The Subplot | US buyers, WeWork, student housing

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England and North Wales.

THIS WEEK

• Here come the Americans: US developer Trammell Crow brings overwhelming firepower to Northern offices. It means business
• Elevator pitch: your weekly rundown of who and what is going up, and who is heading the other way

THE AMERICANS ARE COMING, AGAIN

The Northern office market gets a new player

CBRE’s US-based investor-developer Trammell Crow Company, the US’s largest real estate developer, has acquired London-based office developer Candour and with it a high-value Manchester office development site. TCC wants to explore Leeds, too.

Here come the Yanks – as they periodically do in Northern property markets. Trammell Crow Company has made a big European office debut for a super-big name: TCC has $15.4bn projects in process and $14.5bn in its pipeline. TCC wants to buy more Manchester office sites, is keeping its eyes on two or three Leeds office opportunities, and you better believe it means business. But what’s the logic of investing on this scale at a time when others are bailing out?

Against the trend

TCC is defiantly counter-cyclical. The bail-out from Northern offices is turning from summer drizzle to autumn shower. In the last month, Abrdn is off-loading at 101 Princess Street in Manchester, having already shifted a couple of others, and Swiss Life is getting rid of 86 Deansgate. A string of other sales is imminent.

Logical moves

The logic of the TCC move goes like this: the US office market is in tatters (far worse than Europe for all kinds of structural reasons). Since most money comes from, or is touched by, US fund managers or investment committees, this has soured the mood for everyone everywhere. And that’s wrong.

For US investors, the UK market looks fairly bonny in comparison to home. The bleak mood had knocked back pricing and suffocated efforts to supply a market where some very real demand still exists. Which is excellent – a vastly diminished supply pipeline is super-good news. So gather your courage, take a deep breath and invest in supplying the kind of offices those occupiers want because you’ll have the market to yourself. Fingers crossed.

Hello Manchester, hello Leeds

Locally, this means a focus on graduate-rich, upbeat cities capable of homing chunky office investment (think £100m and upwards), and capable when the time comes of attracting an equally nice liquid pool of well-funded potential buyers. In practice only two Northern cities fit this bill – Leeds and Manchester.

Talent taker

This is the deal, three months in the making. It is meant to combine TCC acquiring some talented people and a few good development opportunities in one swoop. Candour had about 850,000 sq ft of Grade A commercial projects in the ground and in the pipeline, to be completed now by TCC. Candour’s Toby Pentecost and Dan Rees, co-founders in 2019, join Trammell Crow Company as senior vice presidents and co-heads of UK offices. The immediate focus for the offices team will be continuing the development process for projects in progress, including 39 Deansgate in Manchester.

But risks

“The thesis is that despite office market woes, and negative sentiment, there’s an opportunity.” Daniel Rees, senior vice president at Trammell Crow Company and co-head of the UK office business, tells Subplot. “Offices are being repriced, are starting to look attractive although there is possibly a little way further to go. And it’s my view that there’s too much office stock but not enough good office stock. Negative sentiment is drying up the supply pipeline, as are construction costs, so yes, it’s a brave thesis, it’s counter-cyclical, but it is taking advantage of negative sentiment, not negative fundamentals in the office market.”

Live data

Rees is gambling on a robust pool of real occupier demand. “We have great live data on these markets, we know what occupiers want, and their plans, and we know for sure the office isn’t dead. We also know that working-from-home has peaked, it peaked in 2020, it’s not getting any worse, although we can debate if it’s getting better. So one variable that hit the office sector has topped out,” he says.

Speakers House is go

Best-in-class buildings at best-in-class addresses in Manchester and Leeds are the answer. The Speakers House site at Deansgate is top of the to-do list. A 200,000 sq ft scheme has planning consent and will be built out with a few minor variations. Work could begin as soon as next year if a few boxes get ticked. Rees has an appetite for more in Manchester. “I’ve always loved Manchester, so I was over the moon to get into it because it’s a hard market to crack. And TCC will not be shy of doing more than one building in the city,” he says.

Leeds to follow

TCC also has an eye on Yorkshire. “Leeds has great demographics, and a history of institutional ownership, we know you can exit investment there. It’s not our main focus now, but we are tracking two or three opportunities,” Rees said.

Interesting timing

Is now a good moment for confidence? With deflationary risks growing, and political instability growing, surely Rees has had some moments of doubt? Apparently not. “I’d be nervous for a novice office developer thinking it would work to build on the third-best street on a low budget, that’s a play that would keep me up at night. But doing the best building on the best street for occupiers who we know need and want a home, I’m 100% confident. I feel safe,” he says.

ELEVATOR PITCH

Who is going up, who’s heading down

WeWork teeters after four years on the brink, while purpose-built student housing stutters just a little as a Leeds scheme is unveiled.

WeWork

WeWork, already sunk fathoms deep in trouble after four years of impossible numbers, plunged even lower after a Monday stock exchange filing, which disclosed it had until Monday 6 November to make an overdue interest payment on a £95m bond.

Wall Street Journal, Reuters, and BBC all report the prospect that WeWork becomes WeWere on or around deadline day.

Manchester and London hubs seem full – very, sometimes – but global Q2 figures showed occupancy up only a smidgen and the financials were dire. Efforts to knock back its rent bill have helped a little, but not a lot. It’s still haemorrhaging money. The Q2 loss was about £327m, which is dreadful but an eye-popping £196m better than the same time last year, which was beyond dreadful.

It seems unlikely that the Manchester hubs will close because landlords don’t want that. Landlord rental negotiations are at the root of the current crisis, and legal teams will be working overtime this week on ways to keep the chai lattes flowing.

Leeds student housing

Tuesday saw McLaren Property submit plans for a 332-bed purpose-built student block within shouting distance of Leeds’ university campuses. McLaren said it’s the start of a student district, and it ought to know one when it sees one as the vehicle behind £1.5bn of purpose-built student accommodation and mixed-use commercial developments. McLaren’s UK pipeline is about 6,500 beds thanks to partnerships with developers such as Topland and Barings on St Gabriel’s Hall in Manchester.

The plan lands as investor excitement about PBSA begins to cool, among overseas investors in particular. According to JLL, the year to the end of the third quarter 2023 saw investment volumes plunge by 45% to £2.3bn. Too soon to say if this market has plateaued but it’s one to watch.