02How does the supply of commercial property vary across cities?
Office space dominates commercial space in city centres, accounting for half of all space, as shown in Figure 1. Retail also takes up a large share, accounting for a further quarter of all space, while food and drink accounts for 6 per cent.
In the suburbs, industrial space dominates, accounting for 55 per cent of the total floor space. This is followed by retail (15 per cent), office (12 per cent) and warehouse (7 per cent).
This split plays out at the individual city level too. While the exact share of each type of property varies across cities, in most cases there is still a clear shift from office and retail in the city centre to industrial in the suburbs. In Leicester, for example, the city centre has more retail than the average, and more industrial than average in its suburbs. But the variation between the two parts of the city is similar to the pattern seen in Figure 1.
The property offers of city centres and suburbs are determined by their exporting base
The main explanatory factor behind these patterns is the different business investment city centres and suburbs receive. The occupiers of office and industrial space are predominantly exporting firms – those which sell to regional, national and international markets – who in theory could locate anywhere as they are not tied to any particular market. But in practice, different exporters have different location preferences.
High-skilled services exporters, in particular, show a clear preference for city centres – 25 per cent of England and Wales’ high-skilled service exporter jobs were based in city centres in 2011, despite these locations accounting for just 0.1 per cent of land.1 This is because of the benefits that successful city centres offer, namely access to lots of high-skilled workers and a network of highly-skilled businesses. City centres tend to be more expensive places to locate but these companies are willing to pay a premium to access these qualities.2 As a result, city centres are dominated by office space.
A city centre location is not ideal for most manufacturing and logistics operations. Instead, access to lots of land and good transport links has a heavier weighting in their location decisions. This means they tend to set up in either the suburbs of cities or the hinterlands around them where land is cheaper and they can still access a large number of workers without the costs of a city centre location. This is why industrial space is much more dominant in the suburbs.
But there is a great deal of variation in the property composition across cities – no two city centres or suburbs look quite the same. Previous Centre for Cities research has shown that the ability of city centres and suburbs to attract high-skilled exporters varies across the country, as shown in Figure 3. The stock of commercial property in each city centre and suburb varies depending on this ability.
Box 1: A typology of city centres and suburbs
Previous Centre for Cities analysis has categorised city centres and suburbs according to their ability to attract high-skilled exporters. Figure 3 plots the share of exporters against the proportion of these exporters that are high-skilled for all city centres and suburbs. It also splits cities into quadrants depending on whether they are above or below the national average.
For the purposes of this report, we present our analysis for two of these four quadrants – strong and weak city centres – as this allows us to illustrate how trends play out in city centres at opposite ends of the scale. These two groups, based on how successful each city centre is at attracting exporters and skilled workers, are:
- Strong city centres have a higher than average share of jobs in exporting firms, and a higher than average share of these exporting jobs are high-skilled.
- Weak city centres have a lower than average share of jobs in exporting firms, and a lower than average share of these are high-skilled.
There are a few city centres which have different business investment patterns and do not fit these two groups. ‘Moderately strong’ city centres have a lower than average share of jobs in exporting firms, but a higher than average share of these being high-skilled. ‘Moderately weak’ city centres have a higher than average share of jobs in exporting firms, but a lower than average share of these being high-skilled.
The same analysis can be done for the suburbs. However, because exports and skills push in opposite directions for suburbs, they are instead referred to as high and low-skilled:
- High-skilled suburbs have a lower than average share of jobs in exporting firms, but a higher than average share of these jobs are high-skilled.
- Low-skilled suburbs have a higher than average share of jobs in exporting firms, but a lower than average share of these jobs are high-skilled.
Again, some suburbs do not fit the wider suburban pattern. Those in the top right quadrant have a higher than average share of jobs in exporting firms, and a higher than average share of these exporting jobs are high-skilled. Those in the bottom left quadrant have a lower than average share of jobs in exporting firms, and a lower than average share of these are high-skilled.
It is important to note that a city’s centre and suburbs are often in different quadrants. For instance, Birmingham has a strong city centre but low-skilled suburbs, while Blackpool has a weak city centre but high-skilled suburbs. See Appendix 1 for a detailed list of these groups.
The ability of a city to attract exporting businesses – particularly highly-skilled ones – matters because it is these firms which lead productivity growth. The varying concentration of high-skilled exporting businesses in cities is leading to the very different levels of productivity. For cities to successfully raise productivity, they need to focus on attracting more high-skilled exporters.
Deindustrialisation and the growth of jobs in the services sector have increased the importance of city centres in the national economy. As the specialisation towards high-skilled activity continues, their economic role will strengthen further. Possessing the right qualities to attract high-skilled exporters into city centres is becoming an ever greater priority for driving local and national economic growth.
The question for cities is: are differences in patterns of commercial space use associated with economic performance, and if so, what does this mean for local industrial strategies as they aim to improve productivity in their areas?
Successful city centres are dominated by office space
The vast majority of exporting activities in city centres are office based. Given this, to attract such exporting businesses, city centres need to offer appropriate office space alongside the other qualities, such as skills and transport, these businesses look for.
In strong city centres, 62 per cent of all commercial space is occupied by offices, as Figure 4 shows. This is almost three times as much as the share of space given over to offices in weak city centres.
Not only do strong city centres have a larger share of office space, the quality of this space is also higher. Using the energy efficiency of offices as a proxy for quality (see Appendix 2 for details), 27 per cent of the offices in the most successful city centres can be shown to be of high quality, as in Figure 5, while in weaker city centres only 18 per cent of offices are of high quality. In combination with the lower share of city centres that is office space, this suggests there is a large gap between strong and weak city centres for high-quality office space.
The low share and quality of office space in weak city centres is due to the lack of private investment in the office market over recent decades. Private sector-led investment in these cities has been rare because of a lack of demand for office space. This is because these cities have a shortage of the characteristics which city centre exporting firms value, such as skills, agglomeration economies, and knowledge spillovers.
In some struggling city centres, improving economic performance may require the provision of more high quality office space alongside improvements to skills and transport.
Many weak city centres have too many shops
Retail space is much more dominant within weak city centres than strong ones, accounting for 43 per cent of floor space compared to 18 per cent, as shown in Figure 4. The ratio of office to retail space changes dramatically between these different city centres. For every square metre of retail space, there are 3.4 square metres of office space in city centres like London and Bristol. In weaker city centres like Doncaster and Sunderland, for every square metre of retail there is only 0.5 square metres of office space.
Weak city centres dominated by retail do not have enough demand to sustain all these shops which is why so many lie empty. Using data from the Local Data Company (LDC), Figure 6 shows the share of the high street services which are vacant in city centres across the country. For the purposes of this report, we group together retail, food and leisure properties to represent these high street services.
The share of high street services which are vacant ranges from 24 per cent in Newport to 7 per cent in Cambridge. City centres within the Greater South East – the most productive group of cities – on average have much lower vacancy rates than cities in other parts of the country. Cities in the East Midlands, Wales, and across the North tend to have higher vacancies. Retail vacancies drive this trend, accounting for 76 per cent of all vacancies but only 65 per cent of properties in the LDC data.
Previous Centre for Cities research has shown that in strong city centres, the dominance of office space provides greater footfall each day for their retailers and leisure businesses, such as restaurants and gyms. In contrast, city centres dominated by shops and with few exporting firms struggle to provide enough daily footfall to sustain the high street.3
This is illustrated in Figure 7 which shows how a city centre’s exporting base, as defined in Figure 3, determines its level of high street vacancies. The size of the bubbles represent the vacancy data in Figure 6. It can be seen that strong city centres in the top right have the lowest vacancies — 9 per cent on average — while weak ones in the bottom left struggle with the highest rates of empty properties — 16 per cent on average.
This is particularly concerning given the ongoing struggles of a number of high street retailers. But the national story about retail’s troubles ignores how some cities will be hit more than others. Weak cities are particularly exposed to these changes. Not only do current retail vacancies already show their city centres are struggling, but ongoing structural changes in retail leaves them vulnerable considering how much of their city centre is given over to shops.
Reducing the reliance on retail will require both attracting in more city centre exporters and removing excess retail space. Retail units will either experience pressure from the private sector to be converted or city intervention may be needed to repurpose them for uses in higher demand or for improvements in the public realm.
Of course, strong city centres are also exposed to these structural changes. But retailers faced with a choice of which stores to close are unlikely to pick those in the most profitable locations, so they are less likely to pull out of the most successful cities. House of Fraser recently closed 31 shops in cities including Doncaster, Birkenhead, Middlesbrough, and Telford, but they kept them open in London, Reading, Edinburgh, Glasgow, and Bristol.
Strong city centres have more diverse high street services
Not only do strong city centres house more exporters, they also support more food and leisure activities. In these city centres, 24 per cent of high street services are food and leisure, as Figure 8 shows, and the corresponding low vacancy rates show there is sufficient customer demand to sustain them. In weaker city centres only 15 per cent are in food and leisure, on average, but vacancy rates are higher.
Figure 8: Supply of food and leisure space in city centres and vacancy rates of high street services, 2017 – 2018
While the nature of shopping will continue to evolve, other high street services such as restaurants and yoga classes are arguably less vulnerable to these structural changes. Strong city centres are better placed to respond to these challenges because the large exporting base from their office jobs is already consuming and supporting more diverse high street services that are less exposed to structural change.
Box 2: Commercial property in the city centres of Leeds and Doncaster
Leeds and Doncaster are in opposite city centre groups and these economic differences in their industrial structure can clearly be seen in their commercial property. While over half of Leeds city centre’s commercial space is taken up by offices, less than a fifth is in Doncaster. Doncaster’s city centre has twice as many shops as offices, while Leeds has two and a half times as many offices as shops. The quality of Doncaster’s offices is poorer – 12 per cent are high quality compared with 32 per cent in Leeds. Doncaster also has more industrial and warehouse space in the city centre than Leeds and food and leisure account for a greater share of Leeds’ high street services than Doncaster’s.
As a result, Doncaster city centre’s dominant retail market is supported by a much smaller exporting base than Leeds. This contributes to Doncaster’s high street vacancy rate of 18 per cent . A retail intervention such as building a new high-quality shopping centre would not change these underlying fundamentals, and at best will just move shops around the city. Improving the performance of Doncaster’s city centre means getting more exporters into the city centre, to both improve headline productivity and better sustain high street services.
There is less variation in the make-up of suburban commercial space
Both high-skilled and low-skilled suburbs have much more industrial and logistics land than city centres.
Nevertheless, high-skilled and low-skilled suburbs are distinct, as shown in Figure 10. High-skilled suburbs have much more office space (17 per cent) than low-skilled suburbs (7 per cent), and less industrial space (45 per cent compared with 63 per cent in low-skilled suburbs). Low-skilled suburbs also have over twice as much warehouse space (10 per cent) than high-skilled suburbs (6 per cent).
Suburbs tend to find that as they increase their exports, the skill level of their exports decreases. This results in suburbs tending to diverge between those with a high-skilled but small exporting base and those with a low-skilled but large exporting base, unlike city centres.
This trade-off between skills and exports in the suburban quadrants introduces a tension into the Local Industrial Strategy that was not present for city centres. As exports and skills pull in different directions, cities will find it challenging to increase the productivity and employment of suburbs at the same time.
Office quality is better in suburbs than in city centres, even though high-skilled firms preferring suburban office space are rare
Office space is much less common in suburbs than in city centres. But some offices are located in suburbs both as a result of some occupiers’ preference for out-of-town locations, and policy interventions by cities to build business parks outside of urban areas.
As a result, the quality of the offices of weaker city centres is worse than in their suburbs. Looking across city centres, in strong city centres about 27 per cent of offices are high quality in both the centres and the suburbs of those centres. But in weak city centres, only 18 per cent of offices are high quality compared to 26 per cent of offices in their suburbs.
This will in part be a legacy effect of decisions made by some local authorities to permit out of town office parks rather than provide new office space in the centre. In practice, the record of such decisions has been disappointing for cities which have not been able to attract high-skilled firms which need suburban locations. Previous Centre for Cities research has highlighted that subsidised business parks in weak suburbs such as Newburn Riverside in Newcastle have tended either to be filled with firms engaged in low knowledge activity such as call centres or subsidised again through public sector occupancy.4
But some suburbs do have productive firms, and these high knowledge suburbs have more office floorspace as Figure 10 shows. This implies that not all work that takes place in offices in suburbs is low value-added activity such as call centres, but that some are relatively high-skilled.
But high knowledge firms that prefer suburbs are rare, and they appear to be distinct from other kinds of high knowledge employers as Box 3 indicates. In cities like Cambridge and Warrington with strong suburbs, the commercial space they need is present, but it is unclear whether building offices in weak suburbs is enough to attract new high-skilled firms of this type, especially if they also require specialised skills.
Box 3: Why is some high knowledge work in the suburbs?
Previous research from Centre for Cities has shown that high knowledge firms in suburbs tend to need either a large amount of land and/or more control over their spillovers than other kinds of high knowledge firms. As an example, “technical” high knowledge jobs prefer to locate outside of Crawley city centre. This would include industries that are security conscious and land intensive, such as nuclear and forensics in Warrington and pharma and life sciences in Cambridge.
Spillovers do happen in business parks between these types of firms. Firms in the nuclear supply chain at Birchwood Park in Warrington have indicated that they all need to be within 5-10 minutes’ walk from each other as they often do business with each and draw from the same skills in the labour market.
Another factor that emerged from interviews was that these location decisions may arise from demographic factors underpinning amenity preferences. While younger workers prefer city centre locations to enjoy available amenities, high knowledge industries with an older workforce such as nuclear may prefer more suburban amenities such as green space.
57 per cent of people in high-skilled occupations in city centres are aged between 35 and 75, compared to 67 per cent in suburbs. High-skilled occupation workers in city centres are younger than those in suburbs in every city in England and Wales except Crawley. If these are deliberate preferences by older workers, high-skill industries with disproportionately older workforces might prefer suburban locations as a result.
The average quality of offices in weak city centres is, therefore, lower than in their suburbs, and high knowledge firms that can drive growth in suburbs are rare. Improving productivity through interventions in the suburban office market is, therefore, more challenging than in city centres. The typical suburban office market has less need for new stock, and attracting high knowledge firms to suburban offices will be more difficult than in city centres due to their rarity.
As city centres are likely to grow in economic importance in the future due to agglomeration economies and the continued shift towards high-skilled service jobs, the office challenge for most cities will be how to improve the appeal of their city centres.
Industrial space is in decline but logistics is becoming more important
In contrast to retail, the logistics market has strengthened, as the trend towards online commerce drives growth for logistics space. This is in contrast to long-term trends in falling amounts of industrial space due to deindustrialisation.
In cities, total industrial and logistics floorspace has fallen by almost 12 per cent since 2001. In contrast, the total amount of industrial and logistics floorspace fell by 4 per cent in non-cities, according to the Valuation Office Agency data on uses in commercial property shown in Figure 12.
In cities such as York and Oxford, almost a third of industrial and logistics space has been lost. Large cities such as London, Leeds, Birmingham, and Manchester have also each lost just under 20 per cent of their industrial and logistics floorspace. Manufacturing employment has fallen, and much industrial land in stronger economies will have been reallocated to uses in higher demand, including residential.
Cities which have seen much smaller falls such as in the North West or the Sheffield City Region may though not be experiencing enough growth to encourage landowners to take on the risk of changing these plots to more productive uses. In these cities, interventions to remediate brownfield land may be necessary, especially in or near city centres. However, there are a few cities where the total amount of industrial and logistics land has increased. Doncaster, Milton Keynes and Northampton have seen an increase since 2001 in their total industrial and logistics floorspace, but also now have some of the greatest amounts of warehouse space in their suburbs of all cities.
This suggests that the growth in demand for logistics floor space has been especially strong in a few cities. These tend to offer excellent transport connectivity, for instance, the famous ‘Golden Triangle’ for logistics in the Midlands including Northampton and Milton Keynes has strong motorway links and can reach over 90 per cent of the UK’s population in four hours. ‘Big sheds’ are placed in the suburbs of these cities to serve the national market.
Every city will need logistics space, if only for ‘last mile’ deliveries which account for nearly 30 per cent of total logistics market costs. While the big sheds in the Midlands serve the UK market, serving individual city markets requires logistics space in each city. The largest costs facing firms for last mile logistics is that of land – particularly in larger cities with big populations and a complex delivery market.
Although logistics space is in high demand and appears likely to remain a source of modest jobs growth in the near future, automation has the potential to change its employment potential over the longer term.
Cities Outlook 2018 noted how elementary storage occupations represent 7 per cent of all the jobs in cities that are likely to be automated through to 2030, with Northampton and Wakefield seeing 12 and 18 per cent respectively of their workforce in this sector at risk.5
As a glimpse of what this would look like, Ocado’s highly automated warehouses are receiving increased attention and experiments with drone deliveries are continuing with mixed success.6 For now, progress is slow, but these types of innovations will likely reduce the logistics industry’s ability to provide future employment growth.
For cities that are overly reliant on logistics for jobs growth, this context of high logistics demand combined with forthcoming structural change has specific implications.
A few cities will remain dominated by logistics because of their physical advantages from infrastructure and access to the national market, but demand for smaller sites and uses will continue to grow in most cities.
As part of the Local Industrial Strategy, releasing more land in suburbs for large sheds will be appropriate for cities with the physical advantages and the demand that logistics need. Over the longer term, delivering prosperity in cities will require supplying commercial space to meet every kind of demand.
Box 4: Commercial property in the suburbs of York and Northampton
York and Northampton are in the opposite suburban quadrants, and these differences are reflected in their commercial property offerings. Like most suburbs, both have almost half of their suburban commercial space in industrial land, and offices are less common than in the city centre. But the rest of the commercial space is allocated quite differently. York as a high-skilled suburb has more office (14 per cent) and retail and food and leisure (21 per cent and 6 per cent) while Northampton, as a low-skilled suburb, has much less in each of these categories (8 per cent, 7 per cent, and 2 per cent respectively), and has 35 per cent of all suburban commercial space as warehouse, compared to York on 2 per cent.
This indicates the particular strengths and weaknesses of each city. While York is relatively high-skilled, it has also lost the second most absolute amount of industrial and logistics land of any city – a 30 per cent decrease. While it may have been successful at recycling brownfield land in the centre, a combination of a tight green belt and low logistics space suggests that York may be beginning to experience pressure for releasing some green belt land for logistics uses. In contrast, while Northampton has clear strengths in logistics, a weaker skills base remains a challenge. The city should make the most of its advantages in logistics, but recognise that continuing to drive economic growth will require some additional attention to the city centre.
Summary of findings
- Strong city centres have more and higher quality office space than weak city centres.
- Weak city centres are frequently over-reliant on retail and do not have enough exporting activity to support their high street services.
- Suburbs tend to be dominated by industrial space. Earlier attempts to drive economic growth in the suburbs of weaker cities through business parks have achieved success in only a few cities which possess high knowledge suburban firms.
- A reallocation of land away from industrial and logistics uses has occurred in almost all cities, especially those with stronger economies.
- Logistics is increasingly important in those suburbs with good infrastructure links, but a sufficient supply will be needed in small amounts in all cities to serve the local logistics market.
What does this mean for cities looking to increase productivity through the industrial strategy?
- If weak city centres are to attract the high-skilled exporters who drive productivity they need to be able to offer more high-quality offices.
- Alongside this, they need to reduce their reliance on retail because they have more shops than they need for their level of customer demand, especially when it is space that could be providing offices or other uses.
- Suburbs are not the priority for interventions in office space in most cities.
- Cities with weak economies may need to intervene to accelerate the conversion of low-demand industrial land to other uses, while stronger cities may need to protect industrial and logistics land where it is scarce.
- But cities need to be aware that employment in logistics activity is at risk of automation in the longer term, meaning they should not rely on this space for future jobs growth.