Macroeconomic challenges continued in 2023 to leave occupational and investment markets for offices and warehouses in uncertain waters, with deal volumes trending down year-over-year.
Higher inflation and interest rates have not helped the regions, while the fallout from COVID-19 continues to cast a shadow over both sectors.
CoStar looked at the major regional deals across offices and industrial to make sense of the year and what occupiers and investors are looking for as they search for property.
Office Leasing
More than two years on from the worst of the pandemic, companies in UK regional cities continue to scratch their heads over how much workspace they need, with hybrid working continuing to reduce their need for physical space and making them delay decisions on larger outlays.
High running costs, not helped by rising inflation, also forced the hands of businesses on the hunt for new premises. These factors meant that regional office leases were smaller than previous years, although some cities like Edinburgh continued to see familiar levels of deals.
According to CoStar market analysts Giles Tebbitts and Grant Lonsdale, more than a third of this year’s take-up across the office markets of Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Newcastle and Manchester was for the smallest size brackets of 1,000-2,499 square feet and 2,500 square feet to 4,999 square feet by mid-December.
Total take-up for the year across the Big Nine stands at just over 6 million square feet, according to CoStar data, while vacancy is at 8.4%, the highest for at least six and a half years. It reflects a growing move for better quality, smaller spaces as occupiers look to move to properties with higher environmental, social and corporate governance credentials to meet targets.
They added: "The largest two size ranges meanwhile have been exceptionally quiet in 2023, continuing the marked drop-off in activity seen last year. As of mid-December, the 50,000 square feet to 99,999 square feet and 100,000 square feet-plus size brackets had recorded just a single letting each."
Despite shrinking office deal sizes, regional leasing started with a bang as Lloyds Banking Group signed for 124,400 square feet at Leeds' 11-12 Wellington Place, taking space on floors five to 10. The deal helped the city to a 116% year-on-year increase in the first quarter, serving as a shot in the arm for Yorkshire and Humberside.
The regions continue to see a "flight to quality", with the Lloyds Bank letting an example of companies moving quickly for the best available spaces. MEPC's 11-12 Wellington Place was the first scheme outside London to achieve a NABERS five-star design stage rating.
The bank was behind another of the UK's larger regional lettings as it took 59,896 square feet of temporary workspace at Foundry in Birmingham. The agreement with X+why feeds into Lloyds' plans to refurbish its existing headquarters at 125 Colmore Row. It is also undertaking a refurbishment of its Manchester office at Brotherton House.
Telecoms giant BT also showed that established firms are still looking for large chunks of regional offices with a circa 40,000-square-foot letting at 100 Old Hall in Liverpool. Its deal for the managed workspace run by The Instant Group is part of a larger, regional hub strategy and workplace transformation programme.
Eamon Fox, partner and head of offices and development in Knight Frank's Yorkshire team, suggests that larger office leasing deals could return in 2024, with a number of top firms like Amazon, Meta and legal practice Osborne Clarke all sending out clear messages to staff that they should be making greater use of company offices.
"The rippling effect of the COVID-19 pandemic is still being keenly felt," Fox says. "The daily revelations of the COVID inquiry make uneasy reading and watching, while online platforms of Zoom and Teams, which flourished during the pandemic, are now often the go-to means of day-to-day communication, rather than office meeting rooms, board rooms and watercoolers.
"Employers are beginning to realise that their control over the working hours and practices of their staff is being steadily eroded and, while dedicated staff will continue to give their all, less committed and scrupulous employees will use working from home as a free pass to do the bare minimum, if that."
Fox adds that the UK office markets would be impacted by obsolescence in the long-term, evidenced by firms "choosing smaller, more attractive spaces" across major cities. The development of "brand-new, bespoke and imaginatively renovated" offices will be key to meeting occupier demand in 2024, he says.
"The COVID pandemic has hastened the demise of the old-fashioned office; now we must embrace the challenge of creating new office space which puts the wellbeing and comfort of staff first. That way, working from home will become a much less attractive option, and town and city centres across the UK will become vibrant again."
Office Sales
Many in commercial real estate would agree that 2023 has been a hard year in terms of investment. According to data provided by Lambert Smith Hampton for the third quarter of 2023, UK investment volumes slipped to a three-year low as £7.4 billion of offices changed hands. The figure was the lowest since the COVID-afflicted period of the second quarter of 2020, and it was also the fourth successive sub-£10 billion quarter for the first time since 2012.
Across the Big Nine, CoStar data suggests that £1.34 billion-worth of offices have been traded to date. This contrasts with the £2.77 billion which transacted in all of 2022 and would be 52% down year-on-year if no other deals are completed. Meanwhile, yields across these cities are sitting at 8.9%.
Economic volatility, namely higher than average interest rates and inflation, have not helped the regional property market, squeezing the deal pipeline and leaving very few deals over the £100 million mark. One of the major reasons cited by brokers for the lack of major deals, or any general deals, is the continued difference between buyers and sellers.
Where landlords don't have to sell, many are choosing to delay putting properties on the market, or are taking them off all together, waiting for an upturn or until they are forced to act. But with both the Bank of England and the European Central Bank deciding to hold rates this month, it is hard to predict when more certainty will arrive.
The most significant office sale in the regions by value this year has been Menomadin Group's £140 million acquisition of the Co-op's Manchester headquarters. The transaction, reflecting a yield of 7.75%, for One Angel Square was around £25 million below what was quoted for the circa 330,000-square-foot scheme. It was put on the block for £210 million at the beginning of 2022 before being withdrawn.
The Manchester market has been one of the busier regional cities, with CoStar data showing that circa £245 million of offices have been sold as at 20 December. Other deals include the £28 million sale of Dalton Place by Tesco Pension Fund to Kinrise for £28 million (5.75%) while, in the last quarter, NatWest Group disposed of the city's largest office building, One Hardman Boulevard.
Although the exact figure paid by Parthena Reys is unclear, at reportedly around £45 million it will clearly help the city's annual sales total. Will Kennon, executive director at CBRE, who advised on the deal, said that NatWest's vacated offices would help to release refurbished workspace back into "a supply starved market in 2025", moving rents on to just below £50 per square foot in the city.
Outside Manchester, two large deals were struck in Birmingham and Bristol. In the Midlands, UK property investment and management platform Praxis, along with private credit specialist investor Veld Capital, acquired the Brindleyplace offices campus for £125 million in a deal revealed by CoStar News.
One of the reasons quoted by Praxis and Veld Capital for their purchase was the inward investment taking place in Birmingham, referencing the city's HS2 station, providing quicker travel to London. With the government scrapping the Northern leg of HS2 in September, it is yet to be seen what wffect this could have on markets like Leeds and Manchester.
In Bristol, an early deal which kicked off the large regional office sale was Tesco Pension Investment Fund's disposal of the Halo offices, which were acquired by CBRE Investment Management for £72.3 million, reflecting a 5.6% net yield, as revealed by CoStar News. The sale was a bellwether deal for the regional offices investment market, as a highly sustainable, multilet office in a central location.
Brokers say, however, that there is no shortage of investors lining up opportunities in UK property. But the conditions are needed before this can happen, with many set to be keeping a keen eye over interest rates in 2024.
Bruce Poizer, head of capital markets at Cushman & Wakefield in Manchester, says the sales environment has been "pretty brutal" in 2023 but expressed optimism for more deals next year. "Clearly we have seen a fairly significant shift in values over the year, it depends what sector you're in, but the occupational sector has dictated precisely how each of the sectors is currently viewed by investors, and the difference from one sector to another is considerable.
"Obviously the beds and sheds end of the market have been the go-to sectors that most institutional investors have been targeting over the course of the last 12 months, and I don't think that is going to change going forward because those occupational markets remain strong.
"Interest rates are going to come down and that can only be positive for property, and I think that will feed through. So I think at some point next year we are going to see an inflection. There's no shortage of capital out there, it's just waiting for its moment."
He adds: "There are already some private investors picking up bargains and, at some point, the market will move and we will see people breaking cover en masse. I think that's going to happen at some point next year, so there's definitely scope for optimism moving forward to next year."
Industrial Lettings
Much like the offices sector, take-up of industrial properties fell year-on-year in 2023. DTRE's end of year Big Box analysis shows that, as of mid-December, take-up totalled 24.2 million square feet. This is significantly below the total for 2022, which was 40.8 million square feet, according to the agency last year.
The macroeconomic environment, with rising rates and inflation in the UK and across Europe, meant that decisions are taking much longer when firms come to take industrial space. This, along with slowing online retail sales after COVID and the wait for certain industries to rediscover a thirst for warehouses are other contributing factors to slower take-up this year.
Experts have stressed that, although the numbers may look bad, take-up total in the COVID years was extraordinary, with this year's figure falling more in line with the long-run average from 2009 to the end of 2019. DTRE says it is tracking a further 8 million square feet of industrial that is under offer and "in solicitors' hands", meaning there could be a fast start to 2024.
DTRE also reports in its mid-December analysis that vacancy has moved out to 6.6%. This measure was 3.5% at the end of 2022, although it had already been increasing last year. A strength of industrial leasing this year has been steady rental increases, reflecting its strong fundamentals.
Take-up in the Midlands remained robust, reaching circa 19 million square feet by the end of Q3. The biggest leasing deal in the region took place in Derby, with Danish shipping business Maersk taking circa 690,00 square feet at Unit 5 Segro Logistics Park East Midlands.
It was the first bespoke prelet logistics unit the company has built in the UK, with the Maersk selecting the site because of its direct links to UK seaports, including Felixstowe and Southampton. It also shows that in uncertain times, location continues to remain a key factor in companies' considerations.
Derby and Segro were again the main players in another significant big box deal, with meals provider HelloFresh signing for 434,000 square feet at SmartParc Segro in the city. HelloFresh said the site would help it to acheive net-zero by 2030, reflecting occupiers' willingness to commission purpose-built development that prioritise strong ESG performance.
CoStar's Grant Lonsdale notes that a mini-wave of large warehouse openings across the region in 2023 helped net absorption of industrial space rebound, measuring positive 2.5 million square feet in the three months to September. Amazon's opening of its 2 million-square-foot fulfilment centre at Wynyard Park in Stockton-on-Tees also helped this figure.
James Orr, head of industrial and logistics at Royal London Asset Management Property, agreed, in a statement sent to CoStar News, that location and strong ESG credentials were top of occupiers' and investors' wish lists, when they are looking for industrial properties.
"Even though supply increased in 2023, rents increased consistently. Next year, we still expect strong rental growth due to the limited supply of high-quality, sustainable space. In common with other sectors, the focus for investors and developers going forward must be on providing space that meets rising occupier ESG standards.
"Royal London Asset Management’s focus is on bridging this gap with our Atlantic Park site in Liverpool. As we look ahead to 2024, we are committed to exploring new opportunities in the North West, a region that boasts Europe's biggest industrial site and that has become even more attractive for investors with the launch of the freeport this year."
Unlike other parts of the country, vacancy rates have remained stable throughout 2023 in the North West. Rental growth as of mid-December was at a healthy 9.1%, making it the best performing region.
Deals of significance in the region included discount retailer TK Maxx agreeing to lease 454,130 square feet at PLP Crewe. That building has been built to UK Green Building Council Carbon Net Zero standard, and includes 970 square metres of roof-mounted solar photovoltaics, air source heating and cooling in the office areas, LED lighting and 24 electric car charging points.
The Wakefield market also saw a 211,364-square-foot letting by XPO Logistics at Voltaic at Wakefield 41. The deal was representative of a good year for shed owners along the M6 corridor, with the major highway network outstripping leasing activity along the M62 corridor by mid-December for the first time since at least 2009.
CoStar's Giles Tebbitts said: "The M62 corridor has not seen the mega-box lettings by the likes of Amazon that the market had become accustomed to during the pandemic. Nevertheless, logistics companies have supported big-box activity with XPO Logistics’ 211,000-square-foot letting at Wakefield 41 and John K Phillips’ 120,500-square-foot letting in Warrington.
"Vacancy rates remain low in both areas, but from a similar base of 2% at the beginning of 2022, have moved up to 4% on the M6 corridor, compared with 2.4% on the M62. This is largely due to the new speculative supply that has recently completed on the M6, notably 674,000-square-foot Link 674 at Ellesmere Port and 300,000-square-foot-plus units at PLP Stafford and Lymedale Business Park in Newcastle."
Industrial Sales
Industrial sales this year also dropped off from the highs of the pandemic years, with DTRE's end of year data indicating that £7.4 billion had been traded by mid-December 2023. Although the year-on-year figure is down from £7.8 billion in 2022, it is actually 40% up on the long-run, pre-COVID average from 2007-2019.
Those in the sector have remarked that this year's economic and political "choppiness" has led to deal volumes being significantly down. Head of UK logistics at industrial developer and investor Trammell Crow Company Mike Forster tells CoStar News that the year had been "predictably challenging".
"One of the frustrating parts of the year has been the continuing dislocation between willing sellers and willing buyers. That's caused a lot of inertia in the market in terms of development, so securing land or secure assets for redevelopment.
"There's been a lot of activity on the market, people trying to sell properties and one of the big takeaways is that a lot of these haven't converted into a deal even when they've selected a top bidder, and that is mainly because the capital has been moving, changing its view quite a bit during this year."
One area of the UK which was a hotbed of activity in an otherwise quiet investment environment was the North West, with commercial real estate giant Blackstone completing a £480 million deal for two of the UK's best-known industrial estates, Trafford Park and Heywood Distribution Park , in a deal revealed by CoStar News.
Comprising 96 properties across the two estates, the agreement with fellow US investment giant Harbert Management Corporation reflected a circa 4.0% yield for the portfolios totalling more than 4 million square feet of logistics accommodation. Another scheme in the region, Gorsey Point Logistics Park, was subject to a £89 million deal as Clarion Partners expanded its UK industrial property portfolio.
The Cheshire deal comprised a three-property portfolio of around 440,000 square feet sold by Mirastar. The investment marked Clarion's second venture in the UK in 2023 after it bought two distribution warehouses from Equites Property Fund for £52 million in March, and served as another indicator of foreign capital circling UK industrial schemes.
Forster says one of the contributing factors to the popularity of the North West with developers and investors this year is the region's dearth of industrial accommodation, with the group planning on constructing a circa 400,000-square-foot scheme in Rochdale. He said a large talent pool was also another consideration for investors.
"It's a chronic lack of supply to meet demand, there is a shortage of supply. If we build our scheme in Rochdale, we will be one of three units of that size in the whole north west, two of which are up at the moment and we will complete ours in a year's time. It is also has a very plentiful workforce and a skilled workforce.
"The Liverpool freeport status, that will have had some impact on the popularity of the area. But it is the old fundamentals of an intersection of a number of key arterial motorway routes in the middle of a huge population."
Mileway, the specialist urban logistics outfit, was behind one of the significant portfolio deals in the Midlands, buying LondonMetric’s Garrison portfolio of UK industrial for around £42 million. The portfolio is made up of 20 properties at three urban logistics schemes across Birmingham. It reflected the continued strength of third-party logistics occupiers in the UK market.
Elsewhere, DTZ Investors’ purchase of Coventry Logistics Park, on behalf of Strathclyde Pension Fund, for £140.4 million, reflecting a 4.5% yield, was one of the largest deals of the third quarter, helping Birmingham to boost investment volumes in the Golden Triangle, one of the UK's best-known industrial hot spots.
While 2023 may be coming to an end, many are tracking the storing of a large amount of foreign investment waiting to do deals in the UK industrial market, due to strong rental growth and the largely future-proof nature of the sector.
Forster adds that companies have to be ready for every possible eventuality in 2024, but the right conditions are needed first. "It's going to be a difficult year ahead but the question there is, at what point is the market going to emerge? If you're an optimist investor, you may be targeting the second half of next tear, but others would say into early 2025.
"But that will be fuelled by when the macro economy improves. Positively, we've seen inflation go down to 3.9% this month. It's all about how long it is going to take for that inflation to fall and for interest rates to come down and at that particular point we might start to see a market emerge, debt returning and demand returning."
He added: "Valuations are going to be the key this year, whether that is first or second quarter. We haven't seen that unlocking of property, owners of properties who are vulnerable to fund redemptions, covenant breaches and maturities, and it's at that point we're going to start seeing some willing sellers and a market will emerge."