There is still three to four years left to run on its existing leases and the firm has a reputation in the market for driving a hard bargain, which could rule out a prelet for cost reasons.
VERDICT: Don’t count on a decision this year, but maybe it will be the surprise deal of the 2013.
Lawyers
US-owned law firm Squire Sanders had been seeking 40,000 sq ft and had shortlisted Wellington Place and Sovereign Square but is thought to be renegotiating its existing lease. However, DAC Beachcroft, with its long-standing 35,000 sq ft requirement, is thought to still be in the market. The firm is located in two buildings with a lease expiry of 2016.
VERDICT: A prelet is thought to be on the cards for DAC Beachcroft, could timings with existing leases mean this year will be the year a deal is signed?
Unnamed requirement
A client of Colliers International with a 60,000 sq ft requirement came to the market at the end of last year. Broad Gate (see below) is the only building that could accommodate it if it was to take existing space.
VERDICT: It’s a mystery.
Broad Gate, the Headrow
Before the Yorkshire Building Society deal was announced this week (see main text) Highcross’ 169,000 sq ft building with its 40,000 sq ft floor plates was the biggest chunk of space available and tipped for attracting the bigger deals. Rumours of a big deal circulating have certainly proved true leaving just 49,000 sq ft of space available to let.
VERDICT: Prior to Yorkshire Building Society Broad Gate was the building to watch and there is still room for another albeit less chunkier deal to land.
Is refurbishment the answer to short-term supply problems?
CBRE moved into high-quality refurbished space on the sixth floor of Toronto Square last month and other landlords are hoping to attract similar deals.
Evans of Leeds is undertaking major refurbishment work at Minerva House and Capital House – five floors speculatively at the former 48,000 sq ft building and floor-by-floor at the latter. It is looking for £20 per sq ft, compared with the £25-£26 per sq ft sought for brand new space.
Yorkshire House and 21 Queen Street are also receiving facelifts and One Air Street is due to start imminently. According to EGi data, the amount of pre-construction refurbished space being marketed increased from 52,000 sq ft at the beginning of last year to 178,000 sq ft in Q1 2013.
Jonathan Shires of CBRE reckons the refurbished office sector is where there will be rental growth and where the deals will land – but not until next year when these buildings become available.
stacey.meadwell@estatesgazette.com
