Making the Grade, a new report out today by Centre for Cities and supported by the British Council for Offices, shows that there is a striking mismatch between where offices are needed in the UK and where they are being built. According to the report, towns and cities which had higher rates of office based employment in 1998 performed better over the subsequent decade across a range of economic indicators. Despite this growing importance of office space in UK towns and cities, the supply of office space has not responded to demand.
To help the country to recover from recession it is essential that buoyant* towns and cities with dynamic economies have enough office space to support businesses to grow. The report highlights that some of the UK’s strongest small to medium sized town and city economies, have seen the lowest net floorspace growth over the last decade.
In 8 out of 10 of these fast growing cities, such as Reading and Aldershot, demand far outstrips supply. Across these towns and cities it costs on average 50 percent per square metre more than the national average to lease an office for a year. Yet the rate of office building has not responded to these high prices and the increase in office space in most of these cities has been well below the national average.
Conversely some of the UK’s more vulnerable economies such as Bolton and Blackburn have seen the most growth in floorspace despite having much weaker property markets. For example, between 2000-2008 around 58 new offices were established for every 1000 new office jobs in Blackburn. In Milton Keynes, one of the UK’s fastest growing cities, the figure was 35.
The table shows that whilst ten of the fast growing towns and cities have higher than average rents only York and Crawley have seen higher than average growth in office space:
The research suggests two reasons why smaller cities are not seeing the growth in office space needed to meet demand. Firstly new office development is only possible where land is available and where local authorities will allow it. Secondly bigger cities are less risky for investors and developers which means that many preference the UK’s biggest cities over smaller more dynamic cities.
The report recommends that cities with high demand for offices need to make a better case to the property industry to ensure that its key players are more aware of local development opportunities. To maximise the choice of development options for developers and businesses, cities should work closely with their neighbouring authorities and work with existing businesses to pre-empt growth.
“Some of the UK’s most dynamic towns and cities are not meeting demand for office space and this could ultimately hinder the growth prospects in those places.
“In a time of national economic uncertainty, smaller, dynamic city economies will play a key role in kick starting future growth. Without adequate quality office provision in these cities the service sector, likely to be instrumental on the road to recovery, will not be supported to grow. Local government and the property industry must work together to address this issue as a priority”.
“This report highlights the importance of offices to the growth of towns and cities and to the economic recovery of the UK as whole.
“It also shows that many UK towns and cities with best potential for growth are being held back by a lack of suitable office space. This is a missed opportunity. Well designed, flexible office space, let on flexible terms will help drive growth now and in the future.”
NOTES TO EDITORS
*The report identifies five different types of towns and cities, ranging from ‘Buoyant’ to ‘Struggling’. ‘Buoyant’ towns and cities are those with the most potential for economic growth, many of which are relatively small, such as Brighton and Milton Keynes. This typology was taken from Centre for Cities’ 2010 report Private Sector Cities.
**The index is derived from the average rateable value assigned to offices in each city. Rateable values, which are used to calculate the business rates that firms must pay on their property and are designed to reflect the value of the property. They are used as a proxy for rents in the research because there is no consistent data series available for office costs across all of the UK’s cities.
Full list of barriers and recommendations in the report:
The report identifies three main barriers to office development in buoyant towns and cities:
1. Land supply and planning: New office development is only possible where land is available and where local authorities will allow it.
2. Public sector investment: In some cases, excess office space in struggling towns and cities has been influenced by investment from the public sector.
3. Currently, bigger cities are less risky for investors and developers: Larger cities usually provide a higher level of overall demand, a larger existing pool of safe occupiers, more occupier churn and higher rental values; all factors which reduce the risk on investment. Larger cities can also accommodate bigger developments, which involve larger investment deals which can reduce transactional costs when compared with investing in several smaller developments. These cities are also better known amongst foreign investors in a market where, in 2011, over half of the investment in UK regional offices came from overseas.
The report also makes the following recommendations to help drive growth in smaller, dynamic cities:
1. Towns and cities should work closely with their neighbouring authorities to maximise the choice for developers and businesses: Cross boundary collaboration can bring benefits of economies of scale for inward investment attraction and boosting their national profile and create a greater choice of potential sites for both residential and commercial development. It will also create more efficient infrastructure planning in order to give people access to new jobs and create a larger pool of labour for businesses. This should lead to the city becoming less dependent on the pre-let market which slows growth.
2. Towns and cities should proactively work with existing businesses to pre-empt growth. The key here is to understand what space provision existing businesses need, and potentially will require, and work with developers to respond this.
3. Smaller towns and cities also need to raise their profile with national property agents. National agents have access to a large number of potential occupiers and investors which cities would like to accommodate.
The Centre for Cities is grateful for the support of BCO for this independent report. Except where otherwise indicated, all views expressed are those of the Centre for Cities and do not necessarily reflect those of BCO.
The British Council for Offices’ (BCO) mission is to research, develop and communicate best practice in all aspects of the office sector. It delivers this by providing a forum for the discussion and debate of relevant issues.
Press and External Affairs Officer