Right Place
Right SPACE
Our Carter Jonas commercial property experts have come together, with our research team, to identify and analyse the key catalysts for change within our sectors, considering how development can meet the needs of occupiers and investors, helping to ensure that our cities continue to thrive.
What’s driving change?
Providing the right space
Due to an increasingly diverse range of drivers, the next decade will see more change than ever before. This research assesses potential opportunities and challenges for those who develop, occupy and invest in commercial property.
Enablers and constraints of change
This research is considered in the context of our core commercial markets - Bath, Birmingham, Bristol, Cambridge, Leeds, London and Oxford - where our property experts have the in-depth local knowledge to assess key contributors of change. National commentary is provided by our specialist researchers.
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As part of our research series, the core topics presented within this report will debated in a sequence of regional roundtables and seminars throughout spring 2020.
BRISTOL
CAMBRIDGE
LEEDS
OXFORD
LONDON
BIRMINGHAM
BATH
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The research presented above is part of a comprehensive document produced by our research specialists and local property experts.
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what's DRIVING CHANGE?
View the introductory video to our research, outlining what will drive change in the 2020s
what's driving change?
Change is inevitable, but what’s driving it? We consider four key themes for change; technological advances, ESG, how we interact with property and the nature of growth itself.
This research is considered in the context of our core commercial markets - Bath, Birmingham, Bristol, Cambridge, Leeds and Oxford - where our property experts have the in-depth local knowledge to assess key contributors of change. National commentary is provided by our specialist researchers.
The changing nature of growth
Despite a decisive outcome to the 2019 general election, the economic outlook remains more uncertain than at any time since the financial crisis a decade ago.
Although the Conservative Government has committed to leaving the EU by the end of January, the nature of our future trading relationship will only become clear during 2020. A stable government will help, but many businesses will continue to delay plans for relocation and expansion until this is resolved.
growth sectors
The UK’s growth expectations vary considerably by sector, as our interactive graph illustrates. The further to the right, the higher the expected rate of growth over the next decade.
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Growth, last 10 years (% pa)
Projected growth, next 10 years (% pa)
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Computing & Information Services
SHOW ALL LABELS
Administrative & Supportive Services
Pharmaceuticals
Telecoms
Finance
Health
Public Administration & Defence
Computer & Electronic Products
Insurance & Pensions
Professional Services
Land Transport, Storage & Post
Recreation
Accommodation & Food Services
Retail
Media Activities
Sectors with the strongest predicted growth include:
HEALTH
TELECOMS
FINANCE
Sectors with strong growth, but at a slower rate:
MEDIA
PROFESSIONAL SERVICES
ADMIN & SUPPORT
Computing & information services
5G
Significantly speed up data communication
Enable a major enhancement of mobile broadband services
Facilitate the use of new technologies. For example, Autonomous vehicles will require it
1
2
3
The fifth generation of wireless networking technology will:
However, there are major challenges with its introduction and a significant number of sites will be required for infrastructure such as phone masts and exchanges.
TECHnoLOGICAL ADVANCES
ELECTRIC VEHICLES
A revolution is already under way and will have a huge impact on the way vehicles interface with the built environment.
28,000 public charging points required by 2030, at an estimated cost of around £1.6 billion
Source: Hurry up and… wait: The opportunities around electric vehicle charge points in the UK, Deloitte
However, battery technology is evolving rapidly and as it improves, charging times are likely to reduce. So, demand may peak as electric car usage rises, and then falls over time.
Demand for some existing uses is likely to fall, creating redevelopment opportunities. For example:
Petrol filling stations
Car repair centres
Car parks
Whilst the electric vehicle revolution is very much under way, the mainstream use of autonomous/self-drive vehicles is considerably further off. However, it is already impacting in some areas, for example factories and warehousing.
Technology is increasingly fundamental to the operation of distribution warehouses, in response to the need to improve performance (speed and accuracy), reduce costs, and also address shortages of labour in many key locations.
SMART CITIES
What is a smart city?
There is no single agreed definition for a smart city, but it can be described as an urban location where technology and data are used to improve how residents live, work and consume. Ultimately, this has the potential to change the way cities are developed and how they operate.
All of the core cities considered for this research – Bath, Birmingham, Bristol, Cambridge, Leeds, London and Oxford - have initiatives to identify, develop and promote technology to help address a range of issues. These issues include:
4
5
Energy usage
Air quality
Traffic flows
Community Engagement
Assessing the profile of visitors
Environmental, Social, and Governance issues
ESG:
Environmental, social, and governance issues (ESG) are increasingly being seen as core considerations for companies and those who invest in them.
ESG represents a major shift from the traditionally perceived trade-off between financial returns and environmental, social and ethical benefits. The model of maximizing the value to shareholders is increasingly being challenged, and the needs of other stakeholders including employees, suppliers, contractors, and local communities are being considered alongside pure financial factors.
Legislation will continue to be a driver for ESG, with pressure building on countries to meet agreed sustainability targets.
ESG in numbers
$30
34
11
%
billion
Global sustainable investing exceeded $30 billion in 2018 according to the Global Sustainable Investment Alliance
Overall global sustainable investing has increased by 34% in two years
However, Europe is slower on the uptake with sustainable investing only increasing by 11% in two years
Environmental
This area covers the energy and resources used by a building, and the waste and pollution it produces.
Recently, environmental concerns have experienced a significant increase in public awareness. In May 2019, the UK Parliament declared a climate emergency, the world's first national parliament to do so. Environmental movement Extinction Rebellion has carried out a number of high-profile protests, and 17-year old campaigner Greta Thunberg has inspired millions.
The Climate Change Act 2008 commits the UK to a net reduction in CO2 emissions by 80% by 2050.
Commercial property accounts for 37% of total UK CO2 emissions
Latest figures 2017
It is increasingly recognised that the built environment should have a positive impact on urban spaces and those who live and work in and around it. This includes a wide variety of areas such as fostering relationships with local communities, diversity and inclusion, and labour relations.
A key aspect in relation to commercial property is health and wellbeing, and there is compelling research evidence that good office design benefits employees, and thereby productivity.
social
This area covers how businesses are governed and how responsibly they behave. It includes wide-ranging issues such as diversity, executive pay policies, compliance, and payment of tax.
GOVERNANCE
How we live, work and consume
The way we live, work and consume is changing rapidly, enabled and inspired by technological advancements, and also as a result of changing attitudes and expectations. In turn, this affects what employees and customers need from the buildings they interact with, and ultimately, the nature of property demanded by occupiers.
How we live
Key changes incude:
The ‘sharing economy’ is growing rapidly as online technology enables individuals to rent assets when they need them rather than buy them. For example, car sharing 19.5% of UK households now live in private rented accommodation, compared with around 10% in the 1990s The number of people living in many of our city centres is increasing
How we work
Due to technology and the ability to work anywhere, corporates increasingly view offices as a choice rather than a necessity The serviced office sector has expanded rapidly in recent years and continues to grow at pace The traditional lease length has continued to fall. Today only 6% of leases are signed for 15 years or more.
How we consume
Online retail sales have continued to increase their market share, accounting for over 18% of total retail sales in Q4 2019, compared with less than 11% five years previously Online retail has resulted an increased demand for urban logistics, which is being driven not only by the relentless growth of ecommerce, but also by consumer expectations of more rapid and efficient delivery This shift means that distribution centres are moving their focus away from business to business trade and towards direct delivery to consumers
Click a section below to browse the different elements of this report.
THEME 1
uk economic growth is slowing
THEME 2
We believe the focus of investors will increasingly widen from the buildings themselves to the ESG credentials of those who occupy them. Indeed, there is evidence that occupiers who perform strongly on ESG are also more likely to have stronger covenants.
UK Economic Growth by Decade
Source: ONS/Experian
In city centres, this will create opportunities for the retail and leisure sectors to increase footfall while drivers charge their vehicles.
THEME 3
THEME 4
What are the opportunities and challenges created by the drivers of change? How can development meet the needs of occupiers, helping to ensure that our cities continue to thrive?
The impact of construction activity
UK commercial construction activity has been highly constrained since the global financial crisis. In key office and industrial markets, it has been caused by a variety of factors including market uncertainty, rising building costs, land release issues and competition from alternative uses, rather than a lack of underlying occupier demand. This trend is demonstrated in the graph below, which shows the value of new construction orders in the retail, office, industrial and entertainment sectors (adjusted for inflation, this a proxy for development activity). Commercial development has been at little more than half of the long-term average over the last decade, and well below the peaks seen prior to the financial crisis in the mid-2000s. This illustrates the lack of new and refurbished space coming through and is borne out across our regional researched cities – Bath, Birmingham, Bristol, Cambridge, Leeds, London and Oxford - where development in the office and distribution sectors has been insufficient to meet demand in the current cycle.
New construction orders (development activity) Retail, office, industrial and entertainment
Source: ONS / Carter Jonas
The above graph considers rental growth data from our core commercial regional markets of Bath, Birmingham, Bristol, Cambridge, Leeds and Oxford.
However, the trend varies considerably by sector, as this next graph demonstrates. The smallest drop in activity has been in the industrial and the entertainment sectors, where demand has been strong. Conversely, the retail sector has seen a significant drop, as new development has largely halted and the sector struggles with a structural oversupply.
Value of new construction orders
Demand in the office and most notably the distribution sectors, has been strong across out across our core commercial regional markets of Bath, Birmingham, Bristol, Cambridge, Leeds and Oxford. This has occurred despite the prevailing economic uncertainty and is largely a result of many of the structural changes and drivers discussed in the previous section. With the lack of development, and an increasing focus on high quality property, rental growth has accelerated and been above inflation over the last five years. The below graph illustrates this trend, using average rental values (from the MSCI Index), and our forecasts for the next five years. This illustrates that growth in the office and industrial sectors is projected to continue to be higher than general inflation. This will increase cost pressures for occupiers, although it should help development viability. The chart also shows the divergence of the retail sector, with average high street rental values falling sharply in nominal as well as real terms. Although average rental values are projected to level off over the five-year forecast period, prime rental values could see more prolonged falls, as they undergo a process or readjustment.
Implications for rental growth
Average rental growth Core commercial regional markets
Source: MSCI, REFL, Carter Jonas
Although development has been subdued across our core commercial regional markets of Bath, Birmingham, Bristol, Cambridge, Leeds, London and Oxford, a considerable number of office and mixed-use schemes have the potential to deliver the type of high-quality, flexible space required by today’s occupiers, and to help to cater for economic, employment and population growth. Examples include:
Office/mixed-use schemes
Bath has an acute shortage of office space relative to demand. The Bath Quays South scheme will provide the first new build grade A space in the current cycle (46,000 sq ft, incorporating 10,000 sq ft floorplates).
In Bristol, current construction activity (including the 93,000 sq ft Distillery scheme) will do little to alleviate the supply shortage. Several major mixed-use regeneration schemes are under way or proposed which could significantly increase the city centre commercial floorspace.
Bristol
Birmingham city centre is reaping the benefits of regeneration, with Paradise Circus and Arena Central delivering not only much-needed grade A commercial space, but also major improvements to the public realm. Other area within the city centre with transformational potential includes the 17-hectare Smithfield regeneration scheme.
Birmingham
The Cambridge city centre development pipeline remains highly constrained, with pre-letting a major feature. The CB1 masterplan has seen some significant development and regeneration in the station area of the city, revitalising the in-town market.
Cambridge
Leeds city centre has a severe shortage of Grade A office space, although there is significant potential for commercial expansion. Developer MEPC has received planning consent for the next phase of Wellington Place, which has the potential to create more than 800,000 sq ft of office space plus residential.
Leeds
Oxford city centre is highly constrained by its historic nature. There have been no significant development schemes over the past 15 years, with commercial development currently focused out of town on the key science park locations. Various long term schemes including Oxpens, the railway Station and Jam factory site are muted as providing commercial opportunities however these are all medium to long term proposals.
Oxford
Emerging schemes within each of our core commercial markets will be discussed in a sequence of regional roundtables and seminars throughout spring 2020. Get in touch to find out more about a specific event, or to register your interest in attending.
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With the ongoing logistics revolution, we see no let-up in demand for large industrial units. However, given the bespoke nature of the product demanded by retailers and their logistics operators, developers are cautious about building speculatively. It will continue to be hugely challenging for developers to satisfy the needs of industrial occupiers, particularly in urban locations, where land has become increasingly scarce and expensive. There is also a severe shortage of units for last mile delivery. However, sites will continue to be taken for higher-value residential use, and land values will see further rises. Increasing creativity will be required, and the multi-storey concept could start to gain more traction in some high value locations.
Industrial/distribution
Birmingham has a supply shortage of major distribution units and only limited speculative development, although there is still some activity. A significant scheme of up to three million sq ft of manufacturing and logistics space is planned at Peddimore, where IM has been appointed as the preferred development partner for the first phase of 37 acres. The scheme will include a new junction connecting to the A38.
The Bristol distribution market has seen high demand, coupled with development at several locations with significant potential for expansion, including Severnside, Western Approach and Horizon 38.
The market around Leeds has seen some speculative distribution activity, for example Total Park (over 250,000 sq ft across seven units) and the 261,000 sq ft Super G (now let to Puma). Gateway 45, close to junction 45 of the M1, will be a key focus for future development with a high-speed rail research facility aiming to “transform transport systems across the world” providing a hub for rail design, construction and manufacturing research.
Catering for the knowledge sectors
In Cambridge, the mid-tech market has seen an increase in demand, catering for start-up companies who require a mixture of office, R&D and manufacturing space. Some occupiers are retrofitting traditional light industrial units to accommodate a combination of office, R&D and manufacturing space.
With Oxford’s emphasis on the knowledge sectors, a new innovation district is proposed at Oxford North. The scheme, to be developed by St John’s College, will be focused on high quality start-up space, and could provide up to 940,000 sq ft of commercial space, plus a hotel, retail and residential units. The established science and technology parks including Milton Park, Harwell, and The Oxford Science Park have otherwise continued to provide the focus for development, alongside the conversion of industrial schemes towards R&D hubs.
In Leeds city centre, the Innovation District is focussed around leading academic and teaching institutions including the University of Leeds, Leeds Beckett University, Leeds Teaching Hospital Trust and Leeds Arts University.
Change of use
In England, change of use has been made easier through alterations to permitted development rights legislation. This has allowed office buildings, light industrial or storage buildings and distribution units to be converted into residential dwellings. The same applies to a number of retail uses. This has played a significant role in changing usage over the last few years, predominately in relation to office to residential conversions, adding to supply shortages in many city centre markets. Across our core commercial regional markets, permitted development permissions in Bristol ranked the highest over the last year, with a total of 32 applications granted for residential conversions, closely followed by 27 applications in Birmingham during the same period.
Granted applications for prior approval for permitted developments July 2018 – June 2019
Source: www.gov.uk
An increasing trend is the conversion of surplus retail property to office use. A good example is Milsom Place, a retail and restaurant development in Bath city centre. Despite the resilience of Bath’s retail sector, there is an oversupply of units across the city, and vacant units at the scheme had become difficult to let. In contrast, the city has a long-term undersupply of the centrally located quality office space needed to attract and retain smaller businesses. The structure of older buildings often precludes their redesign to provide elements such as more natural light and other wellness factors. However, significant space can also be provided through change of use, as demand for some sectors falls and increases for others. There are significant opportunities in repurposing unwanted retail property and reinventing town centres, although Local Authorities need to be pragmatic, as well as ensuring responsible development.
enablers & Constraints of change
Commercial property development can be enabled or constrained by a whole host of external factors. Our commercial property experts identified infrastructure as a key generator of opportunities, whilst delays in delivery are a major obstacle to growth.
Infrastructure as a key driver
The benefits are usually most clearly observed close to the new infrastructure, but the extent of the impact will depend on a wide variety of factors, including the type of infrastructure, the scale of the project, and the location’s existing connectivity.
New transport infrastructure is not, on its own, likely to enable new office or retail markets, but for the logistics sector in particular, new road or rail connections can open up new sites that were previously undevelopable. A range of infrastructure enhancements have the potential to create growth opportunities across our core commercial regional markets of Bath, Birmingham, Bristol, Cambridge, Leeds and Oxford. These include:
Electrification of the rail line from London to Cardiff is under way; a new junction on the M49 is enabling direct access to the Avonmouth and Severnside Enterprise Area; and north-south connectivity has been enhanced by the dualling of the A350 around Chippenham in Wiltshire, benefitting towns to the south of the M4. In addition, the Severn Bridge toll has now been lifted, reducing road transport costs. Other local transport improvements are planned over the longer term, such as reopening the commuter rail link to Portishead.
Bath & Bristol
Birmingham has benefitted from a series of infrastructure enhancements in recent years, including the tram extension linking Snow Hill and New Street stations, redevelopment of New Street station to provide a greatly enhanced passenger experience, and the runway extension at Birmingham Airport. However, the real game-changer for Birmingham is HS2, which will cut journey times to London and shift perceptions of the city. The new terminus at Curzon Street will underpin wider development and regeneration.
The Oxford to Cambridge growth corridor has the potential to drive development activity, based around improved transport links, although the extent of these opportunities remains unknown. The proposed infrastructure consists of the Oxford to Cambridge Arc road link (Oxford to Cambridge Expressway) and the East West rail link, which is due to be opened in stages over the next decade. In Oxford, the proposed re-opening of the Cowley branch line would connect the city centre with the eastern side of the city (including Oxford Business Park and science park districts and The Mini Plant), transforming accessibility to these locations and potentially acting as a catalyst for further development. However, significant investment to upgrade the infrastructure would be required, and there is currently no funding in place or a definitive timescale.
Oxford & Cambridge
The HS2 high speed rail line will deliver a new fast connection to London and Birmingham into Leeds city centre, as well as a significant capacity increase. The new station will be integrated with the existing facilities, delivering a major transport interchange and easy access to the city centre and the South Bank area. There appears to be increased political momentum behind the proposed Northern Powerhouse Rail link with Manchester. There are also a number of road infrastructure improvements, including the Leeds East Orbital Road, which will replace the existing Outer Ring Road, easing congestion but also acting as a catalyst for development.