by Peter Evans and Joe Valente
The well-being of the commercial property market is closely allied to the buoyancy of the economy as a whole, albeit on a lagged basis. Demand for commercial floorspace is broadly determined by the state of the economy, although it does not simply rise and fall with various phases of the economic cycle. It is also determined by the fluctuating prospects of business sectors which tend to expand and contract at different rates and over different periods of time.
It is therefore useful to identify those sectors of the economy which are likely to enjoy prospects for high growth throughout the 1990s, and of specific geographic concentrations of such sectors. The identification of such “hot spots” is particularly important for a number of reasons:
- The future well-being of any particular location is primarily determined by its existing economic structure and the representation of high-growth sectors.
- Companies in high-growth sectors will show an above-average demand for floorspace.
- The multiplier effect of high-growth companies is substantial and provides an impetus for growth in other sectors. High-growth companies are therefore not only important sources of demand in their own right but indirectly trigger considerable growth in other business sectors.
This article highlights those parts of the country which show a concentration of high-growth sectors and which are therefore likely to generate above-average demand, particularly for office/B1 space.
Definition
It is necessary to “disaggregate” existing employment information in some detail — to identify potentially high-growth sectors in otherwise declining industries as well as those high-growth areas within regions whose economies may be forecast to decline over the 1990s. As a result, this analysis is based upon employment data obtained from the Minimum List headings of the Standard Industrial Classification (1980) for each of the 54 counties in England and Wales.
High-growth sectors have been defined on the basis of the latest forecasts available on sector growth for the 1990s. The following are likely to experience considerable growth over the next decade:
- business services
- pharmaceuticals
- data processing equipment
- aerospace
- research and development
- telecommunications
Together these sectors represent around 15% of the work-force. The business services sector alone, which includes banking, insurance and professional companies, accounts for around 10% of the country’s employment. While direct employment in the remaining sectors accounts for only a relatively small proportion of the total work-force, the importance of such companies in generating demand for floorspace is significant.
The aerospace industry, for example, employs around 150,000 people directly (just under 1% of the country’s work-force). However, because of the nature of the industry, its importance in generating demand for commercial floorspace far outweighs the size of its direct influence. In Hertfordshire the aerospace and defence industry employs around 25,000 people, according to the Engineering Industry Training Board. The county council estimate that a further 60,000 are employed indirectly on a subcontracting basis — companies which have shown considerable growth over the 1980s and proved to be significant sources of demand for office/B1 space.
Existing distribution
The distribution of the six high-growth sectors in each of the 54 counties in England and Wales has been derived using the location quotient technique. Location quotient (LQ) provides a standardised measure of the importance of each sector in the economy of each county compared with the national average. An LQ greater than 1.00 indicates an over-representation locally; in the context of high-growth sectors it identifies those areas which are likely to benefit most from the envisaged growth during the 1990s.
High-growth employment is far less concentrated than often appreciated — and indeed varies greatly between sectors. The distribution of business service employment (see fig 1), for example, shows a significant focus around Greater London, Berkshire and Surrey; this is in marked contrast to the employment pattern which emerges in the R&D, pharmaceuticals or telecommunications sectors, which tend to be characterised by a more even distribution across the country. No single factor explains the distribution of high-growth sector employment throughout England and Wales. Any such explanation has to take account of differences between the business service sector and hi-tech companies, varying locational requirements and, indeed, the property needs of both high-order functions (headquarter/R&D) and low-order corporate activities such as sales and servicing and manufacturing/distribution.
Business services
The location of corporate headquarters remains the key influence in determining the distribution of companies in this sector. This is largely because services provided by such companies tend, more often than not, to be heavily channelled through the head office in multi-site organisations.
Over the past 10 years, however, organisational change and the growing usage of technology enabled an increasing number of “back office” functions such as computing and administration to be decentralised. The de-coupling of these functions from the head office has provided an important source of demand for office/business use space throughout most of the key centres in the South East as well as in a small number of areas further afield — the South West, for example (see fig 1).
The extent to which the existing pattern will continue to be reinforced in the 1990s is uncertain, given the shifting importance of both costs and availability of suitable sites/premises and the availability of suitably qualified staff. It will also depend on the nature of organisational change likely to be undertaken by companies presently in central London.
While the business services sector as a whole is set to continue growing, the rate of expansion is likely to moderate as a result of the slowdown in economic growth expected over the next few years (see table 1). Elements such as deregulation and legislation which were important triggers of business growth in the 1980s are likely to be less important in the 1990s. In order to maintain growth and profitability, banks, insurance companies and the professional sector will need to place much greater emphasis upon supply side factors such as technology, work redesign and corporate restructuring in order to reduce overheads. Given the increasing cost of a central London location — defined to include not only accommodation costs but also those costs associated with deteriorating infrastructure, housing and availability of labour — relocations of certain corporate functions can be expected to increase through the 1990s.
It is likely, however, that relocations initiated over the next few years will be characterised by different features from those undertaken during the 1980s. With much of southern England now seeing full employment, the distance of relocations from central London will increase if companies are to enjoy the benefits of decentralisation or, alternatively, potential movers will have to consider relocating eastwards to Essex and Kent where costs are lower.
Hi-tech
The hi-tech sector comprises a large variety of industries and functions; not surprisingly, therefore, the distribution of existing employment is more evenly spread throughout the country. While it is not possible to provide a detailed analysis of factors influencing locational decisions in each sector falling within the hi-tech classification, it is possible to illustrate the broad issues which determine the location of both high- and low-order functions (see table 2).
The existing distribution of high-order functions is primarily the result of four major factors. The location of Government research establishments (GREs), particularly along the M3/M4 corridors, was an important influence initially in attracting key companies. GREs provided not only an important source of contracts, as in the case of the aerospace, telecommunications and data-processing sectors, but also helped to provide and develop a large pool of highly qualified staff. The agglomeration effect resulting from such a source of qualified staff, access to airports and central London and proximity to head offices have all been of considerable importance in determining the suitability of a particular location to hi-tech activity.
The distribution of high-order R&D functions has also been influenced by the general trend away from older, industrialised centres to smaller towns and rural areas. The urban/rural shift accelerated during the 1980s as more companies recognised the economic and environmental benefits associated with an off-centre location. Clearly there are many other factors influencing the location of high-order functions. Historical inertia is an element which has been particularly important in explaining the pattern of employment in the pharmaceutical/chemical sector and the high concentration of such activities found in Cheshire, Merseyside and Clwyd (Unilever/Shell), Kent (Pfizer) and Nottinghamshire (Boots).
While an over-representation of hi-tech employment in a particular area provides a sound basis for future growth, it is desirable that such employment comes from a range of growing sectors. The dominance of individual companies within certain counties, as is the case of the pharmaceutical or indeed aerospace sectors, will increase the over dependence of the local economy on a particular sector, and thereby increase the volatility of potential future growth. As a result, those counties which enjoy a diversity of high-growth sectors are likely to enjoy not only above average but also consistent growth throughout the 1990s.
Figure 2 provides information on those counties which have been successful in fostering a diverse economic base of high-growth sectors. This has been compiled on the basis of counties with an over-representation of high-growth employment (25% above the national average) weighted to take account of the relative importance of each of the six sectors both locally and nationally.
Berkshire, Hampshire, Surrey and Hertfordshire have been most successful in diversifying their respective economies. It is unlikely, however, that these four counties will be capable of maintaining their 1980s rates of growth. This is primarily owing to increasing constraints on growth seen most clearly in labour shortages and rising costs. Attention is, therefore, likely to shift to counties where supply-side constraints are not as strong such as Essex, Kent, the South West and the cross-country corridor from Nottingham, Staffordshire and Cheshire through to North Wales.
Conclusion
The structure of a particular economy is the most important determinant of future economic growth. As a result, those counties which show an over-representation of high-growth sectors are likely to enjoy above average growth through the 1990s. This should filter through to increased demand for floorspace both directly as key companies seek to expand and indirectly through the multiplier effect.
The existing distribution of high-growth sectors defies any single explanatory factor. It varies both between different sectors and according to the precise nature of the corporate function involved.
Furthermore, there is not only a marked difference in the distribution of various business sectors but also in their concentration within specific counties. The concentration of the pharmaceutical and aerospace industries in a small number of counties testifies to the dominance of a few major companies within these sectors. This may well increase the volatility of future growth, since it is largely dependent on the prospects of individual companies rather than on the prospects of the sector as a whole.
Diversification, even where high-growth sectors are concerned, is all-important in helping to ensure consistent growth. The counties of Berkshire, Surrey, Hampshire and Hertfordshire stand out by virtue of their economically diverse profile. These four counties have been extremely successful in attracting companies from high-growth sectors over the last decade. However, increasing supply shortages have been particularly pronounced and may well affect the prospect for growth during the first half of the 1990s at least.
Full employment over much of the South East should encourage longer distance relocations and bring about a reassessment of the potential merits of decentralising to Essex and Kent, for example — locations which were largely ignored during the 1980s.
