Office & laboratory demand, supply and rents: The strength of Cambridge

Savills data shows the strength of the city centre market during the past 12 months. The majority of take-up, whether for offices and/or laboratories, has occurred in the city centre (Zone 1) around the central station and Hills Road. This area has accounted for 38% of take-up by square footage up to the end of Q2.

Supply is just over 100,000 sq. ft. of existing stock in this area currently, so the market has less than one years’ supply at present. Positively, the city centre market has around 156,000 sq. ft. under construction, of which only 30,372 sq. ft. is pre-let.

The UK commercial real estate investment market has seen an insatiable appetite from overseas investors for UK opportunities, particularly the larger lot sizes in London, despite the decision to leave the European Union. The Cambridge office market has seen £201 million of deals during the last five years (2013-2017); so far, 2018 has seen £139 million; more than half of this total has been within the office sector.

A major investment this year, involving an overseas investor, was the Trinity College and Tus Park joint venture. This £200 million deal involving the Cambridge Science Park development and Tsinghua University, a highly ranked university globally, highlights the attraction of overseas capital to redevelop the earlier parts of Cambridge Science Park as well as collaborate across a range of bioscience and healthcare sectors.

Since the last deep recessionary period for commercial property in 2009, the ‘Cambridge Phenomenon’ has driven capital value growth that has exceeded all other key regional cities.

Following the EU referendum, Cambridge has seen average capital values grow by 7.3%, which is the highest of the key cities shown in Figure 1. Investor confidence, supported by a strong occupier market and enhanced future corporate growth, has driven this. The majority of this growth has emerged during the last 12 month.

A spreading of business geography for Cambridge?

A key question for the future is the ability for the innovation economy to evolve and expand within Cambridge and its hinterland. Balancing cost of space with accessibility to the city centre is what corporates need to consider; and they do, carefully. Access to capital, transport, labour and knowledge are vital considerations and the question evolves in to how does Cambridge prosper and what is the potential for the hinterland to deliver real estate to achieve economic and social success.

How far from the city centre are commercial occupiers, of office and/or laboratory space, willing to be? Whilst the city core is still king, developer confidence is growing outside of the city centre. St Johns College and Turnstone completed the 65,000 sq. ft. Maurice Wilkes Building at St John's Innovation Park in July. The building was let to seven occupiers prior to practical completion. Biomed Realty are speculatively developing 108,000 sq. ft. of laboratory space at Babraham Research Park across two new buildings and Churchmanor Estates are speculatively developing 40,000 sq. ft. whilst simultaneously masterplanning for additional capacity at Chesterford Research Park. In addition the Howard Group are to speculatively construct over 60,000 sq. ft. of office/R&D space at Pampisford adding to the weight of activity on the southern side of Cambridge.

The continued lack of supply in the city core and the strong pre-letting activity in the Northern cluster and Cambridge Biomedical Campus has resulted in limited supply available. Royal London acquired Cambridge Research Park in Waterbeach for £78 million in H1 2018. This has highlighted the appetite for value add opportunities to the edge of the city, most recently the 75,000 sq. ft. speculatively built Enterprise industrial/hybrid scheme has experienced good levels of interest and enquiry since its recent completion.

The overall impact of current and future supply in the Cambridge market will be positive on future rental growth. The limited development pipeline and lack of available space in the city centre and northern fringe combined with the consistent good levels of occupier demand will result in headline rents increasing in the short term. We expect record rents to be achieved in the city centre at 50 & 60 Station Road. By the end of 2020 prime rents could reach in excess of £45 per sq. ft.

Corporate investment: shaping the future of Cambridge

The strong levels of corporate investment into Cambridge seen since 2012 continued in H1 2018. There has been over £8.45 billion invested into and by businesses in Cambridge in 2018. The majority of this investment (£8.25 billion) are by companies headquartered in the Cambridge area.

The five-year annual average, for headquartered companies, is £7.87 billion highlighting the relative strength of this year and continued confidence in Cambridge, and indeed, UK companies despite the uncertainty over Brexit.

There have been four deals worth over £100 million in 2018, highlighting the strong investor interest in Cambridge’s tech cluster. This new investment into Cambridge companies will lead to expansion from existing occupiers in the market and therefore developers need to be able to respond to this latent demand. 81% of the companies which have received investment since 2012 have been headquartered in Cambridge. This is positive for the market as it is likely that Cambridge will directly experience the benefits of any expansion rather than if the businesses were headquartered elsewhere.

Figure 3 shows the distribution of corporate investment for companies that are headquartered in Cambridge. In total, 89 transactions were recorded in 2017, and to date 74 transactions have been recorded in 2018. This shows, again, the continued strength of Cambridge in terms of confidence in the city and the ability for corporates to grow.

What type of ‘next’ sectors?

The obvious growth area for the Cambridge economy is the increase in technology businesses who are developing artificial intelligence (AI) software. Samsung has recently committed to opening a new AI research hub in Cambridge, which will add to the already growing cluster of mature and start-up AI developers. Microsoft also have a research base covering AI at 21 Station Road. A newer company, Darktrace is moving to The Maurice Wilkes’ Building at St John’s Innovation Park. Darktrace is one of Europe’s most promising billion dollar technology companies.

The University of Cambridge will play a role as they have received £10 million of funding to develop a new supercomputer, which will enhance the research capabilities of AI companies. There is also a limited supply of AI experts across the UK, so the supply of new talent from the University of Cambridge, particularly those undertaking PhDs, will attract AI developers. The UK government’s AI Deal is worth over £1 billion and Cambridge is well placed to capitalise on the increased investment into the sector.

New workspace provision is assisting with the evolution of new sectors. The start-up community in Cambridge is buoyant and is supported by the highly talented graduates who want an alternative to working for a corporate.

The Bradfield Centre at Cambridge Science Park is a new 40,000 sq. ft. facility dedicated to accommodating start-ups and scale-ups. This is a welcome addition to the “flagship” St John’s Innovation Centre, which has been providing this type of space for over 30 years and is still in high demand. Savills is also aware of 100,000 sq. ft. of requirements from serviced office operators and envisage stronger demand from this sector in the future.

Employment growth prospects

Companies in Cambridge are expected to grow by 7% per annum for the next ten years according to Cambridge Ahead. When solely focusing on office based employment, Oxford Economics forecasts that in the next five years employment could reach 76,600 in South Cambridgeshire and Cambridge, a 6% increase on the current level which will drive demand for office space. The strong growth of the life sciences and technology sector in Cambridge notably AI technology development will be a key driver for job creation in the next few years. These forecasts will be further boosted by the proposed investment into employment from the “City Deal” and the “Devolution Deal.”

The recently agreed City Deal will see £500 million invested by the Greater Cambridge Partnership until 2035 in supporting infrastructure. With extra funding from central government this will reach in excess of £1 billion. This investment will improve local transport infrastructure, accelerate housing delivery and provide new employment opportunities. The investment into employment will include 1,556 apprenticeships which will be in local growth sectors. There will also be additional support to small and medium sized enterprises. The Devolution Deal also aims to substantially increase employment as it is committed to accelerating the delivery of 90,000 new jobs.

Cambridge, UK versus Cambridge, MA

The future of Cambridge rests on its ability to continue to establish the growth sectors and deliver a real estate environment to enable companies to compete and thrive, but at the same time to be highly connected to sources of capital. Cambridge, therefore, competes at the highest global level within the bioscience and technology fields. So Savills has asked the question of how Cambridge measures up, for some variables, against its US namesake – also a centre of global significance within the same sectors.

When the UK’s Cambridge office/laboratory rents hit the £41 per sq ft level by year end, they will only be 6% lower than the highest rents seen in Cambridge, MA this year. However, it is well known that salary costs are by far the biggest cost and differentiating financial factor in locating a corporate. The impact of Brexit has, of course, delivered uncertainties for the UK and for those companies located here. However, the impact from a weaker Sterling/Dollar exchange rate is now a significant driver. Personal taxation and these Sterling impacts have impacted on the latest analysis. In 2016, Savills highlighted a 40% discount for UK scientists compared to the same roles in the US (and for the same companies).

As shown in Figure 4, this differential has widened. For the UK scientist, the salary level was similar between 2016 and 2018; the Senior Scientist level has increased by 4.7%. However, compared to the US sample, the UK discount sample is now 50-52% lower. The case for Cambridge, UK employees has strengthened significantly compared to the US.