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2015 – Be The Year for Rental Growth?

Brown and Co think so! The rental market was turned upside down in 2008 and stayed on its knees until 2010, during which time there was an oversupply of existing commercial stock in the industrial, office and retail sectors. This led to landlords having to adjust their expectations and accept significantly lower rents, combined with generous incentives to entice a limited supply of prospective tenants to commit. At the same time, existing tenants saw no rental increases and were committed to the terms of their tenancies.

We have seen an increase in occupational over the last 18 months, with some sectors coming back to equilibrium. In Brown and Co’s past market experience it is the industrial sector which recovers first. We manage a number of industrial estates nationwide and have a very high occupancy rate. With a number of industrial estates already at full occupancy we are setting out our stall to secure higher rents when units become available.

Lease Renewals
Negotiations at lease renewals are a good indicator as to where the rental market is now from where it was during the first few years of the recession. Our experience is that tenant’s agents are suggesting shorter leases with reduced rents and incentives. Landlord’s agents are countering that rents are increased with no incentives but that shorter leases may be acceptable. Generally, common ground is being achieved and rental increases are creeping back in.

Office Market
The office market in cities such as Leeds, Manchester and Nottingham have seen enormous office take up throughout 2013 and 2014. This sector is one to two years behind the industrial sector but is quickly coming back to a more sensible equilibrium. The office market is interesting in that proportionately it has had the largest drop in rental during the recession but may also have the greatest increase as the economy recovers and supply dwindles. In some of our core markets decent quality Grade A space is now in very short supply, which is helping rents move in an upwards direction.

New Build
Despite the better economic outlook that we are enjoying there are still very few speculative commercial developments being undertaken, with the exception of London and the south-east. As a consequence we believe that the main markets of industrial, office and retail will hit equilibrium before speculative new build stock is made available in any meaningful volume. New build stock will not be made available unless and until there is some rental growth that will make speculative new-build financially viable.

In our experience where developers have taken the bull by the horns and built, their actions have been rewarded with deals at higher values. If this continues, the prospects for rental growth are positive.