Pressures on office space

The city has seen 262,000 sq ft of office and laboratory space take-up in the first half of 2017. This includes major deals with Amazon, Heptares and Astex Pharmaceuticals. Average annual office and laboratory take-up has reached 620,000 sq ft over the past three years, a 59% increase over the 10-year annual average.

This structural shift has been driven by both inward investing and expanding global R&D businesses, which has left the market with only 1.3 years of supply. We classify this as a shortfall.

If this is not addressed promptly, Cambridge could struggle to attract new projects that might be drawn to other competing centres worldwide. With an additional 2,200 office- and laboratory-based jobs forecast over the next five years, this indicates a need for more than 300,000 sq ft of additional space. This has added further upward pressure on top rents, which now stand above all other UK cities outside London at £37psf for offices and £32psf for laboratory space. We expect Cambridge to see further rental growth, driven by unprecedented levels of take-up and a shortage of speculative development.

^{Source: Savills Research}

Competitive salaries

Although rents are a factor, global occupiers are more concerned with wage costs than commercial property costs, as they are a comparatively smaller part of overall operating costs.

Despite average weekly earnings in Cambridge now standing 13.6% above the UK average, the city’s workforce remains cost effective in global terms. Accounting for exchange rates, the average salary for a software development engineer in Cambridge is 32% below that of the equivalent role in Chicago.

As we covered last year, Cambridge is still more affordable for bioscience companies, with average scientist salaries 40% below the equivalent role in Boston, USA. Multinational occupiers will continue to seek skilled labour at value, and salaries within Cambridge remain attractive.

^{Source: Glassdoor}

Talent pool pipeline

Occupiers are also concerned about where future pools of talent will come from. Education accounts for around 15% of Cambridge’s Gross Value Added (GVA), more than twice the UK average, which is largely driven by research and development at the University of Cambridge. However, Cambridge currently retains only 17% of its graduates in the city after graduation. London retains 77%. Cambridge must retain more of its homegrown talent in order to expand further.

One major challenge for the education sector is the UK’s relationship with the European Union. Typically, 10% of Cambridge’s undergraduates come from other EU countries, but the university recently revealed that 2016 applications from member states had fallen 14% on the previous year. The potential of higher fees for European students and uncertainties over post-Brexit R&D funding could pose a threat to the city’s growth.

In 2016, 13% of the University of Cambridge’s research grants were provided by EU funding. Although uncertainty surrounds the EU funding gap into UK universities post-Brexit, the UK will continue to benefit from Horizon 2020 funding.

So, unless Brexit causes an investment hiatus, the outlook for Cambridge remains positive, but short supply in the office and laboratory pipeline means there is a risk that some investment might be deflected elsewhere.

Boost in commercial investment

There has been a stepped increase in commercial investment volumes in Cambridge in recent years, with the five-year average reaching £241 million; 65% above the long-term annual average. Notable transactions have included Aviva Investors’ acquisition of 50 and 60 Station Road in the CB1 District for £80 million, and the purchase of 14-15 Market Street for £18 million by a private Saudi Arabian investor.

The UK Institutions have historically preferred prime assets in the city and are under increasing pressure to buy following strong inflows of capital.

Strong investment levels have driven capital value growth; Cambridge’s office/laboratory capital values stand 62% above the March 2009 levels. Comparable UK cities have not seen the same growth. Values in Oxford, for example, have only grown by 13% in the same period, whilst Manchester’s office capital values have still not yet recovered to its 2009 values.

Strong international demand and the return of the UK institutions during 2017 has seen prime office yields fall from 5.25% to 5% over the past six months. This being said, yields remain attractive relative to the City of London and West End, at 4% and 3.25% respectively.

^{Source: Savills Research, MSCI}