Familiar with the law of the conservation of motion? It is all about collisions and momentum, and the geeks and tech geniuses of Cambridge understand it well. Indeed, the law was discovered there by Sir Isaac Newton, Cambridge professor of mathematics.
A grasp of this Newtonian rule helps to make sense of Cambridge’s property scene. The largest collision to produce momentum in the Cambridge office market was AstraZeneca’s decision to move a £330m global research centre in the city.
Subsequent, smaller collisions with Apple, Huawei and Spotify, all signing up for new Cambridge floorspace, have kept the ball rolling.
But the essential point of the law of the conservation of motion – and other Newtonian laws – is that some systems are balanced and self-correcting.
As it happens, the Cambridge office market seems an excellent example. Rents are rising – but cannot go too high. Speculative office supply is growing – but cannot get out of control. Demand is strong – but there are economic forces at work to keep it within reasonable limits.
In the meantime, the momentum of the office market is being fully transmitted to the investment scene
Sven Topel, chief executive at developer Brookgate, hopes the momentum will help him let the latest phases of his CB1 development. There is already evidence of fruitful collisions of occupiers with vacant floorspace: three floors amounting to 55,000 sq ft at the 130,000 sq ft One The Square office building are close to letting. Office rents for further floors could nudge up from about £35 per sq ft now to £36.50 this time next year.
In the meantime, the momentum has encouraged Topel to give the green light to the 150,000 sq ft office development at 50-60 Station Road. Work on site could begin early next year.
“The office market is about momentum,” he says. “It is a relatively small market, but in the next few years I see take-up remaining high. Only limited supply can hold the market back, and that will mean rents ease upwards.
“The constraining factor is that opportunities for development are limited. And, in a sense, that creates a self-regulating market that is less cyclical than most in the south of England. Even in the downturn, it was active. Cambridge has resilience.”
But there are only a few places where Cambridge can grow: north of the city, where a new station will open in 2017, is one of a limited list of possibilities. Brookgate is developing plans for the 1.5m sq ft CB4 mixed-use scheme in Chesterton, a north-eastern suburb.
Chris Goldsmith, managing director at Turnstone Estates, is also an admirer of the Cambridge property market’s self-regulating system. Turnstone is in a joint venture with St John’s College on a 60,000 sq ft office building on the northern edge of the city.
Goldsmith hopes to repeat the success of Turnstone’s 43,000 sq ft Broers research and development building, west of Cambridge.
“The colleges are very patient landowners,” says Goldsmith. “For them, a 10-year development cycle is nothing because they have been here for 500, 600 or 800 years. They won’t be led down the road of over-providing speculative floorspace because of a little bit of undersupply or a spike in demand.”
AstraZeneca is certainly producing a spike. One close observer told EG: “In a way, AstraZeneca is a problem – although a good problem – because it is taking up so much short-term office space. About 135,000 sq ft so far in the city centre, on top of the 200,000 sq ft that one wing of the business already had in Cambridge. It’s all adding to the pressure.”
The pressure on rents is real enough. But Goldsmith says rents are naturally self-limited. “Occupiers can’t afford rents to go too high because they’re suffering [from a] cost push on wages, and their staff are watching rising house prices. There’s a limit to how far rents can go in Cambridge, and that too will constrain the supply of new floorspace.”
The result of a self-stabilising market is that today’s increasingly hot market will not boil over, even if top rents creep up to £36.50 per sq ft next year (at CB1) and hit £40 per sq ft by 2017.
Will Heigham, head of office agency at Bidwells, says: “The market is strong but definitely not exuberant. This is well-tempered growth, with a gradual increase in the volume of requirements. It’s not just 700,000 sq ft of new demand landing in Cambridge, but a nice gentle incline, which I think we can sustain.”
The market is not too hot to rule out incentives, however. Rent-frees of six to nine months on a 10-year lease are still to be found. And while Bidwells data suggests annual take-up is heading towards a reliable 1m sq ft, the long-term average is comfortably lower.
Likewise, speculative development is growing, but not excessive. Bidwells says there is 350,000 sq ft in progress and a further 200,000 sq ft on the way.
Heigham says: “Yes, more mainstream developers are dipping their toes into Cambridge, but the opportunities for them to get involved are limited because so much land is in the hands of the colleges or other strategic landowners. So we won’t see much speculative development.”
Chris Hiatt, director at JLL, sums up the Cambridge scene by saying: “Either Cambridge is a perfect market – or an awful market – because you can’t see excessive development, new money tends to tie itself to existing landowners, and everyone has a strong interest in not overheating the market.”
Cambridge has plenty of momentum. In a Newtonian sense, just enough, but not too much, to keep it moving smoothly.
The new tech names
Apple took 9,030 sq ft, Spotify has 9,000 sq ft of serviced space pending a longer deal, and Huawei has 12,000 sq ft at the Cambridge Science Park. Why, when London’s tech city is 45 minutes away by train?
For some, it is easy to guess. Last year, Huawei bought Cambridge networking business Neul. For others – such as Apple’s deal with Freshwater and Endurance Estates at 90 Hills Road –
it is less obvious.
Will Heigham, partner at Bidwells, says: “We’re seeing the kind of tech businesses that concentrate around King’s Cross looking at Cambridge, and that wasn’t happening five years ago. They all want a presence here, and we’ll see more follow Apple and Huawei.
“This isn’t about having a shop window, so much as about collaboration with the university, co-operation with other tech companies, and the opportunities for recruitment.”
Rob Sadler, head of Savills’ Cambridge offices, says many tech firms were bound to follow Microsoft to Cambridge. “Some ask if we are passing through a stage in Cambridge, and it will soon be back to normal,” he says. “But these new occupiers are here to stay.”
Henderson’s speculative development of CPC2, a 40,000 sq ft office scheme at the 22-acre Capital Park site, completing in November, could inspire more deals. “We’ve already got strong interest,” says Sadler. “Yes, rents will hit £40 per sq ft in the next three to five years, but that is still only half of King’s Cross [rents].”
Norwich boost
Cambridge is not the only show in town. Bidwells data shows Norwich is making a strong recovery, led by demand from the energy sector. Bidwells’ Will Heigham says: “Second half take-up in 2014 was up 113,000 sq ft, which is big for Norwich.”
