Yorkshire cities Leeds and Sheffield take the lead for office rental growth in 2023

Leeds was home the only major regional deal in 2023 with Lloyds Banking Group’s 124,400 sq ft pre-let at 11 & 12 Wellington Place in the first quarter of the year.

However, overall, the tough economic year, characterised by continued business and investment uncertainty, led to below average take-up across most of the 20 key regional markets.

Take-up across the 20 key regional markets for 2023 is on course to hit circa 7.2m sq ft, 12 per cent below 2022’s total and 22 per cent below the 10-year annual average.

A paucity of large deals has adversely impacted deals for the year as a whole, with take-up in the 20,000 sq ft-plus bracket running at half the 10-year trend through 2023 and reflecting elevated uncertainty among corporate occupiers. The picture looks brighter from an activity perspective, with the number of deals over 2023 to Q3 in line with both 2022 and the 10-year average.

LSH said that the well-documented flight to quality in the office sector means that quality space continues to attract the lion’s share of deals, accounting for 43 per cent of take-up over 2023 to Q3. This is up from 42 per cent in 2022 and compares with a 38 per cent share in the five years prior to the pandemic.

Robust demand for a new generation of buildings has driven rental growth at the prime end of the market. With several deals in the pipeline set to push rents onto new benchmarks in the final quarter, prime headline rents are forecast to increase by an average of 5.5 per cent in 2023, the strongest annual rate in 17 years.

Prime rents in Sheffield rose in excess of 10 per cent over the year, while Bristol is on the verge of achieving the highest headline rent of any regional market at £45.00 per sq ft for its Welcome building.

Meanwhile, the investment market has been especially subdued in 2023 due to a “cocktail of structural change in occupier demand, perceptions around low occupancy, concerns over ESG remediation costs and a mismatch between seller and buyer pricing expectations”.

Over the year to Q3, total regional office volume amounted to £1.3bn, 58 per cent below the 10-year annual average.

Charlie Lake, senior director – office advisory and capital markets at LSH, said: “While the investment market is still coming to terms with a significant pricing correction over the past year, huge opportunity exists to deliver the high-quality workspaces that occupiers really want and are willing to pay for.

“Pricing for secondary office buildings has now softened to such an extent that the case to viably refurbish assets to the required standard is becoming increasingly compelling.”