Real Estate Economics

City Centre Office Markets in

Manchester & Leeds

Contents

Page 3 - Introduction

Page 4 - UK Office Market Overview

Page 5 - Relevant Literature – Leeds

Page 6 - Relevant Literature – Manchester

Page 7 - Secondary Data – Leeds

Page 8 - Secondary Data – Manchester

Page 9 - Conclusion

Page 10 - References

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IntroductionLeeds is a city in West Yorkshire with a population of around 750,000 people. Prior to the industrial revolution the city of Leeds was heavily reliant on the production and trade of wool, however during the revolution different industries became stronger such as engineering, iron foundry and printing. Currently Leeds is viewed as the cultural, financial and commercial heart of the West Yorkshire Urban Area. [GaWC, 2010]

With over 25,000 businesses based in Leeds and a growth rate of 40% in the last 10 years, the economy has become more diverse and is now worth over £18 billion. The financial sector is an integral part of the economy here, with many banks having global and national headquarters based in the city such as HSBC, Halifax and Yorkshire Bank. This strong financial sector brings 14,000 jobs to the area, and 46,000 jobs in the professional services sector. Throughout Leeds, over 35% of the working population is educated to a university degree level. [Invest in Leeds City Region]

The graph below shows the employment statistics for Leeds, Yorkshire and The Humber (wider area), and the UK as a whole. The data shows that Leeds has a higher employment rate than Great Britain as a whole. Of the 75% of people in employment, 8.6% of those are self employed, this is less than the national average, meaning that people in the city are less likely to start and run their own business. [Labour Market Profile – Leeds, Nomis, 2015]

Manchester is a city and metropolitan borough in Greater Manchester, the second most populated urban area in the UK. In the early 1800’s Manchester was known for its production of cotton, this period during the industrial revolution was a key factor in the increased population of the city and brought about major changes to the area. By 1835, Manchester was without challenge the first and greatest industrial city in the world. [Hall, Peter, 1998]The population of Manchester is around 520,000 people, with 233,800 of those people in some form of employment. Similarly to Leeds, Manchester is favoured by large companies to locate their national, global, and European headquarters, with such companies as Siemens, Adidas, Kelloggs, The Co-Operative Group and Umbro occupying office space in the area. One of the main reasons for these companies basing their operations in Manchester is because it is a strong distribution hub. Every major city between Edinburgh to London can be reached within a 4 hour drive. Along with the World Freight Terminal being based at

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Manchester Airport, where FedEx and Lufthansa Cargo serve global destinations, it is clear to see why Manchester is used as a hub for logistics. Again, like Leeds, Manchester has a strong financial and banking sector, worth £3.22 billion making it the 3rd largest in the UK after Edinburgh and London. Manchester is also a hot spot for various tech and media companies. The graph below shows that Manchester has a higher unemployment rate than the rest of the UK and Leeds (as shown in the previous graph). Although Leeds has more people who are unemployed, Manchester has a higher percentage of their population without a job. Compared to Great Britain as a whole, Manchester has more 10% less people in employment. [Labour Market Profile – Manchester, Nomis, 2015]

UK Office MarketBusiness activity in the UK has remained stable despite some economic uncertainty in the global market. Regional business hubs have seen prime office space stay in demand, however most of the demand has been for cities in “The Big Six”, these are; Bristol, Birmingham, Manchester, Leeds, Edinburgh and Glasgow. Excluding London, these are the 6 cities in the UK with the largest populations and therefore the largest office markets. Central London has seen a strong surge in pre-let activity, meaning that more office developments are being bought prior to construction. In Q4 2015, Grade A office supplies declined further, while refurbished office space is seeing more activity, however not enough to meet the current demand. The UK office market has seen a tightening on the incentives offered to attract tenants, this means that less tenants are receiving rent-free periods, more rent reviews, and poorer lease terms. [Office Market Snapshot, 2015]

The graph (right) shows the prime office rents for different regions in the UK. The data shows that the West End of London is achieving far higher rents per square foot than any other area of the UK, double the amount of the 2nd highest prime rent achiever. The is due to the huge demand for office space in London’s West End and limited supply. The graph also shows how some of “The Big Six” are being outperformed by smaller cities, with Reading achieving particular high prime rents.

[Office Market Snapshot, 2015]

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Relevant Literature

Leeds City Centre

Confidence in Leeds Office MarketIn Leeds there is currently only 235,000 square foot of Grade A office space available on the market, this is because of No1 Leeds has seen all of its office space taken up in April 2016. No1 Leeds is an office development which totals 122,003 square foot of space. The Broad Gate office development is also seeing its office space disappearing fast. Another key development in the area is the refurbishment of the 9-storey Minerva house, providing more Grade A office space. These factors are contributing to the increased confidence in the Leeds officer market and helping the area wash away any memories of the 2008 recession. The development of the Leeds office market has been hugely supported by its strong financial sector, evidence of this can be seen at Broad Gate with both Yorkshire Building Society and CapGemini Financial Services taking up over 100,000 square foot of office space here. [Meadwell, S. Estates Gazzette, 2013]

Optimism for Future DevelopmentsThere has been a growing number of companies “Northshoring” which has helped the office market in Leeds. “Northshoring” is the term used to describe office occupiers moving from the south of the country to more northern parts to escape spiralling rents. There was 680,000 square foot of office space involved in transactions in Leeds in 2015, a huge increase on the 540,000 square foot of 2014. This take up of office space has spurred on developers in deciding to build new office space. Currently there will be 600,000 square foot of office space coming to the market in Leeds in the next 12 months, with a third of that space already pre-let. 55,000 square foot of this space has been pre-let to PricewaterhouseCoopers (PwC) at the Central Square development on Wellington Street. This shows again how many financial institutions see Leeds as suitable location for a global, national or European headquarters. [Creasey, S. Property Week, 2016]

This shows how important the financial and business services sector is the the economy in Leeds and the huge impact it has on the office market in the city. This is supported by data provided by Leeds City Council which states that of the 1.5 million people in the workforce, 38% of the jobs are created through the financial and business services sector. [Leeds.gov.uk]

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Manchester City Centre

A Shortage of Office SpaceIn Q2 of 2016, Manchester would be facing a historic shortage of available office space. 311 transactions in 2015 took 1.32million square foot of office space off the market. One third of these transactions involved Grade A office space, double the amount of the previous three years. This shows that supply could begin to struggle with the demand for this Grade A office space. Currently there is 216,000 square foot of Grade A stock available on the market. There are developments in the pipeline which are ready to address this shortage, however two of these new developments are believed to be fully pre-let already, the XYZ development at Spinningfields and One New Bailey. Ultimately this will lead to a stronger pre-let office market in Manchester, causing occupiers and potential tenants to anticipate their spacial needs a lot sooner. [Don, A. Property Week, 2016]

Refurbished Office Market With the demand for Grade A office space in Manchester rising and supply dwindling, developers and occupiers will have no choice but to turn to the Grade B office spaces. Over the next 24 months, around 625,000 square foot of office space is set to be refurbished. Despite the huge demand for Grade A office space in the Manchester market, the annual take up has been constantly outperformed by the Grade B office space, this is because occupiers are trying to strike the balance between increasing rents and high quality office space. This has caused an increase in the rents of Grade B office space. Over the last 5 years, the Technology, Media, and Telecommunications (TMT) sector has been the main driver for Grade B office space in the city, with transactions equalling 710,889 square foot. This shows that the developers who can deliver flexible and interesting work spaces to the market will succeed. However this will be challenging because many TMT companies will not have strong tenant covenants and may require shorter and more generous lease terms. [Europe Real Estate, 2016]

Comparison and analysisThe data found in the relevant literature for the Leeds office market showed that the economy is growing and the office market in the city will benefit because of this. With many new developments in the pipeline for the city, the office market will continue to grow and perform well. Comparing this to the Manchester market where the main theme is the undersupply of Grade A office space, it shows that the city may struggle in the next few years. This is because of the strong pre-let market, as companies could face great difficulty in predicting their spacial needs years in advance. Overall this data shows that the Manchester office market is in a much earlier stage of economic recovery from the 2008 recession than the Leeds office market.

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Secondary Data

Leeds City CentreData collected by surveying firm Knight Frank shows which different sectors are occupying the office market in Leeds

The table above (figure 2) clearly shows the bulk of office stock is being occupied by the finance and banking sector together with the professional services sector. This data supports the evidence given in the relevant literature regarding the Leeds office market. It also shows the effect that “Northshoring” is having on the occupational market, with many law firms moving up from their London offices to be based in Leeds.

The data provided in the graph above shows how the take up of Grade A office space in Leeds has increased significantly from the end of 2014 to the beginning of 2015. This is due to large pre-let transactions taking place, as mentioned in the relevant literature, such as the 55,000 square foot of space at Central Square being pre-let to PwC.

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Manchester City CentreThe graph below shows the office take up in Manchester City Centre over the last 12 months. This data tells us that a large proportion of this occupation is coming from the professional services sector. This can again be credited to many large law firms “Northshoring”. The TMT sector in Manchester has shown strong take up, accounting for 14% of the overall occupation, which has transformed the city’s northern quarter from a low value location to an established part of the city’s office market.

The graph below supports the theory that the supply of Grade A office space in the city is running low, and that occupiers are turning to the refurbished office market. This is because Grade B/C office space accounts for a much larger proportion of the transactions from Q1-Q3 in 2015. The big take up of Grade B/C office space has provided developers with confidence in the market, with a number of different developments underway in 2016.

Comparison and AnalysisThe confidence in the Leeds office market is stronger than Manchester office market. This is because of the continuing stream of available Grade A office space, whereas in the Manchester market, there seems to be a slower reaction the need for this type of space. The data provided in the graphs for both cities show how heavily reliant the office market is on the professional services sector. The take up of office space from this sector will continue to take up a large proportion of the market in the future, with more firms being put off by the prices of London based offices.

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ConclusionTo summarise, the investigation into the office markets of both Leeds and Manchester are performing well, with the Leeds market showing signs of a quicker recovery from the 2008 recession. The office market in Manchester needs a larger supply of Grade A office space to cope with current demand. The prime headline rents in Leeds are still lagging behind other cities in the country, but they will continue to rise over the next 12 months, with the PwC deal being an indicator of this. The graphs below show how the prime rents in the Manchester office market stalled for 4 years after the recession but are recovering well now and look set to climb in the coming months.

Word count: 2,187

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References Globalization and World Cities Research Network. (2011). The World According to GaWC. Available: http://www.lboro.ac.uk/gawc/world2010t.html. Last accessed 20th April 2016.

Leeds City Region. (2016). A Thriving Business Economy and Leisure Hotspot. Available: http://investleedscityregion.com/invest/leeds. Last accessed 20th April 2016.

ONS. (2016). Labour Market Profile - Leeds. Available: http://www.nomisweb.co.uk/reports/lmp/la/1946157127/report.aspx?town=Leeds#tabempunemp. Last accessed 20th April 2016.

ONS. (2016). Labour Market Profile - Manchester. Available: http://www.nomisweb.co.uk/reports/lmp/la/1946157083/report.aspx?town=manchester. Last accessed 20th April 2016.

Hall, Peter (1998). "The first industrial city: Manchester 1760–1830". Cities in Civilisation. London: Weidenfeld & Nicolson. Tano, J. (2016). Office Market Snapshot. Available: http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/uk/united-kingdom-office-snapshot/. Last accessed 21st April 2016.

Meadwell, S. (2013). Is Leeds or Manchester making the first tentative steps on the road to office market recovery?. Available: http://www.estatesgazette.com/blogs/focus/2013/07/when-it-comes-to-recovery-is-the-leeds-office-market-leading-the-way/. Last accessed 21st April 2016.

Leeds City Council. (2013). Leeds Economy . Available: http://www.leeds.gov.uk/Business/Pages/Leeds-economy.aspx. Last accessed 21st April 2016.

Don, A. (2016). Manchester Faces Record Office Shortage. Available: http://www.propertyweek.com/news/manchester-faces-record-office-shortage/5079058.article. Last accessed 22nd April 2016.

Europe Real Estate. (2016). Manchester Refurbished Office Market Prospers As Occupier Demand Increases. Available: http://europe-re.com/manchester-refurbished-office-market-prospers-as-occupier-demand-increases-uk/61994. Last accessed 22nd April 2016.

Rickard, L. (2016). Leeds Offices - Market Update. Available: http://content.knightfrank.com/research/272/documents/en/h1-2015-3146.pdf. Last accessed 25th April 2016.

Levy, J. (2015). The Northern Powerhouse. Available: http://www.northernpowerhouselaw.co.uk/files/2016/02/LSH-Northern-Powerhouse-2015-15_FINAL.pdf. Last accessed 25th April 2016.

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