Leed’s office market is in an awkward spot. According to King Sturge, just 150,000 sq ft of prime office space is available – a problem in a market where the average take-up tops 550,000 sq ft pa, and which last year touched 600,000 sq ft.
At the same time, there is a good deal of demand. Around 18 deals in excess of 10,000 sq ft were signed last year, including the 87,500 sq ft taken by services supplier Centrica from mobile phone operator O2 in the largest deal ever to hit the Leeds market.
Developers are, however, gradually getting their act together to create a new face for Leeds, with 470,000 sq ft of prime accommodation under construction. Plans are afoot to create a towering metropolis to the south of the city – more akin to Canary Wharf or New York than the Victorian dome of the city’s Corn Exchange. And it is hoped the developments will help shift rents upwards.
But there are two problems. Most of the space under construction will not be available until early 2006. This leaves a hole in Leed’s office supply. In fact, most buildings will not be available until much later.
In addition, occupiers are reticent to sign up for prelets – a problem bourne out by the fact that lawyer Eversheds’ 120,000 sq ft deal at Bridgewater Place, announced in May 2003, is still the talk of the town. Despite incentives rocketing ever higher, occupiers are opting instead for refurbished space in the established city office core, as shown by the fact that only half the space taken up last year was grade A.
The other problem is more pedestrian. Access from the city centre to the south side is more than a little hazardous. The corporate chic of Landmark St James’s Bridgewater Place and the kissing towers of Criterion Place are only accessible through railway arches and a dark, damp 200 yards of busy road perfumed with the smell of tramps and urine.
Those with a vested interest in making the area work are now trying to address these issues. Crosby, the developer behind the 1.1m sq ft mixed-use Clarence Dock scheme, is just one who is looking at making access easier and more pleasant. Simon Kidd, commercial letting director on the scheme, admits: “It is not an established location, and there is a lack of understanding over which routes are best to take.” But he adds: “It is five minutes walk from the centre and we are doing some work to find the best mechanism to ease people getting to the area. And we are looking to promote different ways for people to get there.”
Crosby is one of the few developers building speculatively in a bid to avoid doling out incentives to attract occupiers to take prelets. Crosby is due on site with its 75,000 sq ft Block C office building in Clarence Dock(?) at the end of this month. “Because we will have product, hopefully we can avoid conversations about the terms of deals needed to secure a prelet,” says Kidd.
This will come at a price. Kidd is looking to achieve “just nudging” £20 per sq ft, compared with prime city rents of £23 per sq ft and headline rents of £25 per sq ft at most new builds.
But by providing space, Crosby has a chance to raise rental levels, something that Richard Thornton, partner at King Sturge, believes other developers may have to forego. “Because of the lack of supply, there is limited prospects for growth on quoted grade A rents,” he says.
Lack of new build has, however created a golden opportunity for one corner of the office market, refurbishment. Thornton adds: “We will continue to see rental growth in the refurb market purely because of it’s location, and the fact that the average floorplate of refurb is getting bigger. “
Secondary space has gone from strength to strength over the course of 2004, and is now entering what Jeff Pearey, head of Atisreal’s Leeds office, calls “its purple patch”. Refurbished space in the city achieved rents of £19.00 per sq ft last year, a leap of more than £3 per sq ft over the past two years and fast gaining ground on levels achieved on grade A space. And occupiers love it because they do not have to move out of the densely packed city centre to get it.
“At the moment, we’ve got about half the supply of Cardiff and about the same as Milton Keynes, which is sad,” says Pearey. “There is a huge window of opportunity of about 18-24 months for the secondhand market.”
With refurbished space forecast to bust through the £20 per sq ft barrier before the end of the year, there has been no shortage of takers. Indeed, agents, themselves have issued some of the best requirement so far this year.
GVA Grimley and King Sturge both signed up for space in Shepherd Development’s 62,000 sq ft City Point, refurbishement, which will be ready in spring next year. King Sturge will take 12,000 sq ft while GVA Grimley will take 11,000 sq ft, both paying what is believed to be headline rents in excess of £20 per sq ft on 15-year leases with 18 months rent free.
But even these deals pale into insignificance compared with rumours that property company F&C has signed a deal worth £25 per sq ft for its £7m refurbishment of the 68,000 sq ft Bond Court. Dan Plummer, the company’s head of regional offices, admits there is a deal in the offing but remains coy on both the price and the name behind it. “We are attracting the professional occupiers who don’t want to appear ostentatious to their clients. Look at the development pipeline and when it is coming on stream. We are completing in July.”
In addition, Bond Court is in the city centre. “There are always going to be occupiers that want the city centre and the amenities and public transport links that go with that,” says Plummer.
But developers intent on building a business around refurbishment in Leeds should beware. As Pearey says, the market for such space will only last another two years. After that, it will have to compete with raft of grade A stock coming onto the market. Add in rental levels which match up to those of new stock, and occupiers could loose their desire to remain in the centre and take the five-minute stroll to the south of the city.
BOX out of town
Akeler is making a brave move. Having developed some 120,000 sq ft speculatively on its Leeds Valley Park, it is now starting on site with a further two buildings totalling 140,000 sq ft.
The company’s gamble on phase one paid off. Around 40,000 sq ft in the Boreal building is all that remains following deals to armoured vehicle manufacturer Alvis Vickers and Arla Foods.
But local agents are still taken aback by this latest news. “Where is Akeler getting its balls from?” asks one.
Patrick Going, director at Akeler Developments, smiles at the comment, but says: “If we like something enough to buy it, we are not going to sit on it. We buy to build.”
Going’s comments are characteristic of the company’s philosophy, but Akeler is pitching itself against a unpredictable market. Last year, take-up at the area’s out-of-town office market fell 15% to 460,000 sq ft, although admittedly this is more than the five-year average of 335,000 sq ft.
Headline rents reached £18 per sq ft, but agents believe there is little apetite to break the £20 per sq ft mark in the next 12 months.
In addition, out-of-town space in Leeds has generally been used by occupiers as overflow space from the tight city-centre market. When a string of new developments hit the city-centre market, will Akeler be left out in the cold?
“We are a European developer and we are looking at trends UK wide,” says Going. “We might attract local occupiers, but we are also looking at Leeds as a UK centre. Leeds’ out-of-town market is immature, and there is no reason why it should not have first-class product similar to Cardiff Bay or Cheadle Royal in Manchester.”
