commercial edge - 2016

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CAMBRIDGE 2016

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Cambridge is unquestionably the UK’s pre-eminent location for research and development in high value industries such as pharmaceuticals, biotechnology and advanced engineering in software and electronics.

The catalyst for the city’s success has been the University of Cambridge which, for many years, has ranked consistently among the top universities in the world.*

Cambridge has one of the best educated and most highly qualified workforces in the UK, with 61.3% of its resident population holding NVQ4+ qualifications, against a national average of 36%.**

Such a highly skilled workforce provides an attractive talent pool for major domestic and international occupiers.

Fuelling the continued demand for high quality office space, this activity also helps to drive the city’s residential, retail and leisure property markets.

The city’s accessibility and transport links have also been instrumental in its success.

WELCOME TO OUR 2016 CAMBRIDGE COMMERCIAL EDGE REPORT WHICH PROVIDES EVIDENCE BASED ANALYSIS OF THE CITY’S OFFICE, LABORATORY AND INVESTMENT MARKET OVER THE PREVIOUS YEAR AND OUR FORECASTS FOR THE YEAR AHEAD.

Cambridge is just 50 minutes by train from London and has excellent road connections to the Capital and the wider region via the M11 and A14. The Cambridge North railway station, opening spring/summer 2017, will link to the Cambridgeshire Guided Busway.

Tourism plays a major role in the city’s economy. Cambridge has ranked in the top ten most visited cities in Britain for the last fifteen years, attracting over 400,000 international staying visitors in 2014***. However, the total number of annual visitors to the city usually exceeds three million.

Economic growth forecasts from Experian suggest that Cambridge will outperform the wider East of England region and the rest of the UK over the next few years, driven mainly by its advanced technology industries.

1,120,277 sq ft another strong year for take-up in 2015

195,000 sq ft the largest leasing deal in 2015

895,560 sq ft of available office and laboratory space, a 10% decrease on 2014

£37.00 per sq ft quoting for prime Zone 1 office space by the end of 2016

£31.50 per sq ft quoting rents for business and science parks by the end of 2016

7,469 sq ft average deal size in 2015

*2015/16 QS World University Rankings, Cambridge University was ranked 3rd

**NOMIS

***International Passenger Survey

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COTON

M11

J12

J12

J14

A10

A11

A1307

A1303

A10

A14

B1049

A603

A1309

A603

M11

A1303

A428

A14

CHERRY HINTON

MADINGLEY

GIRTON

HISTON

MILTON

FEN DITTON

ZONE 1

ZONE 2

ZONE 3

ZONE 4

ZONE 5

A CB1

B Cambridge Science Park

C Cambridge Business Park

D St John’s Innovation Park

E Biomedical Campus

F Cambridge Research Park

G Vision Park

H Capital Park

I Granta Park

J Chesterford Research Park

K Babraham Research Campus

L Cambourne Business Park

M Peterhouse Technology Park

N West Cambridge Site

O Haverhill Research Park

P Hinxton Trust

ZONE KEY1

2

3

4

5

The prime central area

The peripheral city centre zoneThe northern fringe

The wider area business parks

Peripheral locations

A

E

G

J

I

P

O

H

F

K

M

N

L

DBC

ZONES

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The Cambridge office and lab market enjoyed another strong year in 2015, with take-up easily exceeding 1 million sq ft – surpassing the 956,000 sq ft achieved in 2014*. Manchester is typically the only UK city outside London to record annual take-up of over 1 million sq ft, so this is a significant milestone for Cambridge.

This year’s figure was boosted by a number of large deals involving major companies in the life sciences sector. The UK life sciences hub Granta Park is seeing a buoyant level of activity, where work has started on Illumina’s new 155,000 sq ft facility which will open in summer 2017, while Gilead has also announced a new 93,000 sq ft building. ARM has taken 195,000 sq ft of space at Peterhouse Technology Park in what was the city’s largest letting of 2015.

Notwithstanding these three “superdeals” (over 75,000 sq ft to a single occupier), take-up amounted to a very healthy 1.12 million sq ft.

OFFICE & LABORATORY

The tone of the market is positive, with momentum starting to build. However, occupiers will have to face the reality that there will be a limited choice of good quality buildings across the city.

AVAILABILITY

The overall availability of built and under construction office and lab stock stood at 895,560 sq ft at the end of 2015, lower than 2014 with a high proportion of this space being relatively poor quality.

Over half of all available space (56%) was in the outer business parks and wider area (Zone 4), where some 50 buildings were available, of which 33 were in the sub-10,000 sq ft category. Indeed, there is a distinct shortage of larger floorplates across the city as a whole, notably those over 20,000 sq ft which can house a single tenant. Only nine such buildings were available as at December 2015, eight of which are located in Zone 4.

*our take-up figures include both offices and laboratories within Zones 1-4.

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Figure 1 Cambridge Office and Lab Take-up

Figure 2 Cambridge Office and Lab Take-up by Zones 2015 (sq ft)

The largest built single units available at the year-end were the Emmanuel Building, Chesterford Research Park and Building 2010, Cambourne Business Park, offering 41,850 sq ft and 31,214 sq ft of space respectively.

The highest profile new building is Brookgate’s One The Square, due to complete in November 2016, part of the CB1 mixed use development. The building offers almost 137,000 sq ft of office space, of which around 57,000 sq ft exchanged at the end of October 2015.

Good quality space is generally taken up quickly, whereas poor quality accommodation typically struggles. As such occupiers have limited choices and tend to consider better space in locations further afield in the outer zones.

THE TONE OF THE MARKET IS POSITIVE, WITH MOMENTUM STARTING TO BUILD

THE CAMBRIDGE OFFICE AND LABORATORY MARKET ENJOYED ANOTHER STRONG YEAR IN 2015, WITH TAKE-UP EASILY EXCEEDING 1 MILLION SQ FT

2012

2013

2014

2015

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

Zone 1 Zone 2 Zone 3 Zone 4

14.5%

67.9%

8.8%

8.8%

sq ft

Year

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DEVELOPMENT PIPELINE

Office and lab developments with outline planning consent totalled almost 3.8 million sq ft at the end of 2015, a rise of 35% on 2014. Of this, around 1.3 million sq ft will be delivered in Zone 4, while three substantial schemes totalling 980,000 sq ft are at the planning stage in Zone 2. It is worth noting, however, that a number of significant deals in recent years have emerged where the space was not understood to be in the pipeline. For example, Cambridge Assessment in 2014 and ARM in 2015.

Cambridge Science Park will see two new additions in Q4 2016, namely 75,000 sq ft at 26-27 Cambridge Science Park and 40,000 sq ft at 184 Cambridge Science Park (The Sir John Bradfield Centre).

As of mid February 2016 an application to provide a new Grade A office building (The Maurice Wilkes building) of 62,410 sq ft on St John’s Innovation Park is close to being submitted.

Caption??

At CB1, Brookgate are seeking forward funding for 50 and 60 Station Road, which will deliver 134,000 sq ft of Grade A office accommodation with ground floor retail. If secured before June 2016 there is potential for delivery in Q4 2018.

Only a handful of schemes have a definitive completion date and 2016 will see a lack of new built buildings available to the market. As a result, occupiers’ choice of space will remain limited in the short term.

TAKE-UP

Take up for 2015 reached 1.12 million sq ft which, compared with a stock level of c. 10 million sq ft, is an impressive achievement. The majority of deals recorded were in the sub-10,000 sq ft category. Zone 4 was responsible for the three ‘superdeals’ and therefore outperformed all other Zones. Q1 of 2015 had a strong start with take up totalling 344,000 sq ft, a 45% increase on Q1 2014. Q3 2015 recorded the most activity achieving 460,000 sq ft.

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600,000

400,000

200,000

-

RENTS

A combination of sustained occupier demand and limited supply is putting rents under pressure and further steady growth is anticipated for 2016. Following on from rents of £34.50 per sq ft being achieved in Q4 2015 in Zone 1, quoting rents are currently £36.50 per sq ft in that zone.

Typically, Zone 3 produces the highest achieved rents outside Zone 1 within the northern fringe business and science parks, which currently stand at £30.00 per sq ft. Rents in Zones 2, 4 and 5 are generally lower than in Zone 1, with typical rents of £21-25.00 per sq ft.

With strong occupier demand, the market remains in favour of the landlord, resulting in lease terms tightening. Tenant concessions of rent free and capital contributions have fallen from previous years.

WITH STRONG OCCUPIER DEMAND, THE MARKET REMAINS IN FAVOUR OF THE LANDLORD, RESULTING IN LEASE TERMS TIGHTENING

Figure 4 Prime Achieved Cambridge Office and Laboratory Rental Levels (2006-2016, split by City Centre and Business Parks)

Figure 3 2014/15 Take-up by Quarters

Number of Transactions by Zone

Number of Transactions by Quarter

40

35

30

25

20

15

10

5

02006 2007

£ p

er sq ft

2008 2009 2010 2011 2012 2013 2014 2015 2016

Zone 0 - 9,999 10,000 - 19,999 20,000 - 49,999 50,000 + Sq Ft

Zone 1 15 1 3 0 162,049

Zone 2 33 2 0 0 98,712

Zone 3 10 2 1 0 99,002

Zone 4 67 4 3 4 780,514

Total 130 9 7 4 1,120,277

Quarter 0 - 9,999 10,000 - 19,999 20,000 - 49,999 50,000 + Sq Ft

Quarter 1 43 2 3 1 344,034

Quarter 2 43 1 1 1 177,736

Quarter 3 28 4 2 2 461,841

Quarter 4 16 2 1 0 136,666

Total 130 9 7 4 1,120,277

Q1 Q2 Q3 Q4

sq ft

2014 2015

City Centre Business Parks

Forecasts based on best achieved rents

Source: Carter Jonas

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Headline rents in Norwich have improved over the last five years rising from £14.50 per sq ft to £16.50 per sq ft, although Peterborough, Ipswich and Colchester have remained relatively stable.

Demand for office space in Norwich continues to rise, with the city seeing above average annual take-up figures for 2015 (by comparison to the five year average). Peterborough has seen the lowest annual take-up of space in comparison with the other major towns and cities in the region and also compared to its own five-year average. Although it is evident that the office market in Norwich is improving, it is known that at least two offices (extending to around 45,000 sq ft in total) have been acquired for conversion into residential accommodation, including 22,900 sq ft of Imperial House purchased for this purpose. Ipswich has seen similar trends, with 67,000 sq ft at St Edmunds House taken by Crown House Homes for conversion into apartments.

FOCUS

ALL OF THE MAJOR TOWNS AND CITIES IN THE REGION HAVE SEEN A FALL IN THE AMOUNT OF AVAILABLE SPACE IN THE MARKET, WITH IPSWICH SEEING THE GREATEST FALL BY COMPARISON TO THE 5 YEAR AVERAGE.

Description 2015 5 Year Average

Headline Rents £16.50 per sq ft £15.50 per sq ft

Stock 5,296,217 sq ft 5,248,306 sq ft

Available Sq ft 430,008 sq ft 446,975 sq ft

Annual Take-up 107,559 sq ft 97,486 sq ft



Stock 5,121,585 sq ft 5,044,464 sq ft





Stock 5,555,496 sq ft 5,608,537 sq ft





Stock 2,815,447 sq ft 2,830,284 sq ft



NORWICH

PETERBOROUGH

IPSWICH

COLCHESTER

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Following a very active 2014 which focused on business parks, Cambridge’s office investment market had a quieter 2015, with investors turning their attentions more towards the retail and leisure sectors – reflecting the attractiveness of the city across the broader property spectrum. However, while there is significant investor interest, standing investments rarely come available and forward funding and refurbishment opportunities are more likely in the current market.

The largest investment transaction of the year was L&G’s and Wrenbridge’s acquisition of the Grafton Centre for £99 million, followed by Singapore-based CDL Hospitality Trust’s purchase of the Cambridge City Hotel for £61.5 million. Frasers Hospitality

INV

ESTMEN

T

Address Sector Price (m) Net Initial Yield (%)

Purchaser

Grafton centre Leisure 99.0 5.25 Legal & General UK PIF II & Wrenbridge

Cambridge City Hotel Hotel 61.5 5.60 CDL Hospitality Trust

Tesco, Newmarket Road Retail 44.5 4.75 Orchard Street IM

Kett House, Station Road Office 20.35 4.70 Kames Capital

Cambridge Research Park Business Park 10.44 6.14 PITCH

Hotel du Vin, Trumpington Street Hotel n/a n/a Frasers Hospitality

EVEN WITH PRIME OFFICE

YIELDS STANDING AT SUB 5%

CAMBRIDGE STILL OFFERS

A SIGNIFICANT PREMIUM OVER

CENTRAL LONDON

also acquired the Hotel du Vin on Trumpington Street as part of a larger Malmaison/Hotel du Vin portfolio from KSL Capital Partners for £363 million. Orchard Street IM followed their forward funding of One Station square in 2014 with the acquisition of Tesco on Newmarket Road for £44.5 million.

In the office sector, the most significant deal was Kames Capital’s £20.35 million acquisition of Kett House on Station Road (Zone 1), at a reported yield of 4.7%.

Even with prime office yields standing at sub-5% Cambridge still offers a significant premium over Central London. Prime yields for science parks meanwhile stand at c. 6%.

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To those uninitiated in the ways of the commercial property market, the prevalence of cranes on the Cambridge skyline and of hi-visibility workwear on its streets might lead you to think the city has plenty of new office space available to occupiers. But, in fact, this year sees us midway through a decade defined by the pre-let.

The feverish pre-let years of 2013, 2014 and 2015 are settling down as the properties rise up out of the ground and occupiers are either in residence or gearing up for occupation in 2016 and 2017.

By the end of 2015 Deloitte, Thales and Carter Jonas agreed pre-lets at One The Square, totalling almost half of the 142,000 sq ft building ahead of its completion in November 2016.

By spring/summer 2017, the new Cambridge North railway station and transport interchange should be operational with planning permission having been secured last summer. Sited opposite the Cambridge Science Park and adjacent to the Cambridge Business Park, the city’s second railway station should enable further commercial development.

Last year saw significant property deals announced at Granta Park which is Cambridge’s high profile life sciences hub. Following the acquisition of two Cambridge companies specialising in genome technology – Solexa and BlueGnome - US pharmaceutical corporate Illumina Inc announced its multi-million pound investment in a brand new, purpose-built 155,000 sq ft laboratory and European headquarters building – with a design which gives scope for an additional 70,000 sq ft to be added. Gilead Science Inc’s expansion of its presence at Granta Park was announced soon after, in a deal which will see it occupy a total of 93,000 sq ft.

In addition, Granta Park itself is set to expand its 120-acre site with the granting of planning permission last year of a masterplan which will provide c. 365,000 sq ft of new R&D space around landscaped grounds.

In its 25th anniversary year, ARM Holdings plc, the world’s leading semiconductor intellectual property company, announced the expansion and reconfiguration of its headquarters at Peterhouse Technology Park. The 195,000 sq ft pre-let, split across two new buildings, required exceptional planning permission as it stretched into Green Belt land.

Although not pre-let, AstraZeneca continues to attract complementary presence at the Cambridge Biomedical Campus. The University of Cambridge will be making a formal planning application for a £94 million science centre on an almost 4.5 acre site. This will bring together their medical research units which are currently spread across four locations. The re-location of Papworth Hospital to a seven acre site at the Campus moved forward last year, with a £140 million construction deal sealed with Skanska. The new state-of-the-art hospital will open in 2017.

A MATURING MARKET FOR PRE-LETS

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Cambridge has a cherished historic city centre with tight boundaries, and an international reputation as a science and technology research and development centre of excellence. It is within commuting distance of London. That is the complicated scenario Cambridge’s two local authorities – Cambridge City Council (‘City Council’) and South Cambridgeshire District Council (‘South Cambs DC’) - were faced with when compiling their Local Plans. And it still is, following the recommendation by the Planning Inspectors that the examination of the twin-track draft plans be suspended last May.

The fact that each authority had decided to collaborate in the production of their respective local plans is to be lauded. It was probably inevitable, given the seamless way residents and commercial interests view Cambridge and its surrounding sub-region. However, the inspectors remain to be convinced about the robustness of both authorities’ strategic approach on a number of fronts and have charged the City Council and South Cambs DC to review and re-submit their draft plans with modifications addressing a number of concerns.

In re-submitting – expected to be spring 2016 – the City Council and South Cambs DC will have to demonstrate that an adequate assessment of the housing needs of the two geographical areas has been properly made, taking into account the need for affordable and market

housing and ensuring that homes growth matches the expected 44,000 new jobs in the two authority areas between 2011 and 2031.

The re-submitted plans will also have to convince the Inspectors that the value of the Green Belt has been adequately assessed in a way the original plans did not. As the plans stood last year, the Green Belt was, with one or two notable and small exceptions, considered as an absolute constraint, as opposed to a planning policy tool that can be ‘flexed’ in pursuit of a sustainable development strategy.

As with previous plans, the combined authorities’ strategy mainly focused development within committed sites on the city boundaries and then ‘leapfrogged’ over the Green Belt to identify new sites in necklace areas around the city in the South Cambs district. It was felt by the inspectors, however, that the supporting material for this policy approach did not address matters of transport infrastructure and its funding in sufficient detail to warrant the approach being taken.

Modifications to the plans were published at the end of last year, with a consultation period running in to the early part of this year. The view of our commercial team is that the authorities have not, materially, changed their fundamental approach to their strategy. However, if the planning inspectors feel the case has been made more robustly this time, then adoption of the plans remains possible.

LOCAL PLANS FOR AN INTERNATIONAL CITY


These new local plans will look to the future and so property professionals and advisers are left to operate in the present with already adopted local plans. The City Council has a robust housing land supply in excess of five years, which should serve the city’s residential needs in the short term. However, the South Cambridgeshire area does not have an adequate, allocated housing land supply and so leaves itself open to developers being able to justify applications for residential development on a case-by-case basis, as has happened in recent months.

Commercial development opportunities look to a number of sites, including the new town of Northstowe and, ultimately, the future redevelopment of Waterbeach barracks. Cambridge North Railway station and transport interchange is bringing forward the Northern Fringe East as a viable new development frontier for commercially led mixed-use. Given its former use and location, scope for residential and amenity use is limited, although specific commercial use-class profiles are yet to be fully determined.

The expansion of the existing West Cambridge site should make it the prime commercial and institutional research hub proposed by the University of Cambridge. This year sees an application for permission for a new masterplan for the site, which includes substantial new development believed to be over 1 million sq ft.

Nearby, progress is being made at the University’s North West Cambridge 150 hectare site. The scheme, which has a strong emphasis on housing and

community amenities, includes a primary school in its first phases. It is a mixed-site development delivered in two distinct parts that will, in its latter phases, offer academic and research space, with a significant element of commercial space which will be delivered in collaboration with the University.

At the Cambridge Biomedical Campus, development land for commercial and medical use is assigned to current and future occupiers already, however, the local authorities are, presently, considering possible modification to the plans to allow for expansion of the site.

There will have to be an intensification of development on existing business and science parks to meet identified commercial needs. Many of the buildings on the original parks are nearing the end of their life span and so where parks are landlocked, the only way to grow will be to go up. Parks on the outer fringes may well be looking to acquire land to extend.

Developers are looking currently to the south of the city, towards Great Shelford and the Junction 11/M11 interchange in proposing at least one new science park. Many believe there is the case to be made for two new science parks on this south side of the city.

THE EXPANSION OF THE

EXISTING WEST CAMBRIDGE SITE

SHOULD MAKE IT THE PRIME

COMMERCIAL AND INSTITUTIONAL RESEARCH HUB

PROPOSED BY THE UNIVERSITY OF

CAMBRIDGE

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Maurice Wilkes building


FORECASTS• Rents in Zone 1 and Zone 3 are becoming

more aligned. Zone 1 rents are expected to increase from £34.50 to £37.00 per sq ft in 2016, with rents in Zone 3 rising from £30.00 to £31.50 per sq ft

• The refurbishment of second hand space will continue as opportunities come forward

• The supply of built office space will remain constrained in 2016. As a result, more firms will consider modern office practices of agile working, digital document management and hot desking

• Lack of available Grade A stock may hinder market activity

• With a steep rise in rents in certain zones, occupiers may look to relocate to less expensive locations

• Landlords will benefit from increased rents at rent reviews and lease renewals

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OXFORDSHIRE 2016

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BATH 2016

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LEEDS & YORKSHIRE 2016

BATH 2016

Report Compiled By:

Will Mooney, Partner, Commercial 01223 558032 | [email protected]

Colin Brown, Partner, Planning & Development 01223 326826 | [email protected]

Darren Yates, Head of Research 020 7518 3343 | [email protected]

Sebastian Denby, Surveyor, Business Space 01223 346640 | [email protected] Additional contacts:

George Fellowes, Associate, Business Space 01223 346645 | [email protected]

William Rooke, Partner, Development/Investment 01223 326815 | [email protected]

John Russell, Associate, Property Management 01223 326818 | [email protected]

Richard Love, Partner, Architecture & Building Consultancy 020 7518 3299 | [email protected]

Nick Brammar, Partner, Valuation & Professional Services 01223 326807 | [email protected]

01223 3157166-8 HIlls Road, Cambridge CB2 [email protected]

© Carter Jonas 2016. The information given in this publication is believed to be correct at the time of going to press. We do not however accept any liability for any decisions taken following this report. We recommend that professional advice is taken.

THIS PUBLICATION IS PART OF THE 2016 COMMERCIAL EDGE RESEARCH SERIES.

To request a copy of any of the other documents in the series, please visit carterjonas.co.uk/CommercialEdge

Carter Jonas LLP is a leading UK property consultancy working across commercial property, residential sales and lettings, rural, planning, development and national infrastructure. Supported by a national network of 36 offices and 700 property professionals, our commercial team are renowned for their quality of service, expertise and the simply better advice they offer their clients.

Find out more at carterjonas.co.uk/Commercial

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