A LEADING office agent says talk of Newcastle rents hitting £24 per sq ft this year is not realistic – despite a major shortage of ‘grade A’ space. Following Atisreal’s annual Property Market Forecast event in Newcastle last week, the company’s regional office head David Furniss said he was not convinced by his fellow agents’ predictions of a new high in rates per square foot. Mr Furniss said while supply of office space would improve during 2008 with potentially 115,000sq ft of prime, grade A space coming on to the market, the current shortage would not drive rents over £24 per sq ft. Mr Furniss noted the current supply of Grade A space “is going fast” with a consequential impact on prime and secondary rents. He said: “The current headline rent in Newcastle city centre is £22 per sq ft but as supply remains very tight, there is great upward pressure on rents, with secondary locations showing between 10% and 15% growth in the last nine months.” A further current feature of the market is the shortage of development sites in the core office area. Mr Furniss said: “Argon’s East Quay 5 development [the old Bannatyne casino] of 36,000sq ft has been forward sold for around £14m, a net initial yield of 5.6%. “This is a good example of investment interest in such sites which can deliver new space in a relatively short period of time.” The Atisreal boss said other than two schemes available on the market now – No 2 St James’ Gate and City Quadrant – it was clear there would be a continuing shortage during 2008 until 2009 when at least three schemes are due to be ready, with each offering 100,000sq ft or more. Moving on to the industrial market, Mr Furniss said it was still being distorted by the incentive available in the former Enterprise Zones. He said: “Typically in East Durham, the ability to offer significant incentives can drive rents down and attract tenants to sub optimal locations.” He cited the letting to Cumbrian Seafoods at Fox Cover, Seaham, at a headline of £4.75 per sq ft but with a substantial rent-free incentive. He added: “Though there are sufficient sites in the region and demand out there, it is critical that developers work closely with end users to ensure that their requirements are clearly understood.” Meanwhile, the regional retail sector is said to be static in terms of prime rental growth in central Newcastle with an overall picture of the major regional centres consolidating their dominant positions in what is seen as a very competitive trading environment. Mr Furniss said: “The second-tier towns and cities such as Durham, Darlington and Middlesbrough remain strong trading destinations and are seeing some development activity and rental growth to underpin this, but third tier towns continue to bear the brunt of consolidation by multiple retailers and, therefore, have higher vacancy rates.” It has been noted the ‘squeeze’ on the high street has seen a large number of retailers going into administration in the last year and others have posted profit warnings. Atisreal has found a growing number of retailers now wish to pay their rent monthly, rather than quarterly, to ease cash-flow problems. Despite competition from the internet and supermarkets, Mr Furniss says there is some good cheer in the sector with a trend emerging where niche retailers are targeting a few select locations frequented by more affluent shoppers. He said: “They are clustering together and creating quality parades. For example Grainger Street, Newcastle, has benefited from this trend.” The investment market is without question “moving away from bull market conditions that have prevailed for the last couple of years, perhaps returning to a more balanced market where the risk premium attached to property returns to a more sustainable level,” says Mr Furniss. “Atisreal believes activity will remain high and the prospects, in general, for the region remain very positive.” | 
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