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The new geography of office demand

1: The Urban Tendency

The Increasing Appeal of City Centres

This report is the fi rst in a three-part series examining how the geography of UK offi ce demand is shifting in response to demographic, economic and technological change. It argues that, overall, increasing numbers of businesses wish to locate in or close to city centres, and that this ‘Urban Tendency’ will intensify over the coming decade.

Cities are becoming more important in the global economy as a result of the rapid urbanisation of Asia and South America. Meanwhile, a small number of world cities, such as London, increasingly dominate corporate activity and investment. In the West, the rise of the knowledge economy has underlined the importance of business clusters in driving innovation and recruiting talented staff.While the urbanisation of the world population will focus international investors’ attention on cities, it is the latter two trends that are driving the change in offi ce demand in the UK. Understanding how the preferred locations for offi ce occupiers are shifting, and the underlying reasons for this, is essential for any investor or developer active in the UK today.

There are six fundamental causes of this ‘Urban Tendency’:• Demographics – Increasing numbers of

young, single people living in city centres and inner suburbs – meaning locating centrally is key to staff recruitment and retention;

• Immigration and Globalisation – The UK is increasingly host to international talent which wants to locate in cosmopolitan cities;

• Working practices – The rise of fl exible working, mobile and cloud computing and self-employment reinforces the need for central meeting points;

• Sustainability – Offi ces in city centres enable walking, cycling and public transport use;

• Policy – The Government continues to restrict out-of-town development;

• Transport improvements – New tram and train lines make city centres even more accessible; younger workers shift away from the car and towards public transport and cycling.

In response to these shifts, the nature of city centres is changing. Their cores are already expanding with new developments on their fringes, while the mix of uses will include more residential and leisure space. In London, the association of particular sectors with ‘villages’ may begin to fade. All these trends are self-reinforcing, and will benefi t some cities at the expense of other locations.

Some out of town locations, particularly in smaller, affl uent cities or towns with constrained cores, are likely to benefi t just as much as city centres from the shifts we have identifi ed here. Indeed, those with the right mix of amenities, or an appeal to a particular cluster, will continue to thrive. Later in this series we will look at the characteristics of successful out-of-town locations and the implications for landlords and investors.

Advance • The new geography of office demand: The Urban Tendency 3

The year 2010 was a major turning point in human history. For the first time, the majority of the people alive in the world lived in a city. Just a hundred years ago, only 20% of the global population was urban. The World Health Organisation estimates that this will have increased to 60% by 2030 and to 70% by 2050.

Urbanisation – the mass movement of populations away from rural, farming-based existences and into cities – is the great theme of our age. The process that began with the industrial revolution in 18th century England has spread to the huge populations of Asia, and with it are coming seismic changes in how the majority of humans live and work.

These shifts do not impact as much on the West; the World Trade Organisation expects the urban population in the developed world to remain roughly static. After all, countries such as the UK, Australia and the Netherlands are already the most highly urbanised places in the world.

Nevertheless, it is increasingly apparent that the centre of cities, within both the developed

Introduction

Welcome to the first of three papers looking at the changing geography of office demand. In the UK, we are undergoing huge structural changes in the way we live, work and shop, driven by the twin forces of technology and globalisation. The office market will not be untouched. In other reports we have looked at how working styles and office layouts are beginning to change as a result of technology, increased mobility and flexibility and more stringent sustainability requirements. This series will look at what the implications are for where companies want to locate. This first report looks at a trend that has been gathering pace for over a decade – the return of businesses to the centre of cities, both in London and the regions. The evidence is drawn from our experience of the market and interviews with businesses as well as quantitative data.

Cities have been engines of innovation since Plato and Socrates bickered in an Athenian marketplace. The streets of Florence gave us the Renaissance, and the streets of Birmingham gave us the Industrial Revolution. The great prosperity of contemporary London, Bangalore and Tokyo comes from their ability to produce new thinking.

Edward Glaeser, “The Triumph of the City”

4 Advance • The new geography of office demand: The Urban Tendency

and emerging world, are becoming ever more important in the world economy. From London to Istanbul, from Paris to Shanghai, they are reasserting their roles as lynchpins of global business. This ‘urban tendency’ is not confined to this group of ‘world cities’; it is also apparent in the great regional cities in the UK.

For much of the 20th century, the Western city was in decline, and many urbanites fled to the suburbs or countryside. Businesses followed them, relocating to the edge of cities close to the emerging motorway network. In the UK, this process was accelerated by Government attempts to ‘decentralise’ both industry and the population.

But over the past two decades, the changing nature of manufacturing and the rise of the ‘knowledge economy’ have made the unique qualities of cities desirable again. As places of interaction and ideas, they are where innovation naturally flourishes, where like-minded people inspire each other and where aspiring entrepreneurs can easily find capital and workers.

This reurbanisation arguably started with the movement of young professionals back into inner cities in the 1970s and 1980s, ‘gentrifying’ previously deprived areas. However, this process has really accelerated in recent years. Young people continue to move back into the urban heart, transforming neighbourhoods that were previously in decline. In the UK, this rapid change is evident in areas as varied as Shoreditch and Hackney in London and the Northern and Jewellery Quarters in Manchester and Birmingham respectively.

Both here and around the globe, these revitalised areas are rapidly becoming crucibles of the new economy. They are the locations where TMT businesses especially – both new start-ups and established giants – want to be; they are also where their employees can find the accommodation, bars, restaurants and shops that suit their lifestyles.

Concerns over sustainability and the rising costs of car ownership are also bolstering this trend. In Britain, public transport improvements such as Crossrail, High Speed Two and the Ordsall Chord will increase the connectivity of city centres. Businesses are increasingly recognising that if they want to attract and retain young, talented staff they need to locate in urban areas, in locations that offer vibrancy and a mix of amenities while being easily accessible to those without a car. Indeed, there is increasing hard evidence that corporate requirements are showing a shift towards these more central locations.

Global investors, too, are following these trends. Increasingly their focus is on cities rather than countries, and a small number of world cities are dominating real estate capital flows. Investment in London, Paris and New York rose from 10% of the global total in 2008 to 16% in 2012. This reflects a belief that the dominance of these cities – along with a growing number in the emerging world – in the global economy will accelerate over the coming decade. They will be joined by a number of secondary centres, although the divide between winners and losers may be sharper than in the past. This is not to say that out of town locations cannot continue to prosper if they appeal to certain industries, have good transport links or a wide range of local amenities.

The rise and fall of the office parkThirty years ago many city centres were tired, scarred by car-led planning and industrial decline. A disproportionate share of their office stock had come to the end of its economic life, just as demand for office space was escalating and a new generation of corporate managers was searching for a fresh start in open-plan layouts.

The Government responded to the increased demand for offices and the reduced demand for industrial units by blurring the use class boundary between the two and releasing greenfield land into the planning system. This enabled more innovative developers to seize the opportunity to deliver a


shiny new US-influenced product. And the rest, as they say, is history or, more specifically, the history of the out of town office park.

It was a product designed to meet the need for open plan working in an attractive landscaped setting. The space was available at a discount to city centre rents, and the priorities then were accessibility by car and proximity to the motorway network.

Now, three decades on, some buildings on the early office parks are reaching the end of their economic lives. Businesses have an opportunity to rethink their location decisions. Some are very happy to stay in the office park environment. They may be committed to a particular location because of staff journeys to work, or because of cost. But other businesses that relocated out of town may find they are no longer in the best place for their

current operations and are looking back to more central locations as the optimum solution. Some are questioning the effectiveness of out of town locations.

There are a number of factors driving these moves back to the city centre. Workplace culture tends to be quite different in central locations, with a greater number of people working non-standard hours, which can help productivity for some businesses.

The hierarchy of urban centres is changing with these shifts. In some cases – where the city core is constrained or inaccessible, for example – out of town schemes will continue to thrive and outperform. Even though the centralising trend is evident, there will always be companies that prefer the flexibility offered by the right out of town locations.


The historyThere are a number of key episodes and trends in the story of city centres and their office markets that are critical to understanding the location decisions that both people and businesses made then and make now.

Urbanisation

Decentralisation

Reurbanisation

19th Century: Urbanisation – the mass movement from the land to the cities during the industrial revolution.

Early 20th Century: Cities are hosts to agglomerations of businesses.Headquarters are concentrated in the big cities.

1930s: Rapid growth of the suburbs, beginning of mass car ownership.

1940s: The damage inflicted on city centres during World War 2 makes large scale reconstruction necessary.

1950s and 1960s: Massive expansion of car ownership. Abandonment of inner cities.

1960s -70s: Large scale rebuilding of cities often with cheap construction and in a monolithic style; widespread demolition to accommodate the car; huge expansion of car use; dismantling of tram lines in big cities; Beeching axe cuts national train services.

1960s - 80s: The continuing decline of manufacturing in the UK and the consequent deterioration of the industrial cities; restrictions on office development in London and Birmingham.

1970s onwards: The oil shock gives the first indication that car dependency could be a problem. The London motorway box, Ringway One, is abandoned, alongside plans for raised urban motorways in central Manchester. Car ownership and car dependent lifestyles, including car dependent jobs, continue to flourish.

1970s and 1980s: In Inner London, there is a wave of gentrification of ‘villages’ close to the centre such as Notting Hill, Islington and Fulham.

1980 - 2000: The expansion of the office economy and the resultant demand for net addition to office stock.

1980s: Deregulation of planning particularly the lifting of restrictions on building out of town. Proliferation of standardised car-oriented housing estates.

1980s and 1990s: The expansion of the UK‘s office stock. Gradual gentrification of some inner city areas.

1990s onwards: The evolution of workplace technology and mobile communications.

1990s: Urban regeneration leads to more city centre office development, alongside residential, retail and leisure. Massive expansion in the number of students and graduates. Rising numbers of single-person households owing to later marriage and high divorce rate.

1990s and 2000s: Sequential test in planning restricts out of town development. The Labour Government ends all new road schemes, meaning that new office park sites are not opened up. Congestion increases and car travel becomes more problematic and expensive.

2007 onwards: Recession, slow down or contraction in office employment. Mobile technologies are leading to changing lifestyles and working practices. Falling car and home ownership levels among younger workers.


City centres - in London and the main regional conurbations - began to adapt to the challenges of the office park in the 1980s. New locations usurped the role of the out of town market by offering all its advantages just a stone’s throw from the city centre. They made locating in cities viable once again by providing the required floorplates and formats at an appropriate price point.

Central London’s expansion, begun in the 1980s and 1990s with schemes such as Broadgate, Paddington and Regent’s Place, has gathered pace over recent years. Stratford, King’s Cross, Paddington and the South Bank are all providing, or could provide, cost-effective, large-scale office space in previously peripheral locations. As with their predecessors, these schemes have some of the advantages of out-of-town schemes, but are extremely accessible by public transport. They are also embedded in vibrant, mixed-use urban areas, close to areas of relatively affordable rented housing – important given the rising numbers of tenants and single-person households.

This trend is not just confined to London. Office developments such as Manchester’s Spinningfields are testament to the outward growth of its core, a process that is likely to continue here and elsewhere. Some of this is organic, but it is also driven by improvements in infrastructure. For example, the plans for Birmingham’s Eastside are driven by the eventual arrival of High Speed Two at Curzon Street Station, while in London, the City Fringe will become fully established through Crossrail stations at Farringdon and Whitechapel.

This expansion is being accompanied by a broader change in the mix of users in city cores. Residential has already become a far more significant component of urban centres, something that will be accelerated by the relaxation of planning regulations for change of use, as well as mounting issues with obsolescence in both the office and retail sectors. Leisure will also be more prominent. Cafés and other social spaces are already, for some companies, becoming extensions of the workplace as office densities continue to rise and flexible working becomes more widespread.

However, it remains true that these environments will not suit every business. Some may continue to opt for out-of-town locations, driven by business priorities or staff needs. Indeed, office parks offering the right mix of amenities and transport connections may outperform some city centres.

The resurgence of city centres

More international workforce drawn to cities

Immigration and Globalisation Mo

ImIm

Young, skilled workers now tend to live in more central locations

Demographyand Lifestyle

o

Urban locations promotesustainable transport patterns and shared services

Sustainability

Rise of flexible and mobile working

Working Practices

New railway and tram lines

Transport Improvements NNew

TTTTrTTTTr

Government continues to restrict out-of-town development

Policy


As the graphs to the right show, urban and city centre populations have increased more rapidly than the national average in recent years – a trend that will continue. After decades of suburban flight young, affluent, educated workers are increasingly congregating in urban neighbourhoods.

In some ways this is not new. The gentrification of the leafier inner suburbs began in the 1970s and 1980s in places such as Notting Hill in London, Didsbury in Manchester or Harborne in Birmingham. These were oases for many years but gradually the net has spread more widely. Today, there are a growing number of options to live more centrally as residential property is developed in the heart of our cities, often on the site of former commercial uses.

The contraction of traditional retail in High Streets and mounting obsolescence in the office market will create further opportunities for residential development in urban environments - creating a more diverse mix of uses in formerly monocultural locations. These shifts will be accelerated by the Government’s introduction of permitted development rights for the conversion of office space to residential use - something which it is looking to extend to redundant retail space as well.

What are the drivers?

Forecast change in population: major conurbations, 2013-2023

0%

2%

4%

6%

8%

10%

12%

14%

16%

Liverp

ool

Manches

ter (North

)

Tynesi

de

Glasgow

Birming

ham

Manches

ter (Sout

h)UKBrist

olCard

iff

Edinbur

gh

Nottingh

amLee

ds

Inner L

ondon

(East)

Inner L

ondon

(West

)

Total population

Working age population

Source: Oxford Economics Forecasting 2012

City living is a reality: Increase in city centre populations, 2001-2011

0%

10%

20%

30%

40%

50%

60%

England & WalesLondonLeedsBristolBirminghamManchester

Source: UK CensusN.B. Figures represent changes in the parliamentary constituency covering the city centre. London and Bristol had more significant city centre populations in 2001

More international workforce drawn to cities

Immigration and Globalisation Mo

ImIm

Young, skilled workers now tend to live in more central locations

Demographyand Lifestyle

o

Urban locations promotesustainable transport patterns and shared services

Sustainability

Rise of flexible and mobile working

Working Practices

New railway and tram lines

Transport Improvements NNew

TTTTrTTTTr

Government continues to restrict out-of-town development

Policy

Demographyand lifestyle


The explosion in the number of students and graduates in the 1990s has produced a much more mobile generation of young employees which has become used to living in flats or in shared accommodation in cities. They do not necessarily want to move to the suburbs. Immigration of young, skilled workers has bolstered this trend.

The resulting fashion for city and inner suburban living is reinforced by a range of cultural and demographic trends. The growing incidence of two working parents adds greater weight to the need to reduce the time and distance between workplace and childcare solutions.

All these factors point to a concentration of young, skilled employees in city centres, many of whom do not own cars. It is unsurprising, then, that companies increasingly see locating in cities close to transport links as key to staff recruitment and retention.

Cities are simply much nicer environments to live in today. The Great Smog of 1952 is hard to imagine. Even changes made in the last 20 years have made an enormous difference. In London for instance, the congestion charge has reduced traffic and improved air quality. New public spaces have been created, while the Thames has been made accessible with the opening of riverside walkways.

Changing household types and the challenges

According to the UK Government’s household projections, 70% of new households forming between 2008 and 2033 will be composed of just one person. This is a result of later marriage, an ageing population and relatively high divorce rates. Many of these households are likely to choose to live in urban settings, close to transport, amenities and employment. After all, having children, getting married or other major life changes are often the triggers for moving to the suburbs or countryside or buying a home. Indeed, most of the rapid growth in the private rented sector in recent years has occurred in central locations.

However, there are indications that this may be changing. Over the past few years, the UK has seen the highest birth rate since the 1960s. If these families stay in urban areas as they age rather than moving out – as their predecessors did – it will place huge strains on schools and related facilities. Indeed, in the longer term, the great challenge facing the economy of British cities will be whether they can provide the environment and amenities to retain these families, their skills and their spending power along the lines of their competitors in not only the continent but also in the USA and Asia. At the moment, even in a city such as Manchester, where city living has boomed more than any other, the evidence suggests that having children prompts a move out of town.

These initiatives have transformed cities as places to live. The challenge which now needs to be taken up by policy makers is to persuade families that the city is a suitable place to raise children. That will require investment in schools and open spaces as well as the supply of affordable, family-sized housing. The fact that pollution in London streets still breaches EU limits on many days highlights the need for further improvements to our urban environments.


According to the Migration Observatory at the University of Oxford, the number of foreign-born persons in total employment doubled between 1993 and 2011 – from 7.2% to 14.4%. While there are particular concentrations of these workers in food services and manufacturing, there are also high proportions in office employment.

In sectors such as Financial Services and Computer Programming & Consultancy, over one in five of employees were born overseas. In many companies in these areas, a multinational workforce is the norm. This reflects both greater employee mobility as well as a tendency for companies to look globally in the search for talent.

The highest concentrations of individuals born outside Britain and Ireland are in Inner London boroughs, although Reading, Oxford, Manchester, Birmingham and Edinburgh are also popular. This is unsurprising – cities will offer a greater choice of accommodation as well as established clusters of overseas nationalities. Many will be arriving from countries where people are happier to live long-term with families in more urban settings, perhaps in apartments. Clearly, if recruiting and retaining some of these potential employees is crucial to a TMT or Financial Services company, a city centre location makes more sense.

Flexible workstyles are gradually becoming the norm for many employers. This will not lead to the death of the office, rather a new relationship with the office where some people mix and match their work time between desk, break out spaces, home and public shared spaces - such as cafes or hubs. Of course, this is not yet the experience of all office workers – and it may never be – but it will gradually become more widespread. Businesses with employees working unusual hours may find city centre locations offer better late night transport options and improved security.

There are also growing numbers of people working for big companies from outside as self-employed consultants giving them greater autonomy over the place and time in which they work. However, it also reinforces the importance of face to face contact. They need to meet, talk, exchange ideas, listen, watch, form informal alliances and so on. Despite the rise of social networking, all of this can be achieved more effectively when people are in close proximity. For many, big cities are also the places where they can compete most effectively for work.

Forecast growth in office jobs, major conurbations 2013-2023Location % changeNottingham 18.1%Leeds 16.1%Inner London 14.7%Bristol & Bath 13.0%Greater Manchester 12.8%Outer London 12.7%Cardiff 11.4%Birmingham & Solihull 10.8%Edinburgh 10.7%Glasgow 10.4%Tyneside 8.6%Liverpool 5.3%

Source: Oxford Economics

Immigration andGlobalisation

Working Practices


All other things being equal, denser cities are generally more environmentally sustainable. Business clusters can share resources and benefit from economies of scale. Meanwhile, transport times and related carbon emissions are reduced, while preserving land and open space. The cost and political uncertainty around energy supplies will continue to affect attitudes towards car ownership and dependency. Whether the underlying reasons are ethical or congestion- or cost-related, there is evidence that fewer young people are buying cars and more are opting to travel by bicycle or public transport. There is also a realisation that car clubs or pooling are viable options. The diagram to the right shows the change in the number of young people with a driving licence – a decline that is likely to continue.

The increased need for sustainability – whether based on regulation or on aspiration – seems likely to be a significant driver of future decisions, from transport options and powering buildings to consumption and leisure activities. Whether the reasons lie in hard-headed business sense – the need to constrain costs and future-proof investments – or in concerns over image and brand, it is clear that companies are putting sustainability at the heart of planning and management.

Proportion of 17-20 year olds holding a UK driving licence

1995 : 43%

2010 : 35%

Source: Department for Transport

Cost is always a consideration in location decisions, particularly during periods of economic difficulty. Most forecasters expect UK GDP growth to be modest for some time to come, putting extra emphasis on the need to reduce costs. However, in interviews conducted for this research, it was clear that this was being balanced against the need to improve productivity and employee retention. So while cost will always be a factor, it is not the primary driver in most cases.

Environmental Sustainability

Workplace densities

For companies, a firm focus on cost control has and will continue to drive office efficiencies and workplace density. According to a recent report from the BCO, office densities have increased almost twofold since the 1990s (BCO, 2011 - The Challenges for the Office Sector over the next decade and beyond). However, there is not a one size fits all approach to office densities and while we could well see further erosion of space per desk - possibly levelling out around 8 sq m per desk - this is likely to vary greatly depending on sector and activity. Office utilisation has become more intense and this is set to continue, although this cannot now be achieved simply by open space policies. We will see more collaborative space on blueprints, but ultimately a city centre location tends to offer more public spaces such as cafes which can be used for one-off meetings at low-cost. Of course, such environments also promote the unexpected encounters and meetings with competitors and colleagues that can help drive greater efficiency and innovation in the workplace.


Policy interventions have, historically, had huge effects on city geographies and office markets alike, affecting both the supply and demand for office space. At various times, development in cities and out of town has been restricted or encouraged, using planning measures or tax incentives. Roughly between 1950 and 1980, the emphasis was on discouraging growth in London and the Birmingham area, and encouraging it in New Towns or the depressed North of England. The laissez-faire approach of the 1980s was replaced by an urban regeneration agenda which prioritised the revitalisation of cities and heavily discouraged out-of-town schemes.

This still remains broadly in place today, and will continue to impact on the office market. There is still significant political will to reinvigorate cities and to bring footfall to conventional High Streets, even if funding cuts have weighed disproportionately on the budgets of large cities such as Manchester and Leeds. lt remains hard to get planning consent for new out-of-town schemes, while new Enterprise Zones aim to bring new businesses into the heart of cities such as Birmingham. There is an increasing focus on supporting the most dynamic, collaborative conurbations - as exemplified by the City Deals agreed with conurbations such as Greater Manchester.

There is also likely to be greater independence for some cities as the recommendations of Michael Heseltine’s growth review are put into action. ln Bristol, the elected mayor may also play a role in driving inward investment. Finally, the growing body of regulation around sustainability and carbon reduction will further increase the prospects of city centre locations, given their usually superior public transport links. For the time being, the ‘urban tendency’ may be driven by supply as much as demand, with only centrally located schemes likely to get planning consent and/or funding.

Britain has, arguably, underinvested in public transport for generations. This, too, appears to be changing. Crossrail, the high-speed railway that will connect East and West London from 2018, is perhaps the most obvious example of this shift. The main effect will be to increase the number of people who can easily commute to the West End and City, bolstering their attraction to businesses, while further expanding the accepted boundaries of Central London.

In the North West, the Ordsall Chord, a small but highly significant railway link in East Manchester, will allow new fast trains to Liverpool and greater frequency links to Leeds when it is complete in 2017. lt will also enable a new direct link between Manchester City Centre and its airport - the largest outside London and a key reason for its host city’s recent economic success. Clearly, this will increase the commuter catchment of Manchester, Leeds and Liverpool while making living and working in their city centres more attractive and viable. Arguably, by increasing the links between the conurbations, it will give the North of England the urban scale it needs to compete more effectively within the UK and Europe.

While the first phase of High Speed Two will not be complete until 2026, Birmingham City Centre will be brought within 49 minutes of London Euston. This will not only increase its accessibility for London, it will also improve connectivity to Paris, Brussels and beyond. As with other transport improvements, it will add to the appeal of city centre locations, although the full benefit may not be felt until 2032 when the links to Leeds and Manchester are due to complete. Meanwhile, the Scottish Government is promoting a 30-minute high-speed link between Glasgow and Edinburgh. The greater connectivity between all of Britain’s main cities will strengthen their collective offer.

Policy Transport Improvements


Evidence of changing location patterns

A number of recent studies demonstrate how occupier preferences are becoming more strongly biased towards city centres.

Two recent publications from the British Council for Offices (BCO) underline the factors that will drive more companies into city centres. “The challenges for the office sector over the next decade and beyond” (2011) concluded that public transport, environmental performance, energy costs, staff retention and lease terms would all rise in importance over the 10-year study period. Almost 70% of survey respondents indicated that they expected the demand for city centre locations to increase over the decade – although the report acknowledged that parking issues and the dearth of large floorplates are constraints for some companies.

A subsequent publication, “Change for the good – identifying opportunities from obsolescence” (2012), went on to argue that “car-only locations are no longer the choice of either the employee or employer. Offices typically need to have good transport links. Some regional and out-of-town locations are now unattractive to many organisations, due to their inaccessibility – requiring car transport and offering employees few on-site amenities.” It suggested that many companies in out-of-town locations were having difficulties with recruitment and employee retention. Also, the research highlights IPD results showing that regional offices and office parks have suffered the greatest decline in returns since 2007 – although higher-end parks with amenities and transport have fared much better.

Respondents agreed that central/city locations are favoured, and among the reasons for this is that they provide the most resilient and large pool of labour, in both the short and long term.

BCO, May 2011

Source: Size Matters - the importance of small firms in London‘s economy - Centre for Cities - December 2012

What are ‘clustering effects’?

‘Clustering effects’ are the benefits businesses draw from being located near to one another. There are three main benefits:

• Matching Access to a wide pool of highly skilled labour makes it more likely that business can find employees with the specific skill set they require. Similar matching benefits occur between suppliers and buyers.

• Knowledge sharing Opportunities for face-to-face contact help diffuse knowledge and skills. With many firms nearby, workers find it easier to switch jobs, taking their knowledge and skills with them.

• Shared resources Access to shared resources such as transport infrastructure and educational facilities. Access to a shared labour pool also helps firms specialise.

There are also disadvantages associated with clustering, which can include:

• High rents If demand for business accommodation is not matched by an increase in supply, prices will go up. Similarly, if workers are attracted to a city because of the volume and quality of jobs on offer and the supply of housing does not increase, prices can rise.

• Congestion As more and more businesses are drawn into a small area, congestion, which costs both business and workers time and money, can become a problem.


For the moment, it is difficult to detect any shift of office occupiers from out of town to city centres in Jones Lang LaSalle’s standard market indicators of take up and supply. Occupier location decisions are rarely made in ideal conditions and involve a number of trade-offs. The ultimate decision may not reflect initial preferences.

There are many reasons for this. For instance, supply may not be available of the right size and specification at the right time; the optimum property solution may be too expensive for the business at that time, especially when the decision point falls in a recession; existing lease commitments might inhibit choice; a relocation might risk workforce attrition and sometimes the personal preferences of a senior leader might dictate the outcome. It can take time for the rationale to embed in an organisation. It might require an unacceptable change in its culture.

The chart shows take up for city centre and out of town locations between 2002 and 2012 based on seven major UK cities. During that period, the out of town market makes up between 30% and 47% of the total take up but there is no clear declining trend. Its highest share was in 2005 and its lowest in 2006. In 2012, it made up 42% of the total. It is perhaps noteworthy that in the two years when total take up peaked, 2006 and 2007, the proportion of city centre take up was higher although that may be explained by availability. The data for the individual cities present a similar picture of ebbing and flowing between in town and out of town with no clear direction. Birmingham is the only place where there appears to be any discernable downward trend in the proportion of

take up going out of town. In Bristol there has been a slight bias towards out of town in the recent past. However, these patterns may reflect supply issues rather than demand preferences.

There is a widely held view in the industry that many occupiers are now beginning to express preferences for city centre locations – both core and edge of city. This is based on anecdotal evidence of individual location decisions and from a change in the characteristics of unsatisfied requirements recorded by our agency teams. It is also backed up by the research profiled earlier in this report. However, it must be emphasised that city centre sites will always be constrained by planning, conservation or existing roads and bulidings. For some companies, the flexibility and larger floorplates available out of town, perhaps combined with proximity to an airport, may trump other considerations.

Take up of office space: city centre vs. out of town locations

Source: Jones Lang LaSalle

Office market data


There is, of course, huge variation in the extent to which preferences for central and peripheral locations are apparent. From region to region, from city to city, local transport networks, the culture of car and public transport use, historic working patterns and the locations in which skilled staff tend to congregate will all vary enormously.

“Many of the out of town offices were low quality construction and suffer from poor energy efficiency. They can rarely offer enough parking to compensate for the lack of amenity and public transport connections are limited. The rent differential is not wide, prime city centre rents are around £19 per sq ft compared with £15 per sq ft out of town As they mature, the flaws are revealed in office parks.” Nottingham

Our research took into account active requirements and the views of businesses that had relocated recently – as well as general market sentiment. While there was a range of opinions about the prospects for city centre versus office park locations, there was a broad consensus about what businesses set as priorities. How these translate into preferences for location types varies from city to city.

Recruitment is an issue across a spectrum of employers from those who need to attract and retain highly skilled and specialised knowledge workers to those who need large numbers of relatively low paid administrative staff. In both cases, access to a large labour pool is critical which means accessibility is a key criterion as are the convenience and wellbeing of staff.

The cycles of inner city decline and revitalisation have been much more intense in Britain than on the Continent – with the possible exception of the Netherlands. In Germany, for example, the out of town office market does not really exist except in Frankfurt and Munich, where its expansion was driven by lower taxes and rents. However, they have failed to take off in a major way and vacancy rates are high. The Germans have never fallen out of love with cities, although they have become even more urban in recent years. A wave of new city centre family development has brought children back into the urban heart – something yet to be seen in the UK. But as in British cities, it is the technology and creative sectors that are driving growth.

Better comparisons can be found on the other side of the Atlantic. In California, the first wave of tech start-ups colonised Silicon Valley, partly because so many had spun out of nearby Stanford University. As a result, companies such as Facebook and Apple have huge campus style offices in the area, amounting to 1m sq ft or more. It would simply not have been possible to accommodate the scale of these operations in San Francisco itself – and for the same reason these companies are likely to remain in Silicon Valley.

However, the number of tech companies in the area – as well as their reputations and the salaries, perks and incentives they offer – has resulted in huge competition for staff. This is a genuine problem for smaller businesses and start-ups, and even some of the large companies that are beginning to see real success. As a result – and combined with the global trend for city living – companies have begun to expand in San Francisco, notably in the SOMA (South of Market) area. Google opened 210,000 sq ft here in 2007 and has expended since. As a result of such moves and a wave of start-ups, supply has become very limited in SOMA.

Tech companies have begun looking in the southern edge of the core San Francisco market, where more conventional office buildings have been designed. In response, landlords have refitted floors to cater for their culture. Others are looking on the Western fringe – a formerly run down area of hotels and low-cost theatres. Its art deco stock has been renovated, and old residential blocks are being revitalised. This area has become a key part of the office stock and has been dubbed ‘midmarket’.

International comparisons

Local market trends


“Professional Services never moved out of town. They always valued the opportunities to network that exist in a city centre. Financial services businesses took some of their operations out of town and in some cases want to move back in.” Bristol

There is no doubt that accessibility and the ability to recruit and retain staff can be satisfied in a range of locations. The city centre is generally expected to score highly on connectivity and on provision of amenities, but for some employers, access to road networks is the measure of an ideal location. For others, open space and proximity to affordable suburban housing are the key determinants.

“The business park is not dead, it still appeals to some occupier groups and the rents tend to smooth out any stark differences in demand.” Western Corridor

Staff employed in call-centres, or similar administrative operations, where wage rates are relatively low, are often willing to change jobs for small uplifts in salary or marginal improvements in the convenience or cost of their journey to work. In this case, any disruption to existing journeys to work could prompt staff to defect to an alternative employer.

There is some evidence that those on higher salaries generally accept larger commutes – probably a result of the scarcity of both such positions and suitable employees.

A business needing to tap into the young, highly-qualified labour market probably benefits from being in a central city location where they can obtain the optimal staff profile. There are further competitive advantages for cities that are well

served by public transport, as they can draw on a wide area for their recruitment.

“There are examples of businesses that are considering or have taken the decision to move into the centre and pay more per sq ft to achieve profile and staff appeal.” Manchester

The expansion of university education has resulted in large numbers of recent graduates – often the most in-demand employees – living in the inner cities of main conurbations. Their equivalents in the 1980s, by contrast, may well have gone straight from school or college to a job, while remaining in their parents’ suburban home. Many in this demographic do not see owning a car as important and there is no longer an assumption

can be space planned efficientlyenvironmental compliance | improves productivity

appeals to staff | cost effective

What businesses are looking for:

AccessibilityAmenities

Efficient andattractive building

Sustainability

public transportcycle | walk | car

cafes | gym | shops | restaurantsbars | outdoor space

for cost containment | staffrecruitment | CSR agenda


that a business will offer parking or a company car. The new priority placed on showers in office buildings – a result of the growing numbers of cyclists – is testament to what transport analysts call a ‘modal shift’.

This ‘mass graduate’ generation is more comfortable with a business culture which emphasises flexibility and sociability. Businesses with a high percentage of younger staff understand that a city centre location is more conducive to unusual or unpredictable working hours, as public transport is more frequent and comprehensive. In more busy centres, there may also be a greater feeling of security if the streets remain busy into the evening, although clearly this will vary from place to place. This all suggests that, for some companies, productivity may be enhanced by an urban setting.

Together, all these changes reinforce the advantages of a central, accessible location close to the neighbourhoods favoured by the young and educated. However, it is worth pointing out that for companies with a broader age profile or those located in parts of the country where there are not defined or important town or city centres, the patterns may be very different indeed.

“There is no doubt that there are occupiers who prefer city centres but only a small number have actually relocated from an office park to the city centre. In reality, once a business has committed to a location, relocation is disruptive. It is also the case that business parks work well for many businesses.” Leeds

Business parks were popular with the first generation of US IT businesses that set up in the UK because it was a familiar environment in that they could replicate the style of their domestic operations. They were built in a pleasant setting and convenient to motorway junctions with low rise and relatively low cost construction.

Now, at 15 or 20 years old, these first generation parks are nearing the end of their lives. Much depends on location and whether the buildings are in single ownership, but in many cases redevelopment is not viable at the rents they command. They tend to be refurbished and are often inferior to the new stock available in the city core

There has also been a contraction in the type of employment that is typical of office parks. For instance many back office roles have been off-shored or made redundant as working practices have evolved. Car-borne insurance staff, for instance, have been encouraged to work at home rather than in an office. There is also an issue with achieving corporate sustainability targets out of town because of the inherent car dependency in most locations.

There is, however, a clear distinction between business parks with comprehensive amenities and those without. The characteristics that attract companies to city centres can be replicated out of town and the best business parks understand that, although it may be hard to provide them if ownership has become too fragmented. Public transport is critical as is access to retail and leisure facilities. Small business parks do not always have the critical mass to support amenities.

Perhaps most importantly, the restrictions on out-of-town development, and the preference of funders for city centre schemes, has left few up-to-date options for those looking for office park accommodation.


This report demonstrates the growing appeal of city centre locations for UK businesses. This is mainly driven by staff recruitment and retention issues – not just the ability to draw on a large potential labour pool, but also the importance of the amenities and character of an urban setting in supporting employee satisfaction. These factors are increasingly important in a knowledge-based economy in which more young people live in cities and fewer own cars. There are, of course, other drivers. Planning regulations have meant that appropriate modern stock is most readily available in city centres. Some sustainability aspirations may be more easily met in such settings.

It is, however, demographic and economic changes that are driving such shifts. The main growth sectors, such as professional services, media and technology, thrive in locations that maximise the opportunities for knowledge-sharing, networking and collaborative working. More often than not, these can be found in urban settings, and once established, these clusters benefit from agglomeration effects.

Meanwhile, the staggering rise in graduate numbers has produced a generation of young workers who have become used to urban or inner suburban settings, and do not want to move out of town. This has been bolstered by the UK’s more internationalised labour market; cities offer these globally mobile workers more opportunities for meeting compatriots or other like-minded individuals. Car ownership is in decline among the young workers that are so key to many companies, while new transport links are improving connections between city centres, enhancing the benefits of a central location.

The impact on office markets will be considerable. The boundaries of what agents and developers

Conclusions

consider to be ‘city centres’ will expand, but at the same time the mix of uses in what is currently ‘core’ will become more diverse. Residential and leisure will be more prominent, reflecting changing lifestyles and demographics as well as the blurring boundaries between work and leisure, at least for certain sections of the workforce.

Uses may change more frequently than in the past, encouraged by planning reforms – but there will also be increasingly popular development on the fringe, where large-scale headquarter style buildings remain more feasible. Some office parks will continue to thrive, however, as long as they can appeal to certain sectors and/or incorporate some of the aspects of city centres that appeal to growth industries – notably connectivity, access to a young, talented and international workforce, and a wide choice of amenities.

It seems likely that the overall demand for office space – indeed, the quantum of office space per se – will decline over the coming decade as companies occupy space more efficiently and flexible working (or self-employment) becomes more commonplace. Alongside this the importance of good-quality buildings in the right locations will grow, for the reasons outlined above. Hierarchies of city centres, submarkets and office parks will undoubtedly shift as part of these changes.

In London, the idea that certain industries are confined to their ‘villages’ – media in Soho, finance in the City, and so on – will gradually fade. There will be greater polarisation in terms of demand, rents and yields as stronger dividing lines between locational winners and losers emerge. Nevertheless, there is still time for landlords, developers and city administrations to ensure they are best placed to compete in this new world.

The new geography of office demand 1: The Urban TendencyAdvance publications are topic driven white papers from Jones Lang LaSalle that focus on key real estate and business issues

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COPYRIGHT © JONES LANG LASALLE IP, INC. 2013. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them.Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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Jon NealeHead of Research - UK+44 (0)207 087 [email protected]

Karen WilliamsonSenior Analyst - Research+44 (0)203 147 [email protected]

Vicky HeathAssociate Director - Research+44 (0)117 930 [email protected]

Chris HiattDirector - Office Agency+44 (0)207 399 [email protected]

Jeremy RichardsHead of National Offices+44 (0)117 930 [email protected]

Angus MinfordDirector - Capital Markets+44 (0)207 087 [email protected]

Mark WilsonDirector - Capital Markets+44 (0)207 399 [email protected]

Simon VerrallAssociate Director - Capital Markets+44 (0)207 087 [email protected]

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