The North East
2025 set for increased investment, predicts Partner at Naylors Gavin Black, Chris Donabie
Chris Donabie
The investment market was chal- lenging throughout 2024, with transac- tion volumes down on the average annual rate. There was a feeling that the market never really got going due to events such as the UK general
election, the subsequent first budget, and the US presidential election. The UK economy unfortunately didn’t see an economic bounce, following the Autumn budget. However, there is more optimism in Q1 of 2025. Inflation is stabilising and we have already seen one interest rate cut in the UK, with more pro- jected to follow this year. This should help improve investment performance and with that - increased investment volumes in the coming months.
The drivers
Income growth is seen as key to investment return at present, more so than yield com- pression. We’re certainly seeing more activity from investors seeking value-add opportu- nities to improve investment performance
and demand is strong for higher yielding and lower capital value buildings especially in the office and industrial markets.Understandably, ESG compliance is becoming more critical to investors’ buying criteria against the backdrop of the government’s Net Zero agenda.
New development remains difficult to justify in the current economic climate. Build costs are high, albeit costs have stabilised, but yields and rents are not where they need to be to enable viable development. This espe- cially applies where landowners have paid a high price for the land. As such, refurbished accommodation particularly in the office and industrial sectors continues to enjoy good demand and underpin rental levels.
Offices
In Newcastle city centre, there’s increased demand for high quality and sustainable buildings and there’s a limited supply of this product - hence why Grade A rents are under upward pressure.
There’s notable emphasis on flexibility and sustainability of office space. As such, land- lords investing in creating fit-for-purpose space with flexible leasing models in the North East will continue to prosper.
Industrial and logistics
There is consistent demand in the North East for industrial space and limited existing sup- ply and speculative development is fuelling rental growth. Prime locations such as the A1 and A19 corridors - Washington and now further down the region into Darlington - con- tinue to see strong occupier demand across all unit sizes. We’re expecting further indus- trial rental growth and rental rises, in particu- lar, for prime and refurbished industrial stock across the region, in 2025.
Retail
There is a limited supply of prime retail space across major high streets and city centres in the region. Investors are viewing the sec- tor as having largely re-based. We’re seeing evidence now that creating leisure experi- ences is ever-more-important in attracting shoppers. However, there is pressure on people’s discretionary spend which is a con- cern, particularly when coupled with higher mortgage rates.
Despite these headwinds, we are seeing rental growth in the retail sector and we’re confident there’s potential in 2025 for improved income returns.
North East industrial market: Demand to remain robust, says Partner at Naylors Gavin Black, Keith Stewart Industrial hotspots
Keith Stewart
Take-up of industrial and logistics space in 2024 was slightly higher than 2023 with approximately 1.4m sq. ft. transacted of units above 50,000 sq. ft. This compared to around 1.2m sq. ft. in 2023.
There were more transactions in 2024, albeit the average size was down on the previous year. The largest transaction last year was a sale on Nelson Way, in Cramlington, which was 204,000 sq. ft. In addition, there were a number of other freehold transactions - mainly from occupiers - which took a number of units out of the market in 2024.
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Areas with good accessibility to the A1 and A19, together with good skills and labour pool, continue to be popular. For example, indus- trial estates in Washington, Gateshead, North Tyneside, Durham, Peterlee and Teesside are seeing good demand and take-up and this is evident from the results over the last couple of years. UK Land Estates (UKLE) is doing more than its fair share of building new, spec- ulative industrial units to try and alleviate the ongoing, chronic shortage of new, modern stock in the North East market.
Naylors Gavin Black completed a letting to FPS of a brand-new, 36,000 sq. ft. unit on the Team Valley in February, for UKLE, and the developer is now on site nearby at Centralway building a new, sustainable, 65,000 sq. ft. industrial unit. UKLE’s other main location for its industrial development investment pro- gramme is the Tyne Tunnel Industrial Estate.
Small and mid-size units
Smaller units are still popular, however, some have been on the market for longer than ideal, in recent times. This is partly due to rents
having increased due to high demand over the last few years - particularly those that are below the Business Rates threshold.
Mid-size units are letting well, albeit there is limited availability of stock between 20,000 and 50,000 sq. ft.
Outlook for 2025
Unfortunately, we anticipate some business failures this year and with that, more stock will come back to the market, of varying sizes. We expect it to be challenging, with some businesses pausing on whether they move and readjusting their forecasts given the recent budget and the effects that may have.
There will be limited construction coming for- ward in 2025 so we anticipate there will still be good demand, with supply of high-quality units in short supply.
Landlords will continue to refurbish and repurpose older units up to higher stand- ards to increase rental levels and protect their investment, but also to provide a stand- ard of unit that most tenants now require and demand.
COMMERCIAL PROPERTY MONTHLY 2025
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