COMMENT Newcastle’s commercial real estate market continues to witness a flurry of activity, with more than £175m transacted in 2023, despite record lows of stock availability.
Against the backdrop of evolving trends and market dynamics, savvy investors are strategically positioning themselves to capitalise on the city’s burgeoning commercial real estate sector.
In today’s market, discerning investors are placing a premium on quality assets that offer sustainable returns and long-term value. This flight to quality is evident across various sectors, including offices, warehousing, industrial, and retail.
The transforming office sector
For offices, properties with an EPC rating of B+ are highly sought after, commanding premium prices.
Conversely, those with lower ratings face significant discounts, highlighting the growing importance of sustainability and energy efficiency in investment decisions.
Occupiers are also driving the flight to quality, with a strong preference for grade-A accommodation in prime city centre locations. Transactions reflect this trend, with the last three years seeing grade-A space account for 76% of all city centre office lettings.
This flight to quality and introduction of newly developed office space into the market has created upward pressure on prime office rents, leaving an opportunity for existing grade-A stock to further drive headline rents, following successful comprehensive refurbishment plans.
The modern office is undergoing a transformation, driven by a focus on environmental, social, and governance principles, high-quality environments, and enhanced accessibility.
Tenants are increasingly willing to pay a premium, as exemplified by Bank House achieving a new rent benchmark for the city at £32 per sq ft.
One Strawberry Lane also serves as a prime example of this reinvention, with an emphasis on quality communal spaces and amenities.
The rise of flexible office spaces is also reshaping the commercial real estate landscape, driven by burgeoning demand and a lack of supply for Cat B fitted and co-working spaces.
Newcastle presents a ripe opportunity for investment in this burgeoning sector, with potential for growth and innovation.
Demand for industrial
Industrial assets, particularly those located in prime corridors such as A1(M) and A19, present compelling opportunities for investors.
Modern facilities or refurbishment projects in key areas like Washington, Gateshead, Sunderland, and Durham are in high demand, driven by a lack of development pipeline and promising growth prospects.
The industrial market continues to attract occupiers seeking well-located modern stock, with ample power supply and market-leading ESG credentials.
Even with recent speculative development, the region still sees a huge shortage of available stock, with the current North East market vacancy rate for units over 50,000 sq ft being just 2.37%, one of the lowest in any market in the UK.
There remains robust occupier demands, as evidenced by seven of the eight new-build units at Hillthorn Business Park, Sunderland, securing pre-let agreements.
Given current high inflation, increased build costs, limited development pipeline and continued strong occupational demand, we anticipate further upward pressure on new-build rents, with prime rents currently sitting at between £8 and £10 per sq ft, depending on unit size.
Focus on retail investment
Retail remains an attractive investment avenue, with a focus on well-located properties with rebased rents. The recent acquisition of 123-125 Northumberland Street – for 6.09% NIY for nine years income – by a private investor underscores the continued interest in retail assets offering stable returns.
The Monument Mall and Pilgrim Quarter developments, spearheaded by Savills as the leasing agent, are witnessing robust occupier demand with dozens of retail and leisure occupiers in discussions, highlighting the allure of prime high-footfall locations.
Newcastle’s commercial real estate market presents a myriad of opportunities for savvy investors willing to navigate the evolving landscape.
With a flight to quality driving investment decisions and occupiers seeking high-quality spaces, the city’s commercial real estate sector continues to attract interest and investment.
As the market evolves, those poised to capitalise on emerging trends stand to reap the rewards of Newcastle’s dynamic investment market.
Peter Atkinson is an investment director at Savills
