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Tenants advised to act now to avoid disappointment

Robert Patterson, Partner at Sanderson Weatherall and Head of Office Agency gives his thoughts on current trends within the office sector and the effects the recession has had on the market in the North East.
 
No two recessions are alike, yet all in recent years have had a similar effect on commercial property, each varying in severity. Clearly, the commercial property sector in the most part is still in state of depression and although talk is turning more positive looking into 2010, it’s too early to say if this downturn is worse than the last.
 
What we can suggest is that this recession is more on a scale with that we experienced in the eighties and certainly more severe than that in the early nineties.
 
In the last 12 to 18 months, the North East market has witnessed, as a predictable effect of the recession, an increase in tenant incentives. In order to attract tenants, landlords have had to demonstrate substantial flexibility in lease terms and occupancy costs.
 
The region has also seen the supply effect of golden contracts having their cut-off dates accelerated to 2011. This has created significant oversupply in former Enterprise Zone locations, particularly in North Tyneside. Some of these schemes are openly offering in excess of five years rent free, to attract and assist occupiers as part of their relocation packages.
 
We are also seeing some former Enterprise Zone buildings returning to syndicate investments, as well as significantly reducing rents to try and attract tenants.
 
Elsewhere, a lack of funding is generally restricting new build schemes in Non-Enterprise Zone locations. This is the case in South Shields, where a pre-let of 50,000 sq ft to British Telecom is now only proceeding thanks to the intervention of the Local Authority to assist the development in going forward.
 
However, movement in the out-of-town market where there is already product built has been strong in 2009.  We have seen two former Northern Rock buildings totaling over 300,000sq ft at Rainton Bridge, Sunderland and The Regent Centre, Gosforth, sold to and for occupation by npower and Newcastle City Council respectively.  Tesco have also signed for 100,000sq ft and Convergys have signed for 60,000sq ft in North Tyneside.
 
Looking at the city centre, the lack of new developments and office space could result in some of the secondary stock in city centre locations being taken up in 2010.   As a result, we would expect that there will become a shortage of quality accommodation available in the city in the coming years and in effect the market could change and become a landlords’, rather than a tenants’ market, turning the table significantly from 2009. 
 
The logical outcome will be fewer incentives and rising rents which in turn will enable new development, providing funds are made available. 
 
However, owing to the economics of the last 12 to 18 months, kick-starting developing is going to take some time and for many proposed schemes there may be a gap of up to two years in which quality stock could be few and far between. In essence, tenants looking for available space that is right for their needs should act now to take advantage of competitive incentives before the shortage kicks in.
 
Flexibility on the part of the tenant and the landlord is crucial to help cash flow, improve the situation for both parties and help to stabilise the market as soon as possible.
 
Void rates of 100% are also impacting on buildings nearing completion and new speculative builds starting – this is further holding up the movement and progression of the market.
 
The optimist would say that the worst is over and as with recessions past, the market will bounce back hopefully sooner rather than later. The realist would say, let’s watch this space to see what the next six months bring – anything could happen...
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