Newcastle's commercial real estate market continues to witness a flurry of activity, with over £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 So, what are key drivers shaping Newcastle's market and the opportunities and challenges it presents

Flight to Quality:

In today's market, 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, retail warehousing, industrial, and retail.

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 importance of sustainability in investment decisions.

Occupiers are also driving the flight to quality, with a strong preference for Grade A accommodation in prime city centre locations, reflected by 76% of city centre office lettings being for Grade A space over the last three years. This flight to quality and introduction of newly developed and refurnished office space into the market has created upward pressure on prime office rents.

For the retail sector, the recent acquisition of 123-125 Northumberland Street for 6.09% NIY for nine years income underscores the continued interest in retail assets offering stable returns. The Monument Mall and Pilgrim Quarter developments, spearheaded by Savills as the leasing agent, is witnessing robust occupier demand with dozens of retail and leisure occupiers in discussions, highlighting the allure of prime high-footfall locations in Newcastle's retail and leisure sector.

Industrial assets, particularly those located on the A1(M) and A19, present compelling opportunities for investors. Modern facilities in nearby 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, Newcastle still sees a 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 the UK. Robust occupier demand continues, as evidenced by seven of the eight newbuild units at Hillthorn Business Park in Sunderland securing pre-let agreements. Given current high inflation, increased build costs, the limited development pipeline and continued strong occupational demand, we anticipate further upward pressure on newbuild rents, with prime rents currently sitting at between £8 and £10 per sq ft, depending on unit size.

Reinvention of the Office:

Tenants are increasingly willing to pay a premium for quality and this is exemplified by Bank House achieving a new rent benchmark for the city at £32 psf. 

The office has been transformed to deliver high-quality environments and One Strawberry Place is a prime example of this, developed with an emphasis on high-quality communal spaces and amenities designed to foster collaboration and innovation.

The strong demand for flexible office space as well as the lack of Cat B fitted and co-working spaces is also reshaping the commercial real estate landscape. 

In conclusion, 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 continues to evolve, those poised to capitalise on emerging trends stand to reap the rewards of Newcastle's dynamic office investment market.

Further information

Contact Peter Atkinson