In this article, James Griggs provides a brief description of the UK office sector and identifies some of the most important data and information resources that measure activity within it.
The most recent government statistics show that, in 2008, offices accounted for 101.5 million m2 of floorspace across England and Wales. This compares with 106.3 million m2 for retail use and 367.1 million m2 for industrial purposes (factories and warehouses). Of this total, almost 83% is classified as “commercial offices”, the bulk of the remainder being local government-occupied buildings. While offices accounted for 17% of the total floorspace, they made up 31% of the total rateable value.
Over the 10-year period 1998 to 2008, commercial offices expanded at the fastest rate of the major use types, with a total increase in floorspace of 29%. In comparison, the amount of retail space grew by just over 4%, warehousing space by 22%, and factory space shrank by almost 8%. This corresponded with the increasing importance of the service sector to the UK’s economy.
Central London has by far the largest office stock. With well over 150 million ft2 of space in 2011, it is around four times the size of Manchester, the second largest. Birmingham, Glasgow, Edinburgh, Leeds and Bristol make up the rest of the top seven.
The value of new construction work on commercial offices during 2012 was £5.9 billion according to the Office for National Statistics (ONS), compared with the total of £22.5 billion for all private commercial work.
Out-of-town offices, particularly in business parks, became an important part of the sector in the latter part of the last century, with ease of access and lower rents being the main attractions for tenants, and cheaper land prices a key incentive for developers. Stockley Park in West London was one of the earliest examples, opening its first phase in the mid-1980s. Other notable examples include Chiswick Park in South West London, launched in 2000 and now comprising 1.4 million ft2 of space spread over 12 buildings, Green Park at Reading, and Cambridge Science Park.
However, business parks have recently fallen out of favour, with occupiers preferring the vitality of city centre locations. Large media-sector occupiers, which might at one time have been expected to locate their headquarters along the M4 corridor, are now seeking more central positions, for example Google at King’s Cross. Business park landlords have been forced to provide additional services in order to attract or retain tenants. GVA’s latest Business Park Review records a national average vacancy rate of over 19% and an historically low 470,000ft2 of space under construction, none of it speculative.
Other major developments include city centre estates. The Broadgate Estate at Liverpool Street in the City of London, which opened in 1991, is perhaps the best known example, with others including Spinningfields at Manchester and Brindleyplace at Birmingham.
Over the long term (since 1981), offices have performed poorly against the other major commercial sectors, delivering an annualised total return of 8.2%, against 9.7% for retail and 9.9% for industrial, according to the IPD. This is made up of 1.4% capital growth and 6.7% income return. However, over the last three full years, the office sector has achieved the best returns, 9.7% annualised, compared with 7.0% for industrial and 8.4% for retail — much of this due to superior capital growth.
The higher values of the central London markets have produced far more volatile returns than elsewhere, with rents reaching higher peaks during the upswings, but falling faster and lower during the downturns. Timing is key for developers and investors in these office markets.
Of the £35.5 billion of recorded transactions in UK commercial property during 2012, Property Data calculate that £15.6 billion was paid for central London offices, and £4.3 billion for offices across the rest of the country. So far, 2013 has seen similar levels of transactions continuing.
Yields on prime office stock ― in the central London sub-markets ― have fallen over the last couple of years, principally driven by demand from overseas investors, and funds seeking a secure long-term home for their money. Data published by Cushman & Wakefield in July 2013 showed prime office yields in London’s West End standing at 3.75%, with regional major cities’ central business district offices at 6.25%, and prime regional out-of-town stock at 8.25%.
Perhaps the most striking change in offices over the last 30 years has been in the way that space is used. The general shift from cellular spaces to open plan, and the shrinking physical demands made by IT infrastructure, have contributed to a reduction in the average space per office worker. In 2001, a Royal Institution of Chartered Surveyors report recorded a national average of 16.3m2 of floorspace per employee. The most recent research, however, shows that this has now come down to a mean density of one workplace per 10.9m2, with financial and insurance sector occupiers achieving 9.7m2. Of course, the increasing use of hot-desking policies will have contributed to the reduction in space per employee. Much has been written about the need for employers to make the workplace environment attractive if they wish to retain the best employees, and a certain backlash against homeworking has been seen ― for example at Yahoo’s offices ― recognising that workers are at their most creative and productive when collaborating in person, with one another.
The British Property Federation (BPF) and the IPD produce an annual survey of commercial leases, which includes average lease lengths for office occupiers broken down by tenant size, location and age of building. The most recent report, containing data for 2011, shows that, on a rent-weighted basis, average office leases rose to 9.4 years from 8.0 years in 2010. For smaller companies in offices outside the south east, the average lease length was 4.6 years.
Actium Consult’s long-running Total Office Costs Survey provides a breakdown of expenditure in the second biggest area after staff costs. The split-out includes rent, rates, annualised costs, hard and soft facilities management (FM) costs, for new and 20-year-old office buildings, at 50 locations around the UK. In a new building, rent accounts for 35% of offices’ costs on average (26% in a 20-year-old building), with hard FM costs being the second largest element at 23% (29% in older buildings). The total cost of a workstation ranges from almost £17,000 per annum in a new office in London’s West End, to just over £4000 in an older building in the north west.
Serviced offices, offering short-term leases and complete support packages, are concentrated in the capital, with around 500 locations. Workstation rates in London have risen above £600 per desk, per month and are back above pre-recession levels.
For office service charges, a useful benchmarking service is provided by Jones Lang LaSalle’s annual OSCAR research, first published in 1983. This itemises service costs for both air-conditioned and non-air-conditioned premises.
ONS, Output in the construction industry, Office for National Statistics
UK Prime Market Yields, Cushman & Wakefield
Overcrowded, Under-utilised or Just Right?, RICS Foundation and Gerald Eve
Occupier Density Study, BCO
BPF/IPD Annual Lease Review, IPD
Total Office Costs Survey (TOCS), Actium Consult
Office OSCAR Report, Jones Lang LaSalle
Last reviewed 9 December 2013