Can UK regions sustain returning occupier activity in 2018?
Occupier activity returned to the UK regions in a major way during 2017, but can the momentum be maintained?
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Against a backdrop of persistent geopolitical uncertainty and slow economic growth rates, occupier activity in the regional markets surprised on the upside. More than 7 million sq ft of office space was let across the ten core markets reviewed in this report. On this basis, the markets were not simply resilient – the aggregate volume was, after all, some 1.3 million sq ft above the ten-year average. Instead, 2017 represented a clear renaissance for occupational markets in the regions.
They were beneficiaries of a perfect storm. Businesses, under huge pressure from digital disruption, brought change to business models which fuelled market demand. Furthermore, the economic backdrop forced many to actively consider and commit to locations that presented a property and operational cost advantage or a cost profile more appropriate to the type of business function being fulfilled. Finally, regulatory and political pressures fuelled significant regional requirements. The ringfencing of UK retail banking operations has supported increased financial services activity, most notably HSBC’s commitment to Birmingham, while cost and efficiency drivers influenced a rethinking of the Government’s estate and with it emerged sizeable deals in a number of regional markets.
The perfect storm was realised through two significant supply side drivers. First, the emergence of a strong pipeline of high quality, amenity rich product located within city centres. There was a clear step change in the physical product found in regional cities. Second, the vibrancy, cohesion and relative affordability of the regional cities increasingly appeals to young professionals. Different lifestyle choices are creating a deepening supply of regional talent that occupiers recognise and buy-into.
So, as we enter into 2018, a key question must be, can the regional renaissance be sustained?
Business confidence, investment and hiring intentions are all positive, relative to their position a year ago, although the twists and turns of Brexit may well bring volatility to these indicators. The potential brake on momentum is actually on the supply side in select cities. We do not envisage aggregate leasing volumes extending beyond the levels reached in 2017. However, the structural drivers underpinning occupier demand remain firmly in place. The outcome will therefore be strong enquiry and requirement levels, intense competition amongst occupiers to secure preferred options and pent-up demand from those unable or unwilling to compete.
In our view, there will be four key characteristics of occupier demand in the regional markets during 2018:
1. Increased occupier mobility
As supply tightens in some markets, but the need for cost effective business transformation intensifies, we anticipate a broadening of search areas and a growing level of competition between regional centres for this mobile demand.
Occupiers will undertake extensive research in relation to market dynamics and options, but also critically in respect of workforce availability and / or the impact of any relocation on core staff.
2. Cost sensitivity but not at the expense of workplace quality or experience
Given prevailing economic conditions cost sensitivity will be high, but occupiers increasingly accept that low cost, low
quality real estate options are actually a false economy as they create expensive staff churn. It is on average ten times more expensive to replace a staff member in the regions than it is to accommodate them. Real estate costs will be scrutinised but not at the expense of creating a workplace that supports staff recruitment, retention and their workplace experience.
3. Further disruption fueling demand
A new wave of technology – automation, AI, and robotics, will create opportunities to enhance business efficiency and productivity. Back and middle office functions will be reshaped and talent requirements will shift away from clerical and processing skills and towards technical and creative skills. As businesses make plans for this next cycle of disruption, new demand will be generated.
4. Increased demand for service
2018 will be the year in which the co-working revolution hits the UK regions. There will be a multiplication of co-working providers ranging from new challengers, established operations and also traditional supply side players responding to the challenge with their own offer. There will also be greater demand from corporates seeking larger scale solutions. The key point, however, is that co-working brings a new approach to customer service within the industry. Highly serviced, scalable environments that give the occupier a turn-key solution with no hidden costs will be in great demand.