Which City? Which Sector?

Future growth locations for office real estate were ranked based on demand metrics such as GDP growth, working age population, access to highly-skilled workers and forecast office-based employment; all of which could impact office demand via size of occupier footprint. We expect that expansion in key growth sectors will in turn impact local markets that are heavily weighted towards them.

Markets best placed for opportunity are expected to benefit from expansion rooted in economic and demographic growth. Additionally, markets with sufficient development or capacity to refurbish second-hand units will be able to take advantage as trends in ESG and design exacerbate demand for quality space.

Within the last decade consumer trends have continued to evolve, driving the retail sector to adapt. The online sales channel is now firmly established and provides the consumer with greater flexibility on when and where they make their purchases. However, despite a prolonged period of online only shopping during the pandemic – once restrictions had been lifted, online penetrations moderated and now only account for 25% of all UK retail sales. As such, when looking ahead to the next decade, it is clearer than ever that physical retail still offers value to both the consumer and occupier.

Large cities present an attractive opportunity for flagship retail locations. High catchment populations not only provide occupiers with strong in-store sales potential, with significant footfall they also offer a marketing opportunity to broaden brand awareness and create spin-off potential for online sales at a later date. Well-positioned stores also help to drive logistical efficiencies for the occupier, diverting the consumer in-store to pick up or return online orders. In addition to population size, previous CBRE research has demonstrated that affluent locations also leverage stronger property performance. Cities such as Manchester, Sheffield, and Glasgow rank highly on these demographic measures.

While in-store remains the dominant sales channel, the growth of online penetration in recent years has reduced the volume of retail floorspace required across the UK. As such, when establishing future opportunities for the sector, it is hugely important to consider the supply and demand balance. Those locations that present a below average supply of retail floorspace per capita are expected to experience lower levels of vacancy, and command higher rental tones moving forward. Within our analysis, cities were ranked by floorspace per capita and vacancy rates to provide an indication of potential oversupply.

Despite periods of economic hardship, squeeze on spending and slow growth, the leisure industry has fared well and proven itself resilient to headwinds. Growth in household income, consumer spending and retail and leisure spend, means consumers will reconnect with leisure and social activities that they value the most. Ultimately, enjoying a drink in the local pub, visiting the cinema or theatre, or taking part in a fitness class will continue to be a priority for consumers, and the leisure sector will remain key contributor to local economies. The cities that performed well in our analysis, were ones with expected increases in household disposable income, consumer spending, and employment.

Larger, regional cities such as Birmingham, Manchester, Leeds and Newcastle appear in the top 10 as these cities show no signs of diminishing in terms of attractiveness and consumer spending power.

Expected 10 year growth in household disposable income (%)

Source: CBRE Research

As supply chains diversify to keep up with accelerated online retail activity and consumer expectations, increased demand is being placed on smaller prime urban logistics facilities located in the UK’s major metropolitan areas. These urban logistics facilities provide more agile warehouses, accommodate numerous delivery vehicles, increase cost efficiencies, and shorten delivery times for the end consumer.

With ongoing growth in online shopping a major driver in the demand for urban logistics space, cities with high online penetration, access to high-speed internet, and forecasted growth in age groups with a high propensity to spend online have been identified as potential growth cities for urban logistics.

Expected 10 year growth in consumer spending and disposable income

Source: CBRE Research

Lifestyle changes and events such as buying a house, home renovations and downsizing have led to the continued success of self storage. Demand within a particular location is driven by a range of factors including the rate of economic and employment growth, urbanisation, population growth, population density and the number of people in the 35-64 age group, the target cohort. Cities which are forecast to experience strong GDP and disposable income growth such as Manchester, Bristol, and Nottingham are likely to fare well if the economic growth leads to an increase in house moves and home renovations, which are a leading driver of demand.

The key elements that contribute to a thriving life sciences ecosystem include a highly acclaimed university, coupled with access to a reputable teaching hospital, corporate anchors, and most notably, access to capital, whether through private or public means.

The presence of an incubator often serves as a promising indicator for the future success of a city as a life sciences cluster. Typically, it involves a joint venture between universities, governments, and venture capital funds to accelerate the growth of spin-out companies. With plans already in place for such an establishment in Glasgow and Bristol, and well-established incubators already existing in all of these cities, the foundation has been laid for the emergence of homegrown commercial life science enterprises in the future.

Demand for purpose-built student accommodation (PBSA) is linked to the demand for higher education. With the student population the largest it’s ever been, undergraduate applications are forecast to grow by 25% to one million by 2030, and with increasing global student mobility, we expect sustained housing pressure on the markets with the greatest imbalance.

Selected in our analysis are those cities with the most compelling demand and supply dynamics. They also include characteristics such as onerous planning policies, Russell Group universities, ageing university stock, and wider regenerative investment further fuelling the imbalance. PBSA supply can also be constrained by site availability with many of the immediately “obvious” sites now developed out.

The mature nature of many PBSA cities means that they are subject to cyclical development and some locations may experience an increase in the supply of accommodation in the next decade, which may result in some short-term rental digestion as new schemes stabilise. Nonetheless, over the long-term, these locations are expected to maintain a demand/supply imbalance in the future while the student population continues to grow.

Professional management, high quality accommodation and amenity provision have been key in driving demand for Multi-Family Housing (MFH). High levels of city centre population growth, in particular the student-age population, along with relative rental affordability, are key determinants of which cities see the highest growth potential in MFH over the next decade.

Manchester’s strong rental and economic fundamentals place it in top spot. Birmingham has the largest current city centre population of all ranked areas and the largest population of renters aged between 20-34. Student population, particularly from overseas, is becoming an increasing demand pool for MFH. Reading’s student-aged population is also expected grow by 20% over the next decade.

Average house price (February 2023)

YoY House price growth (%)

Source: CBRE Research

Our top growth cities for Single Family Housing (SFH) were based on forecasts for economic growth, family population and rental affordability. The average age of the private-rented household in the UK has been steadily increasing over the last decade, creating the demand for family-friendly rental housing. There are currently over 9,000 operational SFH homes in the UK, which makes it’s a relatively small market in comparison with other real estate and residential asset classes.

Cities that are expected to see large growth in family households and in 34-49 year olds, such as Birmingham, Edinburgh and Glasgow, are ranked highly. Cities with a strong economic forecast that will bring new investment, new jobs and ultimately more housing demand also perform well in our rankings. Manchester and Reading rank first in employment and GDP growth in the next decade, and are also in the top 10 growth cities.

Cities experiencing strong demographic expansion will see the highest increase in demand for already constrained housing supply. And as this gets more challenging to access via the open market, either due to high rental and sales values, or lower average wages, the need for delivery and investment into affordable housing will increase. We analysed metrics such as population, household, and employment growth projections, as well as disposable income, affordability of open market housing, including both rental and sales stock, and existing waiting lists.

Still, however strong the demand metrics are, markets need to have sufficient development or capacity to support the delivery of this housing. To take account of this, we also factored in supply factors such as planning decision speeds.

Due to improved health services and living standards throughout the 20th century, the average life expectancy of the population at all ages has risen significantly. Demand for senior living is expected to significantly exceed current supply as the Baby Boomers (born between 1946-1964) reach retirement age. By 2030, the number of people aged 65-74 is forecast to increase by 17.4% and 75–84 year olds by 27.0%. Manchester in particular is forecast to experience one of the highest increases in the 65+ year old population, closely followed by Brighton.

Development of senior living schemes has to date been primarily focused on the most affluent areas of the UK, such as the South East and London due to the high cost of construction and land. However, as the sector evolves and mid-market models gain traction to include rental and shared ownership, then we forecast that new development will more closely align with where the expanding pockets of elderly populations will be over the next 10 years such as Manchester, Bristol and Glasgow.

Expected growth in 65+ year old population (%)

Source: CBRE Research

Cities that are forecast to experience the greatest rise in demand typically have a range of hotels at different price points, from five-star luxury hotels suitable for weddings, to budget, limited-service brands suitable for travellers looking for basic facilities and services. In addition to the array of hotels available across our key cities, a key driver of demand for hotels will be connectivity to international airports and railway stations. All cities in our top ten are connected via regional rail, and nine out of the top 10 have an international airport within an hour of the city; the ease of rail and air connectivity will help to facilitate tourism and generate growth in hotel demand.