Heading in the right direction

Trade tariffs, NIC, and wage inflation have all dominated the narrative in November, with many business leaders indicating that patience for the new government to reveal the fundamentals of its growth agenda is being stretched. The month since the Budget has given companies time to calculate the impact on costs and consider how they might recalibrate their growth projections. Few are overly optimistic, but there are rays of light even as the winter nights draw in. Private sector activity declined in the three months to November, with all three major sectors – services, manufacturing, and retail – reporting falling business volumes, sales or output.

However, this is counter to expectations going forwards, which look more positive for 2025 despite Budget-related fears. In November, ONS Business Insights Survey saw a relatively modest 14% of leaders expecting the next twelve months to be worse, while 23% expect things to improve. Similarly, the CBI’s Industrial Trends Survey saw a 9% improvement expected in manufacturing output over the next quarter, up from 0% in October. Even consumer confidence finds itself 6 points above where it was this time last year in the wake of easing inflation.

So how is this translating into investment sentiment? Savills average prime yield is down to 5.94% – last seen in July 2023 – and investment volumes for 2024 are on track to exceed those in 2023. Only shopping centres have seen this translate into a positive yield shift in November, and looking back to look forwards, retail’s time in the doldrums might be coming to an end, with all subsectors improving by 50 bps or more in the last six months. Meanwhile, other commercial sectors have typically retained the levels held for much of the year. However, if anything characterises the market outlook for prime equivalent yields in December, ten subsectors are forecast to firm up, just in time for the winter snow.

Law firms are driving rental growth in prime office markets

London’s legal sector has historically driven a significant rise in demand for prime office space, and we are now seeing law firms expanding into regional UK cities such as Manchester, Birmingham, Leeds, Glasgow and Edinburgh to capitalise on lower operational costs and access to skilled talent. Since 2019, law firms have acquired almost 7 million sq ft of office space across the UK, with 2023 transaction volume reaching its highest point in over five years.

According to PwC’s Annual Law Firms’ Survey for 2024, 60% of the UK’s top 50 law firms now maintain a presence outside London, reflecting the broader trend of regional expansion in the legal sector. The Big 6 office markets are seeing a steady increase in the number of legal sector property deals since 2020, with 2023 29% up on the long-term average for the annual number of legal lettings.

There is a ‘flight to quality’ within the sector, with legal firms accounting for 40% of the top ten rents in regional markets and 35% of the lettings being for prime office space. This demand for premium, high-end office spaces in cities like Leeds, Manchester, and Birmingham often results in rental rates that surpass those in other sectors. This is also translating into stronger investment values, and there is currently the narrowest gap in regional and London prime office yields since 1993.

But while law firms are taking lots of space, development pipeline remains constrained and, in some areas, demand may soon exceed availability. However, rents in key markets are getting closer towards the critical threshold required to unlock development viability.

Furthermore, the growth of legal (and accountancy) practices are excellent barometers for the health of the wider office economy, and in these key regional markets, the cities are also benefiting from growing business ecosystems in sectors like technology and finance.

Retail sales: “All the right volumes, just not in the right categories”

So said the CEO at AO last month of a ‘Morecambe and Wise summer’, which articulates nicely the challenges retailers face in meeting the often unpredictable needs of consumers. Autumn is often too warm, too wet, or too cold. Black Friday is moved into December. England perform well at the World Cup and people buy TVs, not pints. Consequently, the market can be overly downbeat when reflecting on trade from one week to the next, when in fact the wider narrative is spelled out over months, not weeks.

Consequently, retail sales fell back in October following three months of growth, but the overall trajectory is at least heading in the right direction, and the recent faltering has been more pronounced for online than in-store retail.

There are no tangible indications that trade in retail’s Golden Quarter is going to be muted, at least in terms of year-on-year spending. But predicting how this spend is going to be directed is no less challenging. Black Friday, when a quarter of consumers planned the bulk of their Christmas shopping, fell later than usual, thus impacting November’s figures. Retailers have reported a strong weekend performance, with in-store and full-price both doing well, indicating that Black Friday has evolved from being primarily online and discounted. Most large retail brands appear fairly upbeat about their prospects as the year draws to a close and they sit down to this year’s Christmas special.

In the new year, all eyes will be on April, but so far occupational markets have seen few expansive brands indicating a slowdown in plans post-Budget, and most activity we have recorded remains buoyant – albeit unsurprisingly, when looking for the best space. 

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