DTZ Insight Public administration employment Major office markets weather the storm

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1 DTZ Insight Public administration employment Major office markets weather the storm 27 October 2010 Contents Introduction 2 Trends in office based employment 3 Impact on office markets 8 Appendix 1: Methodology 10 Authors Kasia Sielewicz Forecasting & Strategy Research +44 (0) kasia.sielewicz@dtz.com Matthew Hall Forecasting & Strategy Research +44 (0) matthew.hall@dtz.com Contacts Martin Davis Head of UK Research +44 (0) martin.davis@dtz.com Tony McGough Global Head of Forecasting & Strategy Research +44 (0) tony.mcgough@dtz.com Hans Vrensen Global Head of Research +44 (0) hans.vrensen@dtz.com Austerity measures outlined by the coalition government point to large job cuts in the UK public administration workforce. The aim of this report is to identify the impact of these job losses on key office markets in the UK. Although there will be office market impacts, employment changes are already accounted for in the downgrades to DTZ recent rental forecasts. Since Q4 2009, aggregated rental growth forecasts for the regional capitals have been revised down from 1.38% to 1.02% per annum between The public administration workforce is expected to decrease by 11% between However, public sector office based employment is small and accounts for 19% of total UK office employment. There are regional differences, with northern regions and Wales more dependent on public administration employment. Although total job losses, both in central and local government, are forecast to be in the region of 500,000 by Our current analysis is only concerned with office based employees and this figure is closer to 200,000 with the remainder being in defence, justice and education etc. As in previous public sector downturns, the magnitude of job cuts at the national level is expected to be offset by a rebound in finance and business services employment (Figure 1). Current forecasts are for job growth in the private sector to significantly outweigh job losses in the public sector. Figure 1 Change in UK office employment by sector, Public administration as % of total office employment: 19% Other office employment sectors: 81% 2% 0% -2% Public administration employment Total office employment Finance and business services employment (F&BS) 1

2 Section 1: Introduction Austerity measures announced by the coalition government in the June 2010 budget are expected to result in fiscal tightening of 113bn over the period of the current parliament. The majority of this discretionary consolidation will come from a reduction in public sector spending. Public spending cuts are expected to result in job losses in central government and across local government. The October spending review estimates that over 500,000 jobs could be lost in the public sector by However, the timing and the true scale of redundancies is hard to quantify. Central government does have control over the Departmental, Agency and Non Departmental Public Body budgets and can directly control how the cuts are made. However, when cuts are made to local government, central government only has control over the size of the budget. So how the cost savings are made will partly be down to local decision making. This could involve pay freezes, reduction to working hours and cancelling of projects. The objective of this report is to assess the broader implications of these job cuts on the key office markets in the UK. At the same time we acknowledge that there are other markets where the impact could be more severe. We assess these implications by first identifying markets that are particularly dependant on public sector employment, based on the share of public administration in total office employment. We then put this in the context of an expected recovery in private sector job growth and the outlook for rental growth and occupational demand. Based on these factors, we identify which markets are most at risk to government downsizing and which are in a better position to weather the storm. Our analysis is based on office employment trends at the NUTS3 level with forecasts sourced from Oxford Economics. Office employment is comprised of public administration, finance and business services (F&BS) and other corporates. Public administration refers to public servants employed by both the central government and local authorities. Property forecasts are based on inhouse data and forecasting models. 2

3 Section 2: Trends in office based employment Spending cuts underway At the end of 2009, the UK deficit reached 10.9% of GDP (Figure 2). In order to reduce this elevated level of the deficit the coalition government announced in June 2010 a fiscal tightening of 113bn 1 over the period of the current parliament. The majority of this discretionary consolidation will come from a reduction in public sector spending. It is estimated that an initial 6.2bn (approximately of the estimated budget deficit) will be saved during 2010/ The spending cuts have been recently outlined in the October 2010 spending review. Decrease in number of civil servants The October spending review estimates that over 500,000 government jobs could be lost by Our current analysis is only concerned with office based employees. This figure is closer to 200,000 with the remainder being in defence, justice and education etc. There are currently 1.5 million people employed in public administration. This figure is expected to be reduced by 11% by 2014 (Figure 3). Expressed as a percentage, public sector administration jobs are forecast to shrink from 19% of all office based employment in 2010, to around 1 2 by Civil service jobs concentrated in Greater London For historical reasons the largest concentration of government personnel is in Greater London (Figure 4), accounting for 1 of all public administration employees in the UK. The top five largest regions by number of government staff account for over half of the UK total. However, the regions and cities that are likely to be the most vulnerable to government cutbacks are the ones with the highest proportion of public administration to total office employment. The southern regions in the UK are more geared towards private sector services, implying that the impact of potential government job cuts is likely to be less significant. The reverse is the case for northern regions and Wales (Map 1, page 6). Figure 2 UK government deficit as a % of GDP 2.7% 2.8% Source: Oxford Economics Figure 3 Number of public administration employees in UK Figure 4 4.7% 10.9% 9.8% 8.5% % Public administration employment by region, 2010 (% of total) 2.5% Million +7% Greater London North West South East Scotland South West West Midlands Yorkshire and the Humber East East Midlands North East Wales Northern Ireland 8% 7% 8% 9% 10% 11% 12% -11% 1 55% 1 Source: HM Treasury 2 Based on total office employment data from Oxford Economics 3

4 High proportion of public sector workforce highlights areas at risk In Blackpool over half of all office employees work in public administration, making it highly vulnerable to civil servant job losses. Durham and Belfast follow closely at 43% and 37% respectively, well above the UK average of 19% (Figure 5). Many of these cities and towns have smaller office markets and therefore the impact of job losses in these locations is expected to be significant. Ultimately, a reduction in the number of jobs means cuts to the amount of required. But lease structures will be critical to the timing and impact of any job cuts on the size of the public sector office estate. Of the major office markets covered by DTZ Research, and have the largest share of civil servant jobs, with ratios of 33% and 25% respectively (Figure 6). The high proportion reflects their importance as regional administrative hubs. However, many local private sector firms rely on the public sector, pointing to further downside risks. On the other hand, and have a low proportion of public sector administration, with both cities below the UK average. And despite having the largest concentration of civil servants, Inner London has the smallest proportion, due to the dominance of finance and business services. public sector growth stands out Growth in public sector employment has been a feature of the UK over the past 10 years. The Labour government embarked on a deliberate policy of expansion in the public sector as the proportion of the UK workforce employed by government is below that of many of our European neighbours. The added advantage of expanding public sector was to create stability in regional cities by providing employment. However, this policy has now left many markets significantly exposed to cuts. and stand out as two markets that have experienced significant growth in public sector employment. Over the same period, several cities in the UK experienced a decrease in the number of public servant jobs. and Inner London had experienced the greatest decline which has reduced the share of civil servants in these areas in the past decade. Unlike many other areas, at the same time, these cities saw strong growth in overall office employment, led by business services. Figure 5 UK NUTS3 areas with highest proportion of office employment in public administration, 2010 Blackpool Durham Belfast Swansea Plymouth Portsmouth Sunderland Liverpool Newport UK Figure 6 % share of public administration to total office employment in city office markets covered by DTZ Research, 2010 Figure 7 Greater Manchester UK Outer London Inner London 19% 11% 1 29% % 33% 32% 35% % 19% 37% 21% 21% 25% 2 43% Change in public administration employment in city office markets covered by DTZ, Outer London UK Greater Manchester Inner London - -7% 5% -8% -9% 7% 13% 12% 1 21% 27% 5 52% 33% 4

5 Job cuts across all major office markets Over the next four years public administration cuts will affect all the major office centres in the UK. When measured in percentage terms, the biggest cuts are expected to hit, with a 3.5% per annum reduction to its public administration workforce over the next four years. and Inner London are also expected to have higher cuts than most cities (Figure 8). For the UK overall, public administration job losses are forecast to average 2.7% per annum over Finance and business services employment forecast to exceed pre-crisis growth Finance and business services employment growth is forecast to exceed its pre-crisis rate in some locations (Figure 9). For the UK as a whole, growth is expected to be similar to the expansion during , with employment within finance and business services expected to grow by 3.3% per annum over the next four years. However, given that there remains considerable uncertainty over the strength of the broader economic recovery, there are downside risks to the F&BS employment outlook. Increased number of jobs in finance and business services to offset government layoffs Against this backdrop, we expect total office employment growth to be flat during , with public administration job losses broadly offset by F&BS employment growth. Growth in total office employment is expected to return in 2012, as the recovery in financial and business services gathers pace. This segment accounts for the majority of office employment in the UK. Typically, the financial and business services sector is much quicker to cut staff in times of economic crisis. But it also tends to lead the rebound in employment as the economy recovers (Figure 10). By 2013, new jobs created in finance and business services are expected to offset both the layoffs incurred in this sector during and the government redundancies anticipated beyond However, there are downside risks to the strength of this recovery. On a regional basis, few locations are expected to have negative total office employment growth, with southern regions coming back relatively strongly (Map 2, page 7). However, in the short-term the employment outlook is weak. With subdued growth expected in finance and business sector employment in 2011, there are clearly risks to the recovery for office markets in the near term. Figure 8 Change in public administration employment per annum, % -2.2% -2.2% -2.2% -2.3% -2.3% % -2.9% -3.2% -3.5% Figure 9 Finance and business services employment growth per annum 8% 7% 5% 3% 2% 1% 0-1% -2% Figure 10 Inner London Change in UK office employment, Greater Manchester Outer London UK Inner London Greater Manchester Public administration as % of total office employment: 19% Other office employment sectors: 81% 2% 0% -2% - - Outer London UK Public administration employment Total office employment Finance and business services employment (F&BS) 5

6 Map 1 Density of public administration employment, 2010 Public administration share of total office employment (NUTS 3) 8% 15% 1 22% 23% 30% 31% 38% 39% 53% Public administration employment per NUTS 3 region with number of employees above 15 thousand Belfast Durham Blackpool Liverpool Manchester Swansea Greater London Portsmouth Plymouth Source: DTZ Research, Oxford Economics, ESRI 6

7 Map 2 Change in total office employment, Change in total office employment (NUTS 3) 11.1% 14.9% 9.1% 11.0% 6.1% 9.0% 3.1% 6.0% % Belfast Durham Blackpool Liverpool Manchester Swansea Greater London Portsmouth Plymouth Source: DTZ Research, Oxford Economics, ESRI 7

8 Section 3: Impact on office markets Minimal impact on the occupied stock Given the outlook for office employment we have modelled the impact of potential public administration cuts on occupied office across major office markets. Our estimates take into account employment change over as well as the potential loss from greater occupational efficiency proposed by recent government surveys. Our methodology is based on assessing the quantity of occupied in each of the regional markets occupied by public administration versus other sectors (see Appendix 1). In addition to job losses, recent studies have indicated that utilisation levels across the public sector property portfolio are running 20%-30% behind the target. According to the latest State of the Estate report, the average occupancy rate per full time employee is 13.1 sq m whereas the government s target is sq m (Figure 11). This implies that moving to achieve these efficiency standards at a time of headcount reduction will increase the pressure to reduce occupied floor in order to save more costs. Even when this rationalisation is included, our analysis shows that cuts to public administration will have a small proportionate impact on occupied, with potentially 711,000 sq m becoming vacant as a result. However, when the rebound in F&BS employment is factored in, the resultant increase in demand for office floor will be four times the vacated by public administration at 2.8m sq m. This brings the net increase in occupied to 2.0m sq m by 2014 (Figure 12)., and appear to be more vulnerable When analysing the changes on the office occupied stock in the key cities, the changes outlined above look to be broadly positive. The smallest changes appear in at 1.2% followed by at 3.9% and at 4.0%, suggesting that these cities are potentially more vulnerable to public administration job cuts. This is due to a relatively high proportion of government employees and weak finance and business services job growth. London and are likely to weather the storm far better as these cities have a lower than average proportion of public administration employment and the recovery in F&BS employment is expected be stronger over (Figure 13). Figure 11 Space utilisation by tenure type Source: OCG The state of the estate in 2009 Figure 12 Impact of office employment growth on major office markets, current and forecast Source: DTZ Research Figure Change to occupied, Source: DTZ Research Freehold PFI Leasehold Average Occupied (sq m) million Current occupied 0.7 Impact of public administration job cuts on required Change in occupied 12% 10% 8% 2% 0% London Manchester 2008 government standard target (12 sq m/full time employee) Target for new acquired or refurbished (10 sq m/full time employee) F&BS employment growth impact on required Forecast occupied Net impact 8

9 Downgrades in rental forecasts are limited Although the picture remains better than expected in the major regional capitals, it is clear that there will be an impact. As the full effects of austerity have been incorporated into rental forecasts, there has been a small downward revision in the regional centres (Figure 14). However, although London and the major regional markets appear to escape significant impact, the smaller markets, some second tier, are expected to face significant difficulties. Much is dependent on specific department cuts as many of these cities are dependent on one or two major government employers. Government to revamp its property portfolio The Government Property Unit has created a set of National Property Controls whereby ministerial approval is now required before renewing a lease, taking a new lease or when failing to exercise breaks. Tighter lease controls have been put in place in order to help downsize and reshape the government s property portfolio by reverting to freehold ownership of core property assets where possible. Some exceptions to this rule are to be made where there are economies of scale. Other measures such as the creation of property vehicles have been announced. The two planned vehicles would own and manage the office estate in and London respectively. By coordinating the management of property assets, the government expects to increase cost savings across its property portfolio. Similar vehicles could then be rolled out across the entire UK. Reorganisation presents some opportunities The revamp of government properties together with the targeted efficiency standards present many opportunities as well as problems for regional markets. In some respect the public sector occupiers will be able to achieve the rationalisation of only by moving to more modern. Only modern office offers this level of efficiency; this will support demand for grade A, even if the net absorption figure is negative. Furthermore, a rationalisation of the government estate could offer redevelopment opportunities as many of the major regional markets currently have, and are forecasting, a continuing reduction of grade A availability (Figure 15). Figure 14 Prime rental growth forecast per annum, Annualised rental value forecast 5% 3% 2% 1% 0% Source: DTZ Research Figure 15 Regional aggregated availability by grade sq m 1,400,000 1,200,000 1,000, , , , ,000 0 Q Q Source: DTZ Research UK Regional Q Forecast Q Q Grade A Q Q Q Q Q Grade B Central London Q Forecast Q Q Q Q Q Q Grade C 9

10 Appendix 1: Methodology Our approach to calculate the impact of public administration cuts on occupied office across major office markets involved four steps. We have summarised the approach in Figure 16 below. Figure 16 Impact of office employment growth on major office markets, current and forecast Occupied (sq m) million Current occupied Source: DTZ Research Impact of public administration job cuts on required F&BS employment growth impact on required Forecast occupied Net impact Step 1: Aggregate the office occupied stock Our starting point was to aggregate the office stock that is currently occupied across major office markets covered by DTZ. We then accounted for vacant in each market and subtracted this from our calculations. On this basis we have calculated that the occupied stock, in covered markets, equates to 30 million sq m. We then used our in-house data to assess the proportion of this occupied by public administration versus other sectors. We have applied in our calculations the upper band of the over capacity and average of 13.1sq m per full time employee. Our analysis shows that cuts to public administration will potentially result in 711,000 sq m becoming vacant. Step 3: Impact of the F&BS recovery A similar approach was used in order to access the impact of the F&BS recovery on occupied office stock over As such we have applied 2.7% growth per annum in the number of F&BS employees across the major office markets covered by DTZ Research. We have applied this increase to the estimated occupied stock by F&BS. We have also estimated that on average the per worker equates to 10 sq m 3 in finance and business services sector. Our analysis show that increases in F&BS jobs will potentially results in requirements of 2.8m sq m additional office. Step 4: Net impact on office occupied stock Combining the impact of the public administration cuts together with F&BS recovery brings the occupied stock to 31.9 million sq m, a net increase of 2.0m sq m by Step 2: Impact of public administration cuts Secondly, we have taken into account employment forecast in public administration over the sourced from Oxford Economics. This represented a decrease of 2.1% per annum in the number of public administration employees across the major office markets covered by DTZ Research. We have applied this decrease to the estimated occupied stock by public administration. The next factor that we took into consideration was efficiency standards. Recent government surveys suggest that utilisation standards across the public estate are running 20-30% above the target. 3 Based on Global Occupancy Costs Offices, DTZ Research, January

11 Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ 2010 B385