To properly understand the opportunities the UK’s cities offer for investors, developers, occupiers and talent, the use of data, insight and “boots on the ground” are essential. Here the team at Avison Young delve deep into the stats to uncover how the evolving needs of a changed working, living and playing population are affecting our cities.
Making decisions about investment in cities requires an understanding of how key sectors are performing both in relation to one another, and in relation to other comparable cities. This is particularly important in a challenging economic environment with significant structural changes.
Where, when and how we choose to work has changed, irrevocably altering the office sector’s demand profile. The flight to quality is evident when looking at the data, with many occupiers now leasing smaller spaces – and they are willing to pay higher rents for quality space to secure talent and meet ESG commitments. Compared with pre-Covid levels, in regional city centres the proportion of leases which were grade-A (44%) has doubled, while the average size of new leases has fallen by 16% in the past year alone. Cardiff (+23%) and Bristol (+10%) were the cities with strongest 2022 take-up compared with five-year average levels, a sign perhaps that strong green credentials and easy access to outdoor space are attracting talent – and therefore occupiers.
Green development
Avison Young is active in both Cardiff and Bristol, delivering new schemes to feed growing demand. In Cardiff, it has been working with the council to deliver the regeneration of the 30-acre Atlantic Wharf, destined to be a new 15,000-seater arena to the city, alongside other commercial uses.
In Bristol, the firm brought the patient capital of Legal & General together with the council to transform a derelict industrial area into leading net zero, mixed-use development Temple Island.
Driving into the data, it is clear there is a need for new, green development across our cities. The post-pandemic flight to quality has led to chronic shortages of premium space. Supply across regional city centres fell by 5% in 2022, driven by the erosion of grade-A supply which now accounts for just 23% of total volumes.
In some cities, supply has been consistently low for several years. In Edinburgh, for example, just 5% of all supply is grade A. The demand for grade-A space is creating real opportunity across the UK for investment into these cities as occupiers seek out top-quality, amenity-rich office space. The bifurcation of the office market poses an opportunity for investors that are willing and able to invest in repositioning assets to a higher spec and invest in targeting sustainability credentials that occupiers are seeking.
As a result of the imbalance between grade-A supply and demand, prime office rents have increased by 6.5% from 2021 to £34.80, at a rate almost double the five-year average.
Liverpool (15.9%) and Bristol (10.4%) have seen the highest growth. By contrast, average annual rental growth in the wider office market is 1.5%.
Undersupply and increased demand
As grade-A offices across UK cities look set to outperform, so too is there an opportunity for UK locations to benefit from industrial growth.
While the current economic outlook is proving challenging for the commercial real estate sector with investors exercising caution, an increase in demand from manufacturers in the coming years is expected. The pandemic highlighted supply chain fragility and an increasing number of companies are now showing more interest in nearshoring operations. In 2022 the take-up of manufacturing space increased by 11% compared with 2021, and in Newcastle it accounted for 95% of take-up.
Despite economic uncertainty, the industrial sector has structurally changed over the past decade and is more robust compared with previous downturns. Non-food retailers and third-party logistics providers dominate the share of take-up of big box, grade-A space, representing 51% of 2022’s total. Regionally, these occupiers accounted for 100% of take-up in Cardiff, 71% in Manchester and 69% in Birmingham.
Liverpool led in terms of industrial take-up in 2022, up by 89% on the five-year average, while supply in the city is among the lowest.
Across both office and industrial markets, it will be assets with the strongest ESG accreditations and amenity offers that will continue to outperform. As build cost inflation cools throughout the year and asset pricing bottoms out, opportunities for liquid investors to reposition secondary assets or acquire cheaper land for future regeneration will be revealed.
Reinforcing chains
New opportunities have also arisen from structural and policy changes. Established and emerging life sciences hubs outside Oxford and Cambridge offer alternative markets for occupiers; logistics and storage developers are venturing into urban locations as firms seek to reinforce their supply and distribution chains; and the growth of the electric vehicle industry is transforming demand for charging facilities and battery manufacturing centres.
Making the most of these opportunities, including navigating policy changes, needs strong partnership between private sector investors and public sector bodies, with both parties setting out clear priorities, expectations and ways of working together.
