04What role should the public sector play in delivering this commercial space?
Where market failures are currently limiting economic growth, interventions by the public sector are justified to ensure quality commercial space is provided in cities. But the supply of new commercial property alone will not raise productivity. These interventions should be viewed as one tool within the broader Local Industrial Strategies.
This implies roles for local government in city centres and suburbs, and national government on the policy level, as part of a wider industrial strategy encompassing skills, transport, and housing.
Policy recommendations for national government
The Government should acknowledge that within the Local Industrial Strategy, there is a limited role for the public sector in improving city centres’ commercial property offer.
1. Use the Shared Prosperity Fund (SPF) to assist the redevelopment of city centres
The ERDF has played a prominent role in supporting new commercial space in UK cities. When this is no longer available, the SPF should be used to provide similar support. Cities themselves are asking for this — the Greater Manchester Combined Authority has stressed the importance of the ERDF for the supply of recent new commercial space in Manchester including Citylabs, MediaCityUK, Logistics North and the Cotton Building.
The SPF’s role will be particularly important in weak city centres due to the market failure which limits office development despite their lack of supply and the poor quality of existing office space. The SPF’s commercial property objectives should be to ensure that every city has a sufficient supply of high-quality office space in the city centre to better meet demand and to assist in the conversion of excess retail to other uses.
2. Prioritise commercial space in city centres and offering exemptions for permitted development rights
The Government should put more emphasis on and better protections for city centre office space. Permitted Development Rights (PDR) have increased the supply of housing in unaffordable cities, but partly through an unsustainable loss of central office space. A combination of prioritising planning in city centres around office space and reducing restrictions to more and denser housing in suburbs would alleviate these pressures.
3. Business Rates should be reformed to help cities develop city centre offices
Government should implement business rates reforms called for in previous Centre for Cities research to encourage cities to allocate more space in city centres to offices. These include more frequent revaluations of commercial property to increase certainty for business and make the property supply more responsive to market demand; removing the cap on total yield generated to allow local authorities to capture land value growth; and pooling of business rates across city regions to allow the benefits of strong city centres to be felt across the wider economic area that they rely on. Combined, these changes would encourage cities to drive economic development in their city centres and meet the demand for office space in them.
Policy recommendations for city centres
Supporting high-skilled exporters should be the purpose of any Local Industrial Strategy intervention in city centres’ commercial property. Exporters not only drive increases to city-wide productivity, they also support high street services such as retail in city centres. Barriers to city centre exporters such as skills,transport, and commercial property should be identified and addressed by cities and local partners.
1. Weak city centres should be remodelling their city centres to become more attractive to productivity-driving exporters
City centres in weaker economies tend to have fewer, and poorer quality offices than strong city centres of the high quality space that high-skilled firms need is the immediate constraint on growth. The private sector is not delivering the higher quality offices required by productivity-driving firms in these city centres because the market is not proven, and office rents are too low to make private sector-led development viable. Interventions should start small and improve office space step-by-step in order to keep pace with demand and avoid oversupply.
One option is for cities to develop offices themselves, such as Warrington’s intervention in The Base. This gives the city control over design, construction and tenants, but also involves significant risks. Cities should avoid large schemes in order to minimise this risk. Barnsley’s 96,000 square feet Gateway Plaza building opened in the city centre in the immediate aftermath of the financial crisis, and the council ended up having to occupy 78,000 square feet of the building. This results in a double subsidy for office development from the public sector – once for construction, and again for occupancy – and fails to attract in the high knowledge firms needed to increase productivity which would be the purpose of any such intervention.
Cities should partner with universities, Chambers of Commerce and other local institutions to deliver new commercial space. As Liverpool and Newcastle have shown, they are also an important way cities can take a leadership role of their city and its growth in the LIS.
Applications should be made to the Shared Prosperity Fund to finance future commercial property schemes in city centres. The European Regional Development Fund has played an important role in supporting cities engaged in city centre office interventions. The Transforming Cities Fund and other sources of funding such as the Strength in Places Fund may also be appropriate for specific schemes. The metro mayors can help unlock this funding for the cities that have them.
Cities with lots of low quality, vacant offices should intervene to reduce this space. Occupiers are becoming more discerning about the quality of office space, and increasingly expecting features such as co-working and flexibility. Low-quality office in city centres with weak demand will not be able to drive the growth in exporters that these cities need – instead they drag down rents and cities’ amenity offer. Permitted Development Rights have flipped some of this poor quality office to residential in some cities, but if the private sector is not refurbishing or converting this space, then the city should step in.
Weak city centres should reduce their reliance on retail. In the long term, the retail solution for these city centres is the same as the office solution – attracting more high knowledge exporters in the city centre will produce more customers for the shops. But if they have too much retail space, achieving this may require some cities to intervene to repurpose their high streets.
In some circumstances, the replacement of buildings with new structures to fit new uses will be needed. Some retail units are easier to convert than others, as for example Victorian promenades are easier to convert into flats and office space than steel sheds or modern retail units which would need to first be knocked down. In the suburbs of some of these cities, this may include switching retail parks to uses like residential and logistics, or mixed uses for these high demand spaces.
But in the weakest city centres, repurposing vacant or poor quality retail for improved public realm such as playgrounds and parkland may be the best option. Where demand for uses other than retail is also low it may not be plausible to convert all retail into new uses and risks swapping vacant shops for merely other kinds of vacancies.
2. Stronger city centres should respond flexibly to changing occupier demand
Stronger city centres are much more likely to have an office offer which suits productivity-driving firms and where improvements are needed the private sector is often incentivised to deliver these. As a result the role for the public sector in property development in these cities is to shape city centres rather than delivering new space.
Previous Centre for Cities research has shown that competition for space is squeezing commercial property in many of these city centres, as demand for housing grows. These city centres should ensure they balance high quality offices with residential space, given the commercial importance of these central areas.
Stronger cities should facilitate the shift of city centres away from retail and towards food, drink and leisure uses through local plans and reallocating space. A structural shift in high street services away from shops and towards services appears to be taking place. The most successful city centres are already well placed to adapt to and benefit from this, but can only do so if they respond to changing demand on the high street services rather than attempting to sustain an oversupply of retail.
Policy recommendations for suburbs
1. Cities should ensure there is sufficient space for logistics and distribution to match demand
In many cities, the demand for logistics is growing. Supporting this growth and allowing these developments to benefit cities requires a leadership role from cities.
Stronger cities need to allocate and reserve land for logistics uses in their local plan. Large depots will also be needed on the outskirts of cities, including on green belt land next to key infrastructure. But larger cities are experiencing increasingly tight competition for space for logistics inside urban areas, and it is important that sufficient land is provided for last-mile delivery activities. Measures such as the GLA’s protection of strategic industrial space may not currently be necessary outside of London, but larger cities should carefully watch London’s experience with this policy and compare it to their own.
Cities should experiment with innovative uses of logistics space. Multi-storey logistics and mixed-uses between residential and other innovations as in Silvertown and Kings’ Cross can ensure land is used as efficiently as possible.
Cities should not subsidise the supply of logistics sector property. Demand for logistics space is high and it drives private sector activity in this market. In weaker cities, the private sector will look for prime plots of land with exceptional transport links to meet a broader demand for logistics from the UK economy as a whole. Direct subsidy to entice logistics space will rarely be able to change these characteristics.
Weaker cities should be cautious about relying on logistics as a strategy to increase productivity. While logistics firms will bring jobs and investment, and automation may eventually raise the productivity of a small number of those jobs, weaker cities relying heavily on logistics space risk replicating low-skilled patterns of work. If automation becomes more prevalent, then it could replace many newly created logistics jobs if cities are unable to improve their skills base in the meantime.
2. Cities need to manage the de-industrialisation of land
Some cities will need to take the lead in remediating brownfield land. In many cities, industrial floorspace has fallen over the past 20 years in response to a decline in manufacturing employment. However, some cities, especially those with weaker economies, have seen much lower falls. In these cities, in particular, private developers are reluctant to decontaminate old brownfield land as the returns on development are too low. Land remediation led by local government is especially appropriate in order to correct for blight and unlock new land in city centres that is appropriate for dense office spaces, as in Newcastle. The new Brownfield Research and Innovation Centre in the West Midlands will be an important source of expertise for cities, and national funds such as the Home Builders’ Fund are intended to support the development of residential property on brownfield land.