When property experts gathered in May at UKREiiF, one of the UK’s largest real estate events, most of the chat echoing around the corridors of the Royal Armouries Museum in Leeds was focused on muted transaction volumes, sticky inflation and rising interest rates.
Not much has changed since then, with the reality of historically high borrowing costs a continued problem for the UK commercial property market in the first half of 2023, and particularly for the regional office markets.
Despite other major UK cities experiencing a decline in take-up, with occupiers reducing or scrapping requirements, Leeds has offered a counterpoint, registering a number of noteworthy lettings in the first half.
Local agents and investors say there are a number of factors behind the city’s strong performance, with one being how offices have been developed and repurposed for the post-COVID occupier.
Figures published by the Leeds Office Agency Forum earlier this year showed that 146,042 square feet of space was taken up in the city centre during Q2 2023, across 31 deals. It followed a particularly strong first quarter, when circa 270,000 square feet was leased, a 116% year-on-year increase for Leeds. At the mid-year stage, the city centre had registered around 413,000 square feet of deals, a 53% increase on the same six-month period in 2022.
Giles Tebbitts, CoStar director of market analytics for Manchester, says Leeds’ sizeable financial and professional services sector, along with its growing reputation as a tech and media hub, is helping to sustain demand for offices even in tougher times.
“While leasing has slowed since the pandemic started, there have been some sizeable transactions agreed in recent months. Although vacancies have crept up to 6.6% amid occupier consolidation, CoStar's Base Case forecast scenario sees them remain below those of other ‘Big Six’ office markets and the UK overall.”
Tebbitts adds that rising vacancy is putting downward pressure on rental growth, which has slowed to 0.9% year-over-year and is expected to fade further in the coming months, in line with rising supply. Prime headline rents in the city centre stand at £36 per square foot, lower than other Big Six destinations.
Jeff Pearey, JLL head of UK regional office agency, says one of the reasons why Leeds has performed “beyond expectation” during the first half of the year was down to to the availability of prime stock at the right time, with a number of office projects completing, including Globe Point, 12 King Street and 11 & 12 Wellington Place.
“I think the market is doing well because of the continued flight to quality, but there are a range of factors at play here. Any occupier in the face of a lease event, if they're able to move to a more sustainable, greener office space with better environmental accreditation, will do so.
“Another is the ongoing focus of getting people back to the office. If you are seen to be acquiring fresh new offices that align with your sustainability targets, and you’re also able at the same time to fit out the office space in a different way, it creates an environment to encourage people [to come in].”
The largest and most significant deal in Leeds so far this year involved one of those new completions, with Lloyds Banking Group signing a mega 124,000-square-foot deal at MEPC’s 11 and 12 Wellington Place.
The building is one of the city’s most energy-efficient and has attracted other large corporate tenants, including Arup, which has taken 36,000 square feet, GHD and Hill Dickinson. JLL, joint leasing agent on the scheme, has also taken circa 10,000 square feet.
Pearey says the Lloyds deal “really set the stall out for Leeds”, with the transaction helping the city to its best first quarter on record. “The city typically runs at about 600,000 square feet of office take-up each year, which has been the average over the last 10 years. So, for us to be at the half-year point and we're already over 400,000 square feet, the city is going to have an above average year.
“I think the only warning shot is more pipeline is required to respond to the ever-more selective office tenants that are out there in the market. If tenants are going to relocate, they want a meaningful move.”
Cushman & Wakefield partner Adam Cockroft says access to a large graduate population, proximity to green space and lower housing costs are other factors that make Leeds an attractive prospect for businesses and their employees. He echoes that sense of the city’s strong start to 2023 and stresses the growing importance of ESG credentials for occupiers.
“It is much higher up in the decision-making matrix to the point where it is one of the key drivers for companies that want to be able to reflect through their offices their commitment to ESG targets." Cockroft adds that Leeds could continue to see movement via increased tenant movement during the second half of the year because of companies' efforts to continue to ‘rightsize’ and reduce their operating costs.
“One of the other areas of the market that we haven’t seen as much of, but we are starting to see a little bit more of, is grey space coming into the market, or occupier-leased space. There was talk when people weren’t coming back to the office that we would see masses of occupier space come back to market. We’ve seen some, but we haven’t seen masses of it.”
Cockroft, like others, raises concerns about the lack of speculative space being developed in Leeds, saying any new stock that does come to market is quickly snapped up by occupiers looking for the best accommodation.
“There is almost no speculative build stock left. There are a number of schemes coming through, the biggest being Vastint’s Aire Park, which is the former Tetley’s factory site. There is the next phase at Wellington Place, which will provide about 180,000 square feet of workspace, and Wellington Plaza, which is directly opposite, will provide around 70,000 square feet as well,” he adds.
Following moves by traditional occupiers to reduce office space in recent years, the flexible office sector has continued to expand across the UK, with a number of operators opening sites across the regions. They continue to grow.
One such firm is Spacemade, which has 12 locations across the UK including London, Birmingham and also Leeds, operating a circa 22,000 square foot space at Park House. Co-founder Jonny Rosenblatt insists Leeds is up there with London as one of its strongest markets, with a near 100% occupancy.
"As soon as the world opened up again [after COVID], we saw this drive towards flex that was really accentuated in Leeds more than anywhere else. Although there are a number of flex operators, there is probably still a slight undersupply in the Leeds market, whereas other markets have a greater supply. We have also seen a lot of companies that don’t feel confident enough to make a long-term commitment [take space].
"We are competing with people’s home offices and working with companies to help bring their employees back to the office, so we try and support them by providing quality amenity that is better than the home. For example, onsite coffee shops and well-thought-out meeting spaces. We’re also putting in podcast booths and a climbing room in one of our offices in Birmingham.”
Rosenblatt adds that the business is looking to potentially open a further two sites in Leeds and is in discussions with landlords. He says they are targeting a space of above 15,000 square feet to make economies of scale work.
“The buildings we look for in Leeds now are very similar building types, with a ground floor presence and where we can activate that streetscape because you get a lot of footfall and people passing by get a feel for the place and get interested. So, we are looking at a number of buildings, all in the city centre.”
On the investment side, Avison Young data shows that Leeds saw £20 million in offices sales during the first half of 2023, down significantly from what would be expected at this stage of the year. It is the same story across the regions. The prime yield in the second quarter for Leeds came in at 6.25% and is expected to increase in the next quarter.
Bruntwood is a developer that has historically invested in Leeds, having acquired the 90,000-squarefoot Castle House building from Bridges Fund Management in July 2021 for a multimillion-pound fee. The group is refurbishing that building which will combine with the neighbouring West One to create a new 140,000 square foot, Grade A office.
With increased working from home, Bruntwood commercial director Andrew Butterworth says that the idea for West One and other refurbished or new properties is to create environments that are able to compete with people’s home comforts.
“Our model is very much around listening to our customers and understanding their demands and trying to ensure that we layer appropriate amenity and services into our buildings to service whatever they want.
“Particularly how businesses are today and the balance of hybrid working, what we're trying to do is to give businesses and their staff a reason to come back into the workplace. So, when they are there, they are as productive as they can be both in terms of how the building is physically designed but also the services and amenities that we are layering into our buildings.”
Bruntwood is also undertaking a comprehensive refurbishment of one of its other Leeds offices, the 90,000 square foot West Gate. That property, fitted with showers, extensive bike facilities and a gym, has already attracted attention, with HM Courts and Tribunals taking more than 26,000 square feet on a 15-year lease.
Butterworth says Leeds’ mixture of large corporate firms and strong SME scene has allowed Bruntwood to diversify its offer in the city, which make it a stronghold for the developer and an area it has confidence to invest in the future.
“I think it's got a strong proposition. The city is right-sized for the businesses that currently locate there. In the past, we've been to markets and looked at markets where they've got an oversupply and there's not enough demand to fill them, and people are cutting prices and are not prepared to invest in them because the supply and demand dynamics are out of kilter.
“It’s not like that in Leeds. It is well-placed and there is continuous improvement of the office stock and that's what businesses want. They are all happy to pay the right rent for that for that stock, provided the buildings are providing a strong offering.”
MEPC is one of the other key developers. Its 11 & 12 Wellington Place scheme has leased well with law firm Hill Dickinson recently joining the likes of Lloyds and JLL in the building. Paul Pavia, head of development at MEPC, says the careful design of the building and its strong ESG credentials were playing a big part in its success and the Lloyds deal.
“The letting is testament to 11 & 12 Wellington Place’s exceptionally high-quality design, and sustainability credentials, which includes being the first buildings outside of London to achieve a pioneering NABERS Design Reviewed Target of Five Stars or above.
“Reducing the group’s carbon footprint is a key part of Lloyds’ sustainability strategy and being based at one of the UK’s most sustainable office buildings will help them to achieve this. The smart enabled buildings also echo its commitment to having high quality office spaces that people love to work in.”
Pavia adds that the banking giant, which is also upgrading its Manchester and Birmingham offices, was attracted to the scheme “extensive amenity offer” and programme of social impact and community activities, such as street food markets and fitness classes.
He suggests the city will continue to perform strongly and attract big-name tenants. “Wellington Place is a great example of the confidence in the Leeds office market and showcases why the city is a destination of choice for new and existing occupiers.
“With its fast-growing young population, and collaborative environment encouraging the public and private sectors to work together, it becomes clear why brands such as Channel 4 have selected the city as their out of London headquarters, and why global businesses such as Flutter are choosing not just to locate, but to invest and grow here."