Future Shock: the Coming Wave of Office ObsolescenceChallenge One – The Urbanisation of the Economy

Dig a bit more into the data, and the differences become even more apparent. The Central London Boroughs of the City, Westminster and Camden accounted for just 6.7% of new jobs in the pre-Global Financial Crisis decade, whereas in the decade just gone, they accounted for 17.9%. It is not just London that has been responsible for this shift, however. In the decade to 2008, the big cities outside the capital (Birmingham, Manchester, Bristol, Leeds, Edinburgh and Glasgow) accounted for just 9.3% of the net gain in employment. Many rural and “out of town” locations saw faster growth. But over the past decade, that figure has risen to 15.6%. As the chart below shows, Inner London and the “Big Six” accounted for almost half of all new jobs over the past decade, compared to around a quarter during the decade leading up to the GFC. Aside from a few areas, such as around Oxford and Cambridge, economic growth is becoming increasingly urban and city centre focussed.

WHY IT HAPPENED

There are a number of potential reasons for this. It may be partly supply-led – i.e. where new offices have been provided, which has largely been in cities – arguably a result of planning and regeneration policy. Manchester’s renaissance has led to very strong job growth over the past decade, whereas Birmingham city centre’s performance has also improved from a lower base. (Sometimes the strength of regional centres is obscured by the underperformance of other areas of the local authority area.)

Meanwhile, Central London, especiallythe City, has seen more activity at the expense of other parts of Greater London and the Thames Valley, which may be a reflection of the volume of development, particularly in the tower cluster.

However, it is also a result of growing recognition among businesses about the value of cities and agglomeration economies. Attracting skilled, sometimes internationally mobile workers can be easier in amenityrich environments which are more accessible by public transport (as well as by road).

Gathering employees near others in the same or related sectors seems to lead to productivity and innovation gains – a result of face-to-face contact and “accidental” knowledge sharing within networks.

But perhaps most decisive has been the concentration of working age population in urban areas, which has been particularly pronounced among younger generations. This trend started with the expansion of university places in the 1990s but has intensified recently, a likely combination of preferences (as urban environments have improved), demographics (there are more single people than in the past, with major life changes occurring later or not at all) and necessity (cities are where rental housing is available, given affordability issues).

A further factor may be that office space in certain locations, such as Westminster, has been protected through planning policy, whereas in more peripheral markets at least some office stock has been lost through change of use.

WHERE THE WORKERS ARE

Looking at the same analysis periods the top 10 fastest growing local authority areas accounted for 14.0% of the total working age population increase in 1998-2008, a figure that had risen to 24.6% for 2012-2022. In other words, over the past decade, roughly one in every four “additional” working age people lived in one of Tower Hamlets, Birmingham, Manchester, Bristol, Glasgow, Newham, Leeds, Edinburgh, Salford and Coventry. (London’s overall proportion of growth has remained steady, but it has become more concentrated, whereas some previously fast-expanding boroughs such as Westminster have seen their working age population fall).

The Greater South East (including the East of England and London) has been the one exception to this trend of urbanisation, with many suburban and rural authorities seeing strong working age population growth. Indeed, some town centres have benefitted from this given the emphasis on rail commutes, and this may help to support
offices in some accessible locations.

While this is presumably partly a result of affordability issues in London (especially for families), the attractions of the Oxford-Cambridge arc are particularly apparent. Over the past decade this area has accounted for almost 15% of the national growth in working age population, whereas in the decade to 2008 this was only a little over 5%. While this is not yet discernible in the jobs analysis provided earlier in this report, the increasing economic importance of this area is evident – a result of its universities, its skilled population, and the strength of key sectors such as Life Sciences and Technology. Providing more workspace and housing here, alongside improved infrastructure, is clearly vital to enhancing UK economic growth.

CONCLUSIONS – WHAT IT ALL MEANS FOR OFFICES

There is an evident trend of office-type employment concentrating in a handful of urban centres (and mostly in their cores, not out of town). Given the parallel concentration in working age population, this is likely to continue, albeit with the Oxford-Cambridge arc and a few other specialised centres an exception.

This implies that the demand for offices in such locations will remain robust and could increase over time. On the other hand, occupier interest in offices in other locations is likely to become noticeably weaker.

This will not only put into question the viability of office development or refurbishment elsewhere, it is likely to create significant obsolescence problems in some locations that may previously have had a relatively vibrant office sector. In some places transformative projects or conversion to residential may address this problem, but it is unlikely to work everywhere. The polarisation of occupancy levels, capital growth and rents is set to grow.

Fortunately, the recent reintroduction of more General permitted development rights around the office-to-residential conversions may make this process easier. It is important to emphasise that these may be time-limited, given the recent change Of government.