The hierarchy of UK cities (and their smaller neighbours)
Barring unusual events such as the designation of a new capital city, urban hierarchies have taken many years to evolve and are slow to change, certainly over periods as short as twenty years. The economic and demographic rankings of our main cities have not changed substantially in the last twenty years and neither have the real estate consequences. Twenty years ago, for example, Birmingham prime office rents stood at about a third of those in the West End of London – the same level they are today.
In competitive markets, commercial rents and prices reflect things like the size, economic structure and status, connectivity, skills base and attractiveness of cities. The evidence is thinner on whether large commercial office occupiers base their decisions on locational cost differences: CBRE has argued that labour market questions come first. But firms do seem to be especially sensitive to the issue at present. So are things changing or is this just a fad?
CBRE’s Occupier Survey found that 91% of European companies identified cost and availability of real estate as major factors in deciding building selection within a city, up from 85% in the previous year. And in our Portfolio 2040 study, firms highlighted low barriers to entry and new sources of competition (both partly the result of technological innovation) alongside permanently greater price sensitivity as reasons to focus more on real estate cost control in the future.
Large-scale corporate relocations out of London to a regional city carry some risk and are not always successful. And viewed in aggregate, Oxford Economics’ forecasts of the urban structure of the UK economy suggest that things won’t look much different in 2040 to how they look today. The proportion of UK office-based employment located in the urbanised regions of the North West, Yorkshire and Humberside, West Midlands and Scotland combined, are expected to be static in the long term at around 30%, compared with 40% for London and the South East combined.
Figure 1: Average distribution of UK office-based employment, 2018-2030
Source: Oxford Economics forecasts, 2018
This doesn’t mean that the UK’s biggest (or even medium-sized) cities have nothing to play for in their attempts to attract mobile employment. As we show elsewhere, promotion of the factors that increasingly affect the decisions of mobile labour and their employers (infrastructure, skills pool, housing and quality of life, for example) can influence a city’s competitive standing. And we also show how fast and plentiful broadband connections will be important.
One phenomenon that has become evident on an international scale is the elevation of some cities, previously regarded as low-cost back-office centres, into locations with a higher-skills profile that is capable of supporting higher-value functions as opposed to administrative or processing work. So by 2040, we might see some cities emerge as economically specialised centres of excellence too, potentially chipping away at the market share of a larger neighbouring city.
Cities might also grow in such a world by developing collaborative strategies with neighbours, such as the CaMKOx strategy which we write about elsewhere, or Scotland’s Cities Alliance which includes smaller cities such as Stirling and Inverness.