Demand for offices by etssetcf


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									What drives demand for
offices in Great Britain?
Published by the British Council for Offices, June 2008

Executive summary
What drives demand for offices in Great       economy away from manufacturing and
Britain? is a report produced for the         towards finance, real estate, renting and
British Council for Offices by the Centre     other business services, this has
for Economics and Business Research. The      contributed to the strength of demand for
report considers the market fundamentals      office space. An additional 142,000 jobs
which determine the demand or take-up of      in these sectors have been added in
office space in Great Britain. As the         London alone since 1998.
largest and best understood office market
in Great Britain, central London provides     In terms of the second layer, the
the natural focus of this report.             fundamentals that underpin the strong
                                              trend in London employment include the
Our approach is to consider two distinct      quality of the labour force, external
layers underpinning demand for office         transportation links, business clusters and
space. The first is the activity levels of    the size of the local market. Economic
office based business sectors – and
                                              theory and survey-based evidence
notably employment in finance and
                                              demonstrates that these factors are
business services. The second is to analyse
                                              extremely important in determining
what drives the employment trends we
                                              demand for offices. We measure this
have observed.
                                              advantage by analysing productivity in
In terms of the first layer, Great Britain    different locations around the country.
and, in particular, London have               The average London firm has a
experienced strong expansion in the           productivity lead of £13,000 per worker
overall number of jobs and businesses in      per year over the average firm in the rest
recent years. Combined with the               of Great Britain; for central London this
continued change in the structure of the      advantage rises to £17,800.
                                     WHAT DRIVES DEMAND FOR OFFICES IN GREAT BRITAIN?

We extend our analysis to calculate the         region in Britain because it has seen the
extent to which higher productivity is          greatest rental increases and the strength
converted into higher profits for London        of its finance sector means it is most
firms. The combination of higher wages,         exposed to the effects of the credit
rents and other business costs is such
                                                crunch. Furthermore, office construction in
that the profit edge over the rest of Great
                                                the capital has boomed in recent years in
Britain is just £2,500 per worker per year
in London. For central London the               response to the surge in rents, which
advantage is £3,000 per worker per year.        means a large quantity of supply is set to
The South East overtakes London as the          come on-line during a falling market. The
leading region in terms of profits per          combination of weaker demand and rising
worker.                                         supply means that we expect central
                                                London to experience a substantial fall in
The costs faced by central London firms
                                                office rents over the next two years of at
are likely to have risen further over the
                                                least 20%.
past two years due to the sharp increase
in office rents. This has made the West
                                                The medium term outlook for the office
End of London by far the most expensive
                                                market is far brighter with Britain and, in
area in the world for grade A office space.
Rents are more than 70% higher than             particular, London considered an excellent
those in Mumbai, Moscow and central             place to do business. The shift in the
Tokyo – the most expensive locations            structure of the economy towards office
outside of London.                              based sectors is forecast to continue. This
                                                pattern is occurring across Britain with
The fundamentals supporting finance and         significant office based clusters being
business service activity in London remain
                                                developed in a number of regional centres,
sound in the longer term. However, in the
                                                such as Leeds, Manchester and
short-run the London office market is
undergoing a correction. The slowing            Birmingham. Moreover, the decline in
economy is set to dampen office take up         office rents in London in the short term,
and rents over the next two years. We           will reduce the costs faced by businesses
expect London will be the worst affected        and so boost the medium-term outlook.
The British Council for Offices (BCO) exists
to research, develop and communicate best
practice in all aspects of the office sector.
It delivers this by providing a forum for the
discussion and debate of relevant issues.
The BCO works to promote co-operation and
understanding between landlord and tenant,
investor and developer and owner and
occupier, thereby improving efficiency and
innovation in the sector.

For further information contact:
British Council for Offices
78-79 Leadenhall Street
Tel: 020 7283 0125
Fax: 020 7626 1553

Further information about the BCO,
including a membership application form,
can be found on the BCO’s website:

Printed on paper made entirely
from recycled stock.

Design: Vere Hunt

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