Bradley Hall’s David Cran reflects on a mixed first half of the year for Yorkshire’s commercial property market.
Yorkshire’s commercial property sector was one of the few success stories of the pandemic.
Despite fears that ‘the new way of working’ would see businesses give up offices in their droves, the market showed incredible resilience to outperform the rest of the UK.
Yet despite bearing the brunt of the pandemic and its crippling lockdown restrictions, the resulting economic hangover is showing little sign of easing and there is no denying that it is beginning to take its toll.
Rising interest rates, soaring inflation and higher-than-expected debt costs have created a perfect storm which has seen values decline and leasing slow across the board over recent months, especially in the office market.
Lloyds Bank may have completed one of the region’s largest deals in recent years with the letting of 138,500sq ft at 11-12 Wellington Place, however vacancies have still crept up to 6.6% amid occupiers’ consolidation and they are expected to continue rising with negative net absorption and as new supply delivers.
Rising vacancy is also likely to add pressure to rental growth but this still remains positive at present year-over-year but may fade further in the coming months in line with rising supply.
Much like the rest of commercial real estate, the industrial market also finds itself it a cross roads. While the market has regressed somewhat from the heady levels of the past few years, vacancies remain at just 2.1%, having trended below the national average since 2015 and remain among the lowest of the UK’s industrial markets.
Rental growth on industrial properties has also held firm. Despite tapering down somewhat in recent months, the market remains incredibly competitive, especially in industrial hotspots such as Wakefield, Boroughbridge and the outskirts of Leeds.
There has been a notable deceleration in investment activity however, which is mainly due to the economic uncertainty surrounding the sector and the significant increase in interest rates.
Over the past few months, the primary focus of sales activity has also been on buyers seeking stable, long-term income and those interested in enhancing the value of their investments. Similarly, sellers have been motivated to free up funds, driving sales activity.
On a more optimistic note, however, we are seeing some green shoots of recovery.
While the supply of premium office and industrial property is waning, demand remains reasonable, and this will see values stand firm, to an extent. The lack of large industrial sheds and Grade A offices currently under construction will also make the purchasing of properties to refurbish and/ or extend more appealing, which will naturally strengthen the value of existing stock.
Add to that the fact that, despite the tepid outlook, tenants’ willingness to pay for premium space is also seeing rental values at the very top end of the market remain resolute, and we could yet see some green shoots of recovery just yet.
But while it would be easy for us to sit here and say that there will be ample opportunities for savvy investors looking to diversify and grow their portfolios, the market will ultimately reflect how debt costs, inflation rates and inflation fluctuate.
Should we see more of the same, then we’ll see more of the same hesitance from banks to lend and businesses to commit to new leases.
However, should we see rates start to ease, then the opportunity for investors to step in and fill the void left by dwindling supply could be huge and I’m sure landlords and developers will no doubt be monitoring the situation closely.
It will certainly be an interesting six months, that’s for sure.