Nottingham
Commercial Office Market Review 2010
01
Introduction
Welcome to the inaugural Nottingham Commercial Office Market Review, the first in a series of annual reports intended to give the industry an insight into a part of the property market which is a key component of long-term business and economic growth. This review is the result of a detailed analysis carried out by the Nottingham Office Forum, a partnership which has brought together the expertise of the city’s commercial property professionals, specialist consultancies, economic analysts and inward investment and regeneration agencies. The result is a report which maps out the city’s entire commercial office market for the first time. It offers insights into the nature of Nottingham’s office stock, its relationship with the city economy, recent deals, forecast performance and emerging trends. The Nottingham Commercial Office Market Review has been designed as a tool for occupiers, investors and property market professionals, containing data which will assist decision-making. We hope it will provide an insight into the long-term resilience of the Nottingham economy and shows why the city will continue to be an excellent strategic location for businesses and organisations as the UK economy begins to grow again.
Main Image Nottingham’s Waterside area (courtesy of Scene Photography)
02
Key Partners in the 2010 Review
The Nottingham Commercial Office Market Review has been produced through a partnership between the Invest in Nottingham Club and the Nottingham Office Forum which has brought together a range of expertise in property, business and inward investment. Invest in Nottingham is the inward investment agency for the Greater Nottingham area. Its main role is to promote Nottingham as a business location and attract new investors to the city region with the ultimate aim to create jobs and strengthen the local economy. The Invest in Nottingham Club is a business-led networking organisation which comprises key city enterprises and regeneration and inward investment agencies. They have joined forces to help develop the city economy through initiatives which encourage the growth of existing businesses and the promotion of inward investment. The club was launched last year in London and holds regular events at key locations across Nottingham. The Nottingham Office Forum brings together the city’s commercial property professionals, planning and development experts and specialist consultancies. Our extended thanks go out to: Nottingham Regeneration Limited Nottingham City Council Nottingham Development Enterprise Lorne Estates Experian DTZ Fisher Hargreaves Proctor Geo Hallam and Sons HEB Innes England King Sturge Lambert Smith Hampton NG Chartered Surveyors Robert Clarke Savills
Main Image Nottingham’s Waterside area (courtesy of Scene Photography)
03
Setting the Scene: Reasons to be Cheerful
Nottingham has a long history of managing the impact of economic cycles and industrial change without suffering lasting structural damage. During the latter part of the 20th century Nottingham transformed itself from being a traditional industrial city to a diverse, service-led economy. And while it is firmly established as the administrative capital of the East Midlands, it avoided a dependence on the public sector. The opening decade of the 21st century has seen the emergence of new, knowledge-based sectors, though they are founded on expertise which has been present for a long time. The city which saw the discovery of Ibuprofen and the invention of the MRI scanner is now home to the largest bioscience incubator facility in Europe, BioCity. Nottingham also has a particular expertise in data analytics. Experian was founded in the city, while the Capital One bank has its European headquarters here. The analytical expertise which has come out of these two businesses has spawned a range of new, data-based start-ups. Supported by two world-class academic institutions, The University of Nottingham and Nottingham Trent University, it is the presence of this long-term expertise that has helped the city economy to find innovative ways forward. It has also encouraged the growth of the support structures which business expects to find in a major commercial location, top-class legal and financial expertise, a development industry with largescale technical capability, and retail, leisure and cultural facilities which rank in the UK top 10.
UK Top 10 For retail, leisure and cultural facilities
The presence of a number of consumer-oriented corporates has also seen the development of expertise in customer contact centres and back office support functions. Importantly, the city has also seen large-scale investment in transport infrastructure and traffic management. Investment which meant that even as the city economy grew, traffic levels fell back. The most high profile investment was in the expansion of Nottingham’s NET Tram network and the Hub transport interchange. Despite the strictures of the Comprehensive Spending Review, the city still secured coalition Government approval in late 2010 to extend this network significantly, providing a vital artery to support future development. Nottingham is not immune to the immediate challenges present in the UK, Eurozone and global economies. Neither is it over-exposed to them. When the economy begins to pick up, this is a business location ready to make sustainable progress. Main Image BioCity Nottingham
04
Office Market Overview: Quiet Optimism
This inaugural Nottingham Commercial Office Market Review means that direct comparisons with other past studies are not straightforward. Nevertheless, activity levels in 2009–10 do give a flavour for what has been happening in the city. Overall, the year saw over 680,000 sq ft let in the city, with a mix of activity dominated by two headline deals: Nottingham City Council’s move to consolidate its office estate into a single, prime location, the 213,000 sq ft on offer at Loxley House; and E.on’s decision to sign up for 105,000 sq of brand new grade A space being built at the Guildhall site – part of the estate which the city council has vacated. Beyond these headline deals, there was also notable activity in the mid-market sector, activity which has played to the city’s ambitions for the growth of knowledge-based business. The German computer games business Crytek moved its UK development arm into the emerging Southreef complex on Southside, while Speedo which has designed some of the most technically-advanced competition swimwear in the world has built a landmark headquarters building at the ng2 Business Park. The decision of these existing enterprises to take better-quality space is a testament to the growth capacity inside the Nottingham economy. However, it does leave a question mark over what happens to the old stock left behind, particularly the six properties vacated by Nottingham City Council. This issue will be examined later in the review. Recent activity demonstrates that the city has not been overly reliant on the public sector, and that there is a healthy economic diversity in Nottingham which may not be present in other cities, particularly those further north. There is no immediate sign of a return to the office market by the professional and financial sector, though requirements were present prior to recession. It is clearly important that the city maintains its status as a professional centre. Deals Done 2009–2010 sq ft 300K
250K
200K
150K
100K
50K
0
Period Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Main Image BioCity Nottingham
Main Image View of Nottingham Castle (courtesy of Scene Photography)
05
Rental Trends
Improvement in capital values is likely to be greater in Nottingham than in comparable cities such as Bristol and Sheffield over the next five years. Emerging evidence would suggest this is especially true for prime rents. Office forecasts: Rental Value Growth The Investment Property Database Index (IPD) suggests average office rents in Nottingham fell three per cent in 2009, and further falls in 2011 would seem unsurprising. The market is not as muted as it seems though: there is evidence from Prime data that rents may be edging back up again for good quality space in strong locations. Indeed, some of the deals done in Nottingham during the last 12 to 18 months have hit levels which point to a rise in headline rents for Grade A space. They include the £18.75 per sq ft which Specsavers agreed for 34,000 sq ft at its ng2 site, and £18.95 per sq ft which Speedo is paying for 35,000 sq ft at the same location. And in the heart of the city centre, E.on has demonstrated still more rental growth by agreeing £19.50 per sq ft in a pre-let of the landmark building going up at the Guildhall site. Our analysis suggests that average office rents are likely to start rising again from 2011, with an average growth rate of 2.2% expected to the end of 2015. This is ahead of the East Midlands as a whole, where growth of 1.7% is expected. By the end of this period, rents are likely to be some 14% higher than they were at the end of 2009.
£18.75
per sq ft
Specsavers agreed for 34,000 sq ft at its ng2 site
14%
Rents are expected to be 14% higher than they were at the end of 2009
06
Rental Trends
Rental Value Growth (%) 8 7 6 5 4 3 2 1 0 -1 -2 2010
2011
2012
2013
Capital Value West Midlands % UK % Growth (%)
2014
2015
Nottingham %
9
8
7
6
5
4
3
2
1
0
-1
-2 2010
Main Image View of Nottingham Castle (courtesy of Scene Photography)
UK %
2011
2012
2013
West Midlands %
2014
2015
Nottingham %
07
Welcome aboard: Inward Investment into Nottingham
Inward investment enquiries from businesses looking at a potential move into the city are handled by an experienced professional team at Invest in Nottingham supported by an active commercial and professional sector alongside the Invest in Nottingham Club network. Despite the recession, the numbers of enquiries which Invest in Nottingham has been dealing with has remained constant, and the team is currently handling a number of live, high-level projects which could have a significant impact on the city in terms of both jobs and demand for high quality office space. Below, we have provided graphs and charts which give a breakdown of inward investment enquiries in terms of both space requirements and broad geographic origin. Inward Investment Enquiries 18 16 14 12 10 8 6 4 2 0 01K sq ft
1K2.5K sq ft
2.5K5K sq ft
5K10K sq ft
10K20K sq ft
20K50K sq ft
50K+ sq ft
39.5%
Of all inward investment enquiries were regarding office property under 1000 sq ft
Main Image Nottingham City Council’s head office, Loxley House
08
Inquiries by Location
14%
Of investment enquiries are internationally based inward investment enquiries are dominated by two sources: local and national. But while each takes around 40% of inquiries, a healthy 14% comes from international businesses considering Nottingham as a UK base. The rest are regional. Interestingly, while the majority of local enquiries are looking for space in the 0 to 2,500 sq ft category, most are from either start-ups or high-growth businesses – an encouraging sign of future economic vitality. It is encouraging that Nottingham has seen a number of foreign owned businesses investing in the city including Changan Automotive, LEDinLight and Crytek. Enquiries by Location 14%
40%
5%
42%
Local
Regional
National
International
Inward Investment: The Immediate Future During the last 12 months certain trends have begun to emerge in the nature of the projects being handled by Invest in Nottingham, among them a notable rise in inquiries about potential contact/shared service centres. This is probably the result of a trend among financial and service businesses to bring off-shored call centre operations back to the UK, itself driven by the promotion of UK-based customer handling in marketing strategies. Major public sector relocations to the regions are now unlikely in the wake of the 2010 Comprehensive Spending Review, so Nottingham along with other regional cities can no longer look to this as a significant driver of office market activity. Instead, the city office market’s main focus for the foreseeable future will have to be the demands of local requirements and the growth sectors of the UK economy.
09
The Nature of Nottingham’s Office Stock
6,780,480
sq ft
Nottinghams total built office stock
An extensive analysis of the city’s office stock was carried out in summer 2010. We are grateful to Lorne Estates and all of Nottingham’s commercial agents for the work they put into assembling this data. As of November 2010, the total built office stock in the Nottingham office core area amounted to 6,780,480 sq ft. There is a further 2,538,991 sq ft of proposed new stock in the pipeline. However, current economic conditions mean that only one of these schemes is likely to progress imminently – Miller Birch’s pre-let to E.on of 105,863 sq ft of space at the Guildhall site, which is due for completion in 2012. The rest of the consented stock is unlikely to proceed until the space is wholly or partially pre-let. In an uncertain market, it is questionable whether these schemes can proceed in their originally planned form, or whether developers will have to look at alternative uses to achieve progress. Total Office Stock - sq ft 3,325,462
2,538,991
1,062,224
2,369,910
Pipeline
Grade A
Grade B
Grade C
2,538,991
sq ft
Nottingham’s proposed pipeline office stock
Main Image Nottingham City Council’s head office, Loxley House
10
The Nature of Nottingham’s Office Stock
Beyond this raw data, the market continues to find ways forward. Both the Nottingham City Council and Crytek deals referred to earlier have added momentum to the Southside Business District, a cluster of corporate commercial offices ranged around the city’s main transport hub in Station Street the Nottingham Railway Station and the tram terminus. Southside is also home to Capital One, Ikano Financial Services and the corporate law firm Shoosmiths, and it provides a prime example of the drive to encourage pipeline activity through well-designed individual schemes within an overall environment which is naturally attractive to business. Southside’s long-term logic as one of the city’s major commercial locations is underlined by the large-scale investments in transport infrastructure on its doorstep, with funding in place for the extension of the tram network and plans for the redevelopment of the station.
130,000
sq ft
Over 130,000 sq ft of Grade A office space on the market The recent market activity has made an impact on the amount of Grade A office space left available with just over 130,000 sq ft being marketed at the end of 2010. However, this is still a reasonable amount of space available to meet forecast short-term demand and take-up rates. Grade C space vacancy rates account for just over 13% of the total built office stock in the city. A continuing flexibility with planning policy will be needed to bring this level of availability down, for example by considering alternative uses such as student accommodation, leisure/fitness, religious institutions and retail or residential where the location is appropriate. Office Stock on the Market – sq ft 131,999 210,848
375,858
2,448,206
Pipeline
Grade A
Grade B
Grade C
Main Image Nottingham City Council’s head office, Loxley House
Main Image The Tram on Fletcher Gate
11
The Future Shape of Employment
An important insight into future demand for office space comes from examining the likely nature of employment growth in years to come. Research and data analysts from Experian have carried out just such an exercise for the Nottingham Commercial Office Market Review, identifying the sectors likely to generate the most jobs in Nottingham and the city region. Employment Growth Experian’s Regional Planning Forecast flags up the likelihood of significant and acceleratingemployment growth. In Nottingham itself, nearly 14,500 jobs are forecast to be created in the period between 2015 and 2025 – a period beginning only four years from now. Employment Growth in Greater Nottingham
2010–15
2010–20
2010–25
Nottingham 2,092
8,475
16,511
Greater 9,035 Nottingham
22,671
39,255
Source: Experian Regional Planning Service, July 2010
Sector Employment Growth Employment growth is likely to be concentrated in a small number of industry sectors. Between 2010 and 2020, the fastest grower in these terms will be financial and business services, with an annual average growth rate which equates to the creation of more than 9,500 new jobs.
14,500
Jobs are forecast to be created in the period between 2015—25
12
Job Creation by Broad Sector 2010–2025
14,700
Jobs to be created in the Financial and Business services sector between 2010–2025 Job Creation by Broad Sector 2010–2025 15
10
5
0
-5
Engineering
Mining & Utilities
Other Manufacturing
Agriculture, Forestry & Fishing
Metals, Minerals & Chemicals
Transport & Communications
Other (Mainly Public) Services
Construction
Distribution, Hotels & Catering
Financial & Business Services
Job Creation (000s)
Overall, the business services, health and retail sectors are expected to add the greatest number of jobs to the local economy. But what might this translate into in terms of the growth of specific types of business? Delving more deeply into business services points to growth in law firms, accountants, and back office/ contact centres. Similarly, rising employment in health could come from biotechnology (where the city has an established reputation for expertise), while increases in jobs in the transport and communications broad sector seem likely in the city’s emerging ICT and digital media businesses.
Main Image The Tram on Fletcher Gate
13
Mapping Growth and Employment Land Type
As the employment growth data shows, the business services sub-sector which mainly requires B1 business accommodation will need to find employment space for an extra 13,000 workers across Greater Nottingham over the next 15 years. It’s safe to assume that a large proportion of these jobs will be created within the Nottingham office core, and this will have a significant impact on demand for city office space. The health sector will create employment opportunities for an additional 9,000 people. This will increase demand for type D1 business accommodation, along with B1 space for back office functions.
9,000
Employment opportunities with be created in the health sector over the next 15 years Estimate of Employment Land Requirements by 2025 400 350 300 250 200 150 100 50 0
Hotels & Catering
Other Financial & Business Services
Wholesaling
Retailing
Business Services
Health
Employment Land requirements (000 sq m)
Main Image The Arc on ng2 Business Park (courtesy of Scene Photography)
14
What are the Implications for Office Space?
Greater Nottingham is unlikely to have difficulty finding enough employment land. Instead, the challenge lies in developing enough existing sites to satisfy the demand for office space. While employment may fall in sectors like manufacturing, there will still be growth in sectors which demand office space. The Nottingham market must therefore gear itself up to accommodate the increasing pressure likely to be put on both existing and planned stock. There is a question mark over exactly how much stock is genuinely available. In 2007 Roger Tym and Partners, the planners and development economists, carried out a review of employment land which pinpointed a need to make sure enough sites were developed to satisfy future demand:
“Office markets in both the city centre and the M1 corridor are currently tight, with limited availability of both new and second-hand space. This position reflects short term cyclical factors, rather than a shortage of land. There is a good supply of identified development sites to meet currently foreseeable market requirements, but there are concerns about deliverability, as many of these sites require major infrastructure investment.� Roger Tym & Partners However, this analysis may now be misleading as it assumes that all the available space is suitable for occupation. As we acknowledged earlier in the Office Market Overview, moves like those of the city council mean the current stock now includes around 50% graded as office property which is in reality in need of substantial refurbishment. This clearly skews the figures for available space in the city. The implication from this is that the property sector must therefore continue to work with city planners to ensure there are enough new schemes brought forward to avoid a shortfall in high quality employment space.
Main Image The Arc on ng2 Business Park (courtesy of Scene Photography)
Main Image Unity Square, Southside Business District
15
Conclusion: NottinghamA Office TimeCore for Co-Ordinated Map Action?
As withThe other focus cities, of the theCommercial Nottingham Office office Market market Review has2010 is been comparatively Nottingham’squiet mainduring office core the past– couple it is hoped of years, we will though extend this the twoto major the fringes deals involving and out of town Nottingham areasCity of the Council city in and the future. E.on illustrate that even in a post-recessionary market the economies of major English cities can still generate significant opportunities. NOTTINGHAM Most analysts believe that, provided further shocks
are avoided, the UK economy is likely to lock on to the growth phase of an economic cycle again towards the end of 2011. The analysis carried out by those who contributed to this review that for NET TRAMsuggests LINE Nottingham this will generate clear opportunities for business and challenges for developers. MAN D ST T
KS
OO BR
AN
CR
BELWARD ST
AY NW
COLLIN ST
ST
WILF ORD
RD
CANAL
WATERWAY
QUEEN'S RD
ST W
PROPOSED TRAM LINE
LONDON RD
RIVER TRENT
A ARI
From a current perspective, it would be easy to conclude that Nottingham has a development pipeline that is more than adequate to satisfy immediate development trends. This review suggests that in reality there is considerable scope for new space and Nottingham is evidently open for business. Some of the city’s theoretically vacant stock is in need of considerable upgrading/ reconfiguration before it can be assessed for future use. Sentiment in the industry suggests that in future investors and occupiers may favour stock which reflects the trend towards more sustainable energy and environmental performance.
ID M
Alongside that and more immediately there is rising demand for UK customer contact and back office centres, in which Nottingham has significant experience.
MA
Data related to the property needs of start-ups suggests that the city may generate substantial space requirements in the future simply from home grown talent. The recent arrival in the city of the Chinese car company Changan Automotive also shows that Nottingham’s reputation for knowledge-based expertise attracts interest nationally and internationally.
SFIEL
Experian’s employment growth forecast points to an accelerating rate of job creation beginning within the next four years. There is also tentative evidence emerging that the presence of significant clusters of expertise fostered by a combination of industrial heritage (such as Alliance Boots’ long-term commitment to the health, beauty and pharmaceutical industries) and visionary corporate employers (like Capital One and DER Experian itself, BY RD both leaders in data analytics) has given birth to what may turn into the next generation of fastgrowth enterprises.
16
Conclusion: A Time for Co-Ordinated Action?
Further evidence in this review which may inform development decision-making is provided by evidence of improving trends in investment and rental growth. Beyond the raw data, this review is itself evidence that Nottingham is a place where public and private sector have acted quickly to ensure that the potential momentum in zones like Southside and ng2 is not allowed to stall. It is the product of ground-breaking collaboration between the property industry, analysts, regeneration experts and city planners, and it comes at a time when the city has succeeded in securing Government backing for a crucial transport artery despite a difficult fiscal environment. The long-term significance of this infrastructure investment should not be under-estimated. The creation of a fully-fledged transport hub at Nottingham Railway Station will deliver not only an advanced means of mass transit to the Southside Business District, but a commercial sense of place. This inaugural Nottingham Commercial Office Market Review paints a logical picture of mediumterm opportunity, one which demands that City planners continue to work closely with the development and investment community to respond in a coordinated manner to an evolving market. The work of the Nottingham Office Forum and the emergence of the Invest in Nottingham Club suggests that the city is developing the high-level collaboration necessary for these opportunities to be fully appreciated and properly exploited. In an uncertain economic environment, a conservative approach to commercial office development is understandable. For Nottingham, the evidence suggests the property industry may soon need to adopt a more ambitious, long-term approach. In the Nottingham Commercial Office Market Review for 2011 we hope that long-term approach will become clear.
Main Image Unity Square, Southside Business District
Nottingham Office Core Map
The focus of the Commercial Office Market Review 2010 is Nottingham’s main office core – it is hoped we will extend this to the fringes and out of town areas of the city in the future.
NOTTINGHAM
NET TRAM LINE
D ST
SFIEL
MAN
DER
CR
BY R
T
KS
OO BR
AN
D
BELWARD ST
ID M
MA A ARI AY NW
COLLIN ST
ST
WATERWAY
QUEEN'S RD
ST W
PROPOSED TRAM LINE RIVER TRENT
LONDON RD
RD
CANAL
WILF ORD
Invest In Nottingham Loxley House Station Street Nottingham NG2 3NG T: +44 (0)115 876 4469 E: enquiries@investinnottingham.co.uk www.investinnottingham.co.uk Nottingham Regeneration Limited LH BOX 24 Loxley House Station Street Nottingham NG2 3NG T: +44 (0) 115 876 4504 E: info@nrl.uk.net www.nottinghamregeneration.ltd.uk