DERBY OFFICE MARKET ASSESSMENT

Transcription

1 ON BEHALF OF DERBY CITY COUNCIL ROMAN HOUSE FRIAR GATE DERBY DE1 1BX Date: July 2011 File No: TL695

2 CONTENTS Page No. ACKNOWLEDGEMENT 2. EXECUTIVE SUMMARY INSTRUCTIONS ECONOMIC AND MARKET COMMENTARY SUPPLY OF OFFICE LAND AND BUILDINGS DEMAND FOR OFFICE LAND AND BUILDINGS TAKE UP RATES IMBALANCES BETWEEN SUPPLY AND DEMAND IDENTIFICATION OF RENTAL AND CAPITAL VALUES COMPARISON OF DERBY WITH OTHER KEY CITIES CONCLUSIONS AND RECOMMENDATIONS 41. APPENDICES I SCHEDULE OF AVAILABLE SUPPLY II TRANSACTIONAL TAKE UP DATA FOR 2008, 2009 AND 2010 III INFORMATION SOURCES

3 2 ACKNOWLEDGEMENT Acknowledgement and thanks are given to the various agents, developers, innovation centres and Local Authority Officers who provided information to assist in the preparation of this report.

4 3 EXECUTIVE SUMMARY Thomas Lister are instructed to prepare a market assessment in respect of the office market within the Derby City Council Local Authority boundary area. The Executive Summary summarises the findings of our research and we would report as follows; i. The Economy Derby has demonstrated relatively strong economic performance during the last decade with a high predominance of the total workforce (9%) employed in advanced and non-advanced manufacturing sectors including aerospace and rail. GB average is 1%. In 2010, resident earnings were on average 508 per week, ranking Derby 16 th out of 64 cities. Derby has the potential to continue its strong economic performance; however there are a number of potential weaknesses identified which are required to be addressed. Primarily these are the reliance on Rolls Royce, Bombardier and other major employers for employment and supply chain activity. This is of particular relevance given the current position with Bombardier and threat of job losses reported to be in the region of 1,400. Declining public sector employment and budgets along with declining rail investment means that Derby may also be vulnerable to decline. Action is already being taken to counterbalance these weaknesses through various initiatives including National Skills Academy for Rail Engineering (NSARE) to address skills gaps, large employers supporting SME growth through providing linkages to Universities with R&D facilities such as Sheffield and Warwick. In addition business collaboration opportunities are being explored through sharing services, facilities and local supply networks. To support the economy and create conditions for growth, the Council along with its partners are in the process of delivering a balance of high quality key amenities including leisure and housing through its Leisure Strategy and promotion of high quality City centre mixed use developments. ii. The Office Market Office development historically has been successfully delivered at Pride Park, establishing a critical mass of employers within Derby. Pride Park is almost fully developed and occupiers seeking office accommodation are now focusing upon the City centre. Given the lack of new office development in the City for the last 20 years, there are issues with developer, occupier and investor confidence, serving as a barrier to new office development. More recently development activity has been stalled by the recent recession with a post recession legacy of lack of confidence in the market and severe limitations in the ability to secure finance to fund commercial development projects. The Regeneration Fund seeks to work with developers and investors to address this issue.

5 4 iii. Supply Conditions Current estimates are that there is around hectares (38 acres) of land allocated for office use which may be brought forward for future development. This land could accommodate around 70,604 sq.m. (760,000 sq.ft.) of offices, although clearly there is no certainty of timescales for the delivery of any such development. There are also a number of office schemes with planning consent within the City with consented floorspace amounting to circa. 72,151 sq.m. (776,646 sq.ft.). In terms of available office space, total supply is estimated to be 61,043 sq.m. (657,000 sq.ft.) of which 23,225 sq.m. (253,000 sq.ft.) is situated within the City centre. Analysis of this available space has estimated that around 41% of total available accommodation may be of unsuitable quality to meet modern occupier demand and the total supply of offices may realistically be in the region of 36,010 sq.m. (387,630 sq.ft.). Derby also benefits from five established innovation centres with available space currently in the region of 1,188 sq.m. (12,783 sq.ft.). Historically, availability of space has been much lower; however it is noted two of these centres are pending refurbishment and space is being held vacant for this purpose. iv. Demand and Take Up Rates Demand data has been collated and analysed and estimates average levels of live demand to be 11,530 sq.m. (124,100 sq.ft.) per annum. Fundamentally this estimate excludes any pent up demand likely to exist but not registered, due to perceptions within the market that suitable office accommodation is not available. Take up rates of offices have been assessed and anticipated to be in the region of 13,935 sq.m. to 16,722 sq.m. (150,000 sq.ft. to 180,000 sq.ft.) per annum. It is further noted that the take up of property is primarily by companies indigenous to Derby; however around 40% of enquiries are from the wider Midlands and national basis. Derby therefore has the potential to capitalise on significant inward investment opportunities. v. Supply and Demand Conclusions The analysis of demand and supply conditions identified around 1.3 years supply of existing property stock, excluding Grade C accommodation. Adding consented supply to the existing property stock increases supply to 4 years. Considering potential supply of Grade A offices only equates to a supply of 2.7 years. The total supply of office accommodation for the City at these levels is considered to be low. Based upon the above analysis, there is the potential for demand to quickly exceed supply and it is fundamental for Derby to increase the supply of offices in the immediate, medium and long term. Although there is the potential for Grade A stock to be delivered through the consented schemes, the City already has a good supply of existing stock. Many of these buildings form

6 5 part of the historic fabric of the City and the refurbishment of vacant Grade C property would increase the office offer and enhance the environment within the City. vi. Values Rental values of second hand stock within the City are estimated to be between 86 and 129 per sq.m. ( 8-12 per sq.ft.) depending on quality. New build accommodation such as that at Pride Park is achieving rentals in the region of to 199 per sq.m. ( to per sq.ft.). Investment yields for good quality accommodation within Derby occupied by reasonable covenants are estimated to have an initial yield of around 7.5% and values on a floor area basis of circa. 1,668 sq.m. to 1,830 per sq.m. ( 155 to 170 per sq.ft.). In terms of any Grade A accommodation delivered to the City, rental values are estimated to be in the region of 199 per sq.m. ( per sq.ft.) with an investment yield of circa %. vii. City Comparison A comparison of Derby with other key Midland cities and Sheffield identifies that Derby is the least deprived out of all of the comparative cities and has considerable higher weekly earnings. In stark contrast however; Derby has the least established office sector with the lowest levels of activity than any other City, including the lowest level of take up rates, rentals, highest yields and lowest supply of stock, disregarding poor quality space. viii. Recommendations For Derby to capitalise upon potential existing linkages with the East Midlands Airport and other Authorities including Milton Keynes, Sheffield and Peterborough in terms of future potential economic activity. Cooperation with a range of organisations including Local Authorities, D2N2 (Derby and Nottingham LEP) and the HCA will be required to promote cross boundary activity. The delivery of Grade A office accommodation within the City centre is fundamental for the establishment of an office market, which may in turn assist with growth and diversification of the economic base. Issues with the current economic climate, particularly with regard to the ability to secure finance to fund the costs of new development, indicate that the Regeneration Fund should be the appropriate vehicle to overcome barriers in securing investment and to enable much needed development to proceed. There is also a significant opportunity for the City to seek to address the high predominance of existing offices which are Grade C accommodation and potentially unsuitable to meet occupier requirements. The refurbishment of this space would not only address constraints in the existing supply, enhance the range and offer of accommodation, but would also significantly enhance the quality of the environment within the City.

7 6 Derby is therefore a City with great opportunity and with leadership and appropriate intervention from the Council and Partners can achieve its vision to become a world class City.

8 7 1.0 INSTRUCTIONS Thomas Lister are instructed by Derby City Council (the Council) to prepare a Market Assessment in respect of the office market within the City. The report is to assess supply and demand conditions for offices within the City and to identify any mismatches in provision. We understand the findings of this report are to be utilised by the Council in identifying potential projects to seek to address imbalances in the market. In addition, the report may be utilised for guidance by the Council in making investment decisions, such as in respect of the Derby Regeneration Fund. We would report as follows; 2.0 ECONOMIC AND MARKET COMMENTARY 2.1 Economic Context The Local Authority area of Derby has a population of circa. 244,100 residents (Cities Outlook 2010) and is the 18 th largest urban area within the UK. In economic terms, Derby is ranked 69 th out of 354 Local Authorities in the Indices of Deprivation 2007, although it is noted that Nottingham is 13 th, Leicester is 20 th and Lincoln 70 th. The only other East Midlands authorities ranking lower than Derby are Mansfield at 34 and Bolsover at 55. It is also noted that Birmingham is ranked 11 th and Sheffield 63 rd and Derby therefore has lower levels of deprivation than the two other East Midlands cities, Birmingham and Sheffield. In terms of socioeconomic characteristics of Derby, we would note the following; Derby has an economically active population of 77% which is in accordance with the East Midlands average of 0.4% higher than the English average (source: ONS March 2010). Around 64% of Derby s workforce live in Derby with approximately 11% commuting from the surrounding areas of South Derbyshire, Amber Valley and Erewash (source: ONS 2010). Unemployment rate as at March 2010 was running at 7.7% being slightly higher than the East Midlands average (7.4%) and slightly below the English average of 8% (source: ONS). With regard to benefit claimants as at August 2009 people of working age claiming a key benefit was 18%, marginally higher than the East Midlands and English averages of 15% (source: ONS). In terms of education and skills attainment up to degree level, Derby sits comparatively with average scores achieved for the East Midlands and England in

9 and 2009 (source: Department for Education and DCSF). However the level of Derby residents educated to degree level is lower than the GB average. The level of residents with no qualifications is around 18% which is higher than the GB average and that of the surrounding hinterlands. The classification of the employment base in Derby as at March 2010 are that there are 7,665 VAT/PAYE based businesses. The highest proportion of these are retail at around 14%. Professional, Scientific and Technical consists of 12%, Construction at 11%, Health at 7.6% and Accommodation and Food Services at 7% (source: ONS). Derby has a poor record in establishing new firms and ranks on average 44 th out of 64 cities on new VAT registrations between In 2010 resident earnings were on average 508 per week, ranking Derby 16 th out of 64 cities. Furthermore, people who work but do not live in Derby earn on average 644 per week which is the highest average workplace earning of all English Cities. Employment growth between was 6,100 net additional jobs created. Real estate and business activities demonstrated highest growth at 5,200 jobs, whilst manufacturing had the biggest loss, shedding 4,200 jobs (3.5% of Derby s workforce). This job loss was however at less than half of the national rate, indicating that Derby s manufacturing firms are somewhat more resilient to economic conditions. Manufacturing along with energy, water and the public sector have the highest proportions of employment within Derby and higher than the national average. Around 9.5% of Derby s total workforce are employed in the advanced manufacturing sector. Approximately a further 9% of Derby s workforce are employed in non-advanced manufacturing and particularly aerospace and rail. It is noted the GB average employment levels in this sector are around 1%. Derby has a relatively low concentration of employment in banking, finance and other services than Leicester and Nottingham, though levels are relatively comparative to Sheffield. 41% of Derby s employment is in large firms compared to a GB average of 32%. Primarily this is due to the presence of Rolls Royce and other companies such as Toyota, Bombardier and Egg. It is noted Rolls Royce alone employ around 11,000 people. Derby has business linkages with other centres outside of the East Midlands including Milton Keynes, Sheffield and Peterborough. Thus there is an opportunity to exploit these linkages through increased business activity. In summary therefore Derby has experienced relatively strong economic performance in the last decade. In order to continue with this strong performance there are potential issues which have been identified as being required to be addressed, noted as follows;

10 9 The reliance on major employers such as Rolls Royce and Bombardier for employment and supply chain activity makes the Derby economy vulnerable to any change in circumstances negatively affecting major employers. This is currently highlighted with the current position with Bombardier and potential job losses of circa. 1,400 jobs. The decline in government rail investment means this sector (within Derby) may also be subject to decline. The decline in public sector employment will result in increased levels of unemployment in the City thus affecting the economic wealth of the City. The ability for local labour within the surrounding communities to obtain appropriate qualifications, skills and training tailored to business requirements and to complement in house training schemes provided by employers. Derby College and the University clearly have key roles in this regard. A number of initiatives have been identified in seeking to address the above issues, which are noted as follows; The establishment of the National Skills Academy for Rail Engineering (NSARE) in Derby. The Academy is to address the skills deficit in the transport equipment manufacture, which has the second largest skills deficit at national level in the economy. Support SMEs by establishing links to Universities which are research intensive. The University of Derby does not have such facilities; however Sheffield and Warwick Universities do, with strong relationships with Rolls Royce. Encouraging greater sharing of facilities, services and supply chain network in Derby by key employers including Rolls Royce and Bombardier. Target high growth firms for business support as these firms have significant potential for employment creation. In addition the above issues are in part required to be addressed through the diversification and expansion of the business base into growth sectors, such as financial services, investment and banking and other high technology businesses. The establishment of an office sector within the City centre along with a good supply of available high quality accommodation may assist in encouraging such business sectors to relocate to Derby. There are also a number of market issues to be considered as key to the confirmed growth of the Derby economy and these issues are explored below. 2.2 Market Context The Derby City centre office market lags behind Nottingham and Leicester in terms of existing supply of Grade A accommodation and development activity. The key reason for this has been the establishment of Pride Park Business Park located outside of the City centre. The superior quality of office space provided in a single location outside of the City has caused some displacement of businesses from the City centre and primarily serviced demand for offices in Derby.

11 10 As Pride Park is now at development capacity the focus has turned to the City centre for future office development. Developers have therefore been pursuing a number of developments in the City and there is currently around 72,000 sq.m. (776,000 sq.ft.) of office schemes with full planning consent in place. Development and occupier activity was stalled by the recent recession and there remains issues of confidence in the market and the ability of companies to commit funds to expensive property transactions, when many are still in recovery from the recent recession. Furthermore, we understand from our discussions with a number of developers with consented office schemes that occupiers are generally unwilling to commit to acquire office space on developments that are yet to commence on site. In order for proposed office schemes to be viable, usually a minimum of 50% of pre-lets are required to be secured and whilst occupiers are unwilling to enter into pre-let arrangements, developments are unable to proceed. A further issue hampering office development is the limited availability and restrictions on lending from the financial institutions. From the company s experience of working with a number of developers on schemes on a national basis along with developer applicants on the Derby City Regeneration Fund is that availability of finance to fund commercial property development is extremely limited. Where finance may be available, terms are often restrictive and/or finance costs very high resulting in developers being unable to secure the loan finance required to enable projects to proceed. The reasons for this are clearly rooted in the recent recession, where banks suffered huge losses and in some cases had to be bailed out by the Government using tax payers money. Many banks are still in the process of debt recovery such as Lloyds TSB and Royal Bank of Scotland and simply do not have resources for lending on development projects. Other institutions which may be willing to lend are primarily concerned with the ability to recover debt and thus a key consideration is the extent of pre-lets in place. Without significant pre-lets in place (and primarily in excess of 50% of the lettable space) and at least 150% cover from rental income on annual loan repayments, most institutions are unwilling to provide loan finance. Any developer who may be willing to speculatively develop out a scheme is unlikely to be able to do so unless there is no requirement for bank finance as the lending institutions are generally unwilling to lend on this basis. Clearly the above circumstances are ones which may be overcome by investment by the Regeneration Fund and a number of projects are being considered for investment on this basis. The establishment of a growing and diverse office market will clearly assist in expanding and enhancing the economic growth of Derby; however the delivery of new high quality offices in isolation is unlikely to be sufficient to attract and retain new business to the City, who will take a number of key factors into consideration when considering a location for their business.

12 11 In order to attract both businesses and highly skilled workers to reside in Derby, a comprehensive range of affordable leisure, cultural services and amenities are required to be on offer along with high quality housing, urban and natural environments. Derby City Council have and continue to respond to the above issues and it is noted that a number of new facilities have already been delivered in the City. New leisure facilities have been provided at the Quad, Westfield Shopping Centre has revitalised Derby s retail offer, the Derby Royal Hospital has been completed and works to upgrade the City s inner ring road are currently under construction. The Riverlights scheme has upgraded the central bus station, secured the Holiday Inn and Hilton Hotels and is currently seeking to secure a number of restaurants to the scheme. The Council has also recently announced the 50 million Leisure Strategy to deliver major new facilities to the City including an Olympic size swimming pool, multi uses sports facility and entertainment venue including a velodrome. 3.0 SUPPLY OF OFFICE LAND AND BUILDINGS The assessment of the supply within the Derby office market has been undertaken through identifying sites allocated for office development and mixed use schemes along with schemes with planning consent in place for the provision of new offices. An assessment has also been undertaken of existing buildings available on the market. We would report as follows; i. Land Allocated for Office Use Detailed discussions have been undertaken with the Local Planning Authority in respect of allocated sites and to obtain an update on current status. Homely Way, Chelaston This site is located on land to the south west of Chelaston, between Derby Southern Bypass at the end of Homely Way. Around 3 hectares of land are allocated for high quality office development. There are no proposals known to be coming forward for this land at this time. Chadderston Sidings There are 5.5 hectares of land allocated for office development on this site. The Local Planning Authority confirmed there are no known proposals coming forward for this site at this time. Heatherton Extension, Littleover Situated on the Ricknald Road, this land forms part of a wider comprehensive development project with 2.4 hectares of land allocated for B1 use. There are no known schemes coming forward in respect of any potential office development at this time.

13 12 Manor/Kingsway Hospital Site Scheme proposals are for a mixed use development which include 7 hectares of land allocated for B1a, b and c use. It is anticipated that given other uses including residential on this site that a high proportion of employment land is likely to be office development. Tenders were submitted from interested developers which are currently under consideration by the HCA. Becket Well Becket Well forms an area in the City around Green Lane and St. Peters Street and the policy identifies this as a major mixed use regeneration opportunity. Any future proposals coming forward for this area may include some element of office use; however there are no known proposals coming forward at this time. Castleward On the fringe of the City centre, this 12 hectare (30 acre) site is proposed to accommodate around 800 new homes and a relatively small element of commercial use. Compendium have been selected as preferred developer and masterplan proposals for the site are under preparation. The delivery of new offices within this scheme will be known upon the completion of the masterplan and approval of the scheme. Northern Quarter The Northern Quarter covers the area between Saddler Gate and Ford Street/St. Auckland Way. The area is mixed use in character including a number of significant development opportunities. The Northern Quarter policy area is seeking to promote reuse of existing buildings and as part of the general policy may include office provision. There is however no proposals coming forward for delivery of new offices in this area at this time. Land to the South of Slack Lane This area extends to circa hectares and is identified as a major mixed use regeneration opportunity. Potential uses on this site include office use. There are however no proposals coming forward for this scheme at this time. Markeaton Brook Mixed Use Area This is situated in relative proximity to the University and is primarily a student area which is identified for regeneration. As such any future redevelopment could include some office development however there are no known proposals coming forward for this part of the City at this time.

14 13 The Derbyshire Royal Infirmary Site The former Hospital site is being progressed by the NHS and a planning application is anticipated to be submitted imminently for a campus style development including retail and office use. Until the planning application has been submitted the level of potential offices within the scheme have not yet been identified. We also understand from the Council this site is being considered along with Riverlights as a potential location for the Olympic Pool, which if progressed will negate implementation of current mixed use proposals. In summary therefore based upon the information above there is at least hectares (38 acres) of land allocated for office use which may be brought forward for development in the future. It is anticipated this land could accommodate around 70,604 sq.m. (760,000 sq.ft.) of offices and thus new supply to Derby; however there is no certainty of delivery of these schemes or associated known timescales in respect of when these sites may be brought forward. ii. Schemes With Planning Consent The following schemes are those for which planning consent exists and have been confirmed through discussions with the Local Planning Authority; Central Square, Cathedral Road Proposals for the delivery of 4,645 sq.m. (50,000 sq.ft.) new offices over four storeys being proposed by Bolsterstone Developers. City Gate House, Cathedral Road Cedar House Investments were initially promoting a building of 5,574 sq.m. (60,000 sq.ft.) of high quality office development over four storeys on land adjoining the Joseph Wright College. Number One, Cathedral Green, Full Street Being promoted by Wilson Bowden this is a mixed use development including 7,432 sq.m. (80,000 sq.ft.) of offices. One Derby, Siddals Road Norseman Investments are proposing the phased delivery of offices extending to 37,160 sq.m. (400,000 sq.ft.) along with a hotel within six buildings on this site. Riverlights Part of a mixed use development incorporating 4,645 sq.m. (50,000 sq.ft.) of offices within the scheme.

15 14 Saddler Square, Bold Lane Part of a wider mixed use scheme incorporating 4,180 sq.m. (45,000 sq.ft.) of office accommodation. Friar Gate Square A two phase development comprising 7,015 sq.m. (75,500 sq.ft.) of high quality offices to be delivered by Lowbridge (Derby) Limited within the Friar Gate Conservation Area. Cathedral Road Clowes Development have a secured consent for new offices extending to 900 sq.m. (9,688 sq.ft.). St. Marys Gate Clowes Development have consent in place for the development of new offices extending to 600 sq.m. (6,458 sq.ft.). Therefore the total amount of consented floorspace is 72,151 sq.m. (776,646 sq.ft.). The total amount of new offices that could be provided on both allocated sites and consented schemes is therefore 142,755 sq.m. (1,536,646 sq.ft.), though as previously noted timescales for delivery are uncertain. iii. Available Office Space We have undertaken a review of properties available on the market through utilising the Focus Property web based search engine and also through reviewing agents web sites to ensure that wherever possible, all available space that is being marketed within Derby is captured. The results of our findings are shown in the table below; Summary of Available Office Property in Derby as at July 2011 City Centre Out of Town Total New/Refurbished Second Hand Total The total volume of floorspace available is estimated to be in the region of 61,043 sq.m. (657,000 sq.ft.). It is further estimated that around 23,225 sq.m. (250,000 sq.ft.) of available floorspace is within the City centre with the remainder being within the wider Derby area, but within the boundaries of the Derby City Council area. It is noted that out of the 175 properties, 136 are offered on a leasehold basis, 14 on a freehold basis and 25 on either a freehold or leasehold basis.

16 15 The breakdown of size of the various properties offered is shown in the table below; No. of Properties Up to 186 sq.m. (2,000 sq.ft.) Up to 464 sq.m. (5,000 sq.ft.) Size Up to 929 sq.m. (10,000 sq.ft.) Larger than 929 sq.m. (10,000 sq.ft.) Total In summary therefore the analysis of the available supply of property within Derby is as follows; The majority of available office stock is in out of town locations including areas such as Pride Park, Brunel Business Park, Litchurch Plaza, Pullman Business Court and Jubilee Business Park. Some of the accommodation particularly in the out of town centres has only recently been placed on the market, whereas some of the City centre and older second hand stock has been on the market for considerably longer periods of time and in some cases up to and beyond a period of three years. A much higher proportion of the out of town stock is new or refurbished. It is also noted in out of town locations that even the property stock which is recorded as being second hand is actually in such locations as Pride Park and is better quality than much of the City centre second hand stock. Technological advancements and change in business culture has led to a requirement for open plan accommodation with raised floors, suspended ceilings and air conditioning. There is also an increasing requirement for greener buildings and more efficient buildings in terms of energy use and waste. The majority of second hand accommodation in Derby is Grade B or C, with around 41% of offices being Grade C and unable to meet the requirements of modern businesses. Over 65% of the existing property stock is less than 186 sq.m. (2,000 sq.ft.) and around 60% of this stock is less than 92 sq.m. (1,000 sq.ft.). Only around 13% of accommodation is in excess of 464 sq.m. (5,000 sq.ft.). It is noted that the majority of available accommodation is available on a leasehold basis; however this is generally in accordance with property market trends in that many businesses only have the ability to commit to short term property transactions given uncertainties in the economy and business environment thereby seeking short term leasehold arrangements or longer leases with break options. Landlords are therefore offering property on terms which are most likely to attract occupiers and these are currently short term leasehold arrangements.

17 16 Using the assumption that around 41% of total available accommodation is Grade C quality and provisionally unsuitable to meet modern occupier demand, the total supply of suitable space may realistically be in the region of 25,025 sq.m. (269,370 sq.ft.). Furthermore, the actual supply of accommodation of suitable quality within the City centre may be close to 9,522 sq.m. (102,500 sq.ft.). A schedule of available accommodation is contained within the appendices to this report. iv. Innovation/Managed Office Space Schemes We are aware that there are currently five managed offices/workspace/innovation schemes within Derby, four of which are operated by the University of Derby and one which is led by Derby City Council, funded through a mix of public sector funding. We would comment on the supply position of each of these schemes as follows; a. Banks Mill Studios, Bridge Street Operated by the University, this scheme extends to 644 sq.m. (6,931 sq.ft.) lettable space and provides both clean and dirty workspace units seeking to target new and fledgling companies within the creative industries sector. A location plan for the studios is shown below; The scheme provides easy in and easy out workspace in studios along with business and professional development support. It is noted however that greater periods of occupancy may be permissible by way of leasehold arrangements between 1 and 6 years. The University of Derby also provides business support activity including one to one advice, workshops, seminars and bi-annual open studios.

18 17 All units are let unfurnished and broadband and phone lines are to be provided at the cost of the tenant. The rentals for the units are subsidised by the University and are detailed below and include service charge costs and reception services; Year Rental per sq.m. ( per sq.ft.) per sq.m. ( per sq.ft.) per sq.m. ( per sq.ft.) per sq.m. ( 15 per sq.ft.) per sq.m. ( per sq.ft.) per sq.m per sq.ft.) Banks Mill has generally run at 100% occupancy with a waiting list also for units within the Centre. More recently there has been a greater turnover of tenants and the Centre is now running at between 80-90% occupancy levels. There is currently around 95 sq.m. (1,023 sq.ft.) of space available within the centre. b. The ID Centre, Lathkill House, rtc Business Park, London Road Also operated by the University, this scheme provides 658 sq.m. (7,083 sq.ft.) of lettable space. This Centre is generally designed to target companies setting up within the aerospace, rail, engineering and high technology industries. A location plan for the Centre is shown below;

19 18 The University also offers various support services to occupiers including business mentoring and all units are offered by way of a 3 year leasehold agreements. The rents are also subsidised by the University over a 3 year basis and are noted as follows; Year Rental per sq.m. ( 9.97 per sq.ft.) per sq.m. ( per sq.ft.) per sq.m. ( per sq.ft.) It is also noted that VAT is charged in addition to the rent and there is a service charge of 116 per sq.m. ( per sq.ft.). This Centre has been relatively successful since opening and generally runs in excess of 80% occupancy levels. There has been a slight reduction in occupancy levels during the latter part of 2010 with occupancy generally running at between 70-80%. There is currently around 165 sq.m. (1,770 sq.ft.) of accommodation available in the centre. c. Network House, Nun s Street This scheme comprises 10 units and operates in conjunction with Banks Mill; however Network House provides clean office space only. A location plan is shown below;

20 19 The units were historically targeted at the creative industry sector; however we are now advised that the University is intending to open up occupation to any sector but will still target new and fledgling businesses. All units are unfurnished and the tenant is responsible for telephone and broadband connection and associated costs. All of the units are offered by 3 year leasehold arrangements, which are again subsidised by the University. Rentals for the space inclusive of service charge are noted as follows; Year Rental per sq.m. ( per sq.ft.) per sq.m. ( per sq.ft.) per sq.m. ( per sq.ft.) It is noted that Network House generally runs at between 70-80% maximum occupancy levels. The Centre is currently operating at around 50% occupancy levels; however this is in part due to the fact that the University are seeking to undertaken refurbishment of the building subject to being able to secure the necessary funding and occupation may only be available on a very short term basis. This has served to deter some companies from taking space within the centre. In addition a number of existing occupiers are seeking to relocate to alternative accommodation to avoid business disruption during any refurbishment of the building. Vacant space within the scheme is approximately 464 sq.m. (5,000 sq.ft.). It is noted that refurbishment proposals are uncertain and therefore the occupancy of this Centre is likely to run at lower levels until future proposals have been confirmed. d. The Innovation Zone, 37 Bridge Street, Derby. DE1 3LA This forms part of the University Enterprise Centre and comprises nine units with lettable floorspace of between sq.m. (140 sq.ft. 183 sq.ft.). The rentals for each unit are again subsidised by the University but are on a fixed price basis as follows; Unit Size Rent 13 sq.m. 400 per month 15 sq.m. 450 per month 16 sq.m. 475 per month 17 sq.m. 500 per month

21 20 The rentals include telephone, broadband, utilities and business rates. It is also noted that all units are furnished. The Innovation Zone is available for businesses within any sector, the only condition being that they must be a new start or recently started business. All units are available by way of a 1 year licence up to a 3 year term. The Centre opened in August 2010 and seven out of the nine units are currently occupied, with good levels of enquiries for the remaining units. Vacant space currently equates to circa. 30 sq.m. (323 sq.ft.). Discussions with the University confirm there have been strong levels of enquiries and demand for space within all four of the schemes and that generally it was not uncommon for there to be waiting lists for space within the various centres. The recent recession and current difficult economic time have seen lower levels of occupancy and greater space within the Innovation Centres; however enquiries and occupancy levels are generally now starting to improve with the exception of Network House which is pending refurbishment proposals. e. Friar Gate Studios, Ford Street The studios opened in November 2006 and the scheme comprises forty individual offices spread over four floors and targeted at the creative industries sector. A location plan of the Studios is shown below;

22 21 Total lettable space within the studios extends to 1,687 sq.m. (18,163 sq.ft.) and unit sizes range between 25 sq.m. (275 sq.ft.) up to 110 sq.m. (1,190 sq.ft.). Units are available on monthly easy in/easy out terms and broadband, Wifi and telephone line rental are all provided along with use of meeting rooms and reception services. Other facilities that are also provided include hot desking, office sharing facilities between companies, conferencing facilities and virtual office packages. Business administration services including secretarial support, photocopying and telephone call answering are also available subject to recharge on a monthly basis. The Friar Gate Studios are intended to operate as move on accommodation for businesses which are becoming established and able to move out from other incubation/innovation centres including within Derby and run by the University, but still require co-location and support services to continue the establishment of their business. With regard to rentals for the office space, those units that do not have air conditioning are let at 156 per sq.m. ( per sq.ft.) which includes service charge and basic reception services, but excludes electricity and business rates. Office units which do have air conditioning are let at 178 per sq.m. ( per sq.ft.) including all service charge costs, excluding electricity and business rates. The centre is currently running at around 71% occupancy levels which is lower than average occupancy levels which have been consistently in the region of 80%. The reasons however for lower occupancy levels is that a number of the units are due to be subject to refurbishment and therefore some units have been kept vacant either for refurbishment or to decant existing tenants in to. It is anticipated therefore that following

23 22 completion of the refurbishment of some of the space within the studios that occupancy levels are likely to increase to usual occupancy levels of 80% and above. There is currently around 489 sq.m. (5,267 sq.ft.) of space available within the Centre within a range of units. Summary In terms of available space within the five schemes this is currently in the region of 1,188 sq.m. (12,783 sq.ft.). Part of the reasons for the availability of space particularly within Network House and Friar Gate Studios is due to the impending programme of refurbishment where units are required to be vacant either for refurbishment or for the purpose of decanting existing tenants during the refurbishment programme. 4.0 DEMAND FOR OFFICE LAND AND BUILDINGS The assessment of demand has been undertaken through discussions with the Council s Regeneration Team, Marketing Derby, The University of Derby, Friar Gate Studios manager and local property agents. Discussions have also been held with a number of developers interested in securing funding from the Council s Regeneration Fund. We would report as follows; a. Office Land Through discussions with various organisations noted above, we have been unable to identify any enquiries for office land at this time. This is likely to be due to the number of developers who own land and have secured planning consent for schemes within Derby, which as noted earlier within this report equate to a supply of circa. 72,151 sq.m. (776,646 sq.ft.). All of these schemes are primarily competing for occupiers and have stalled due to the inability to pre-let sufficient space in order to facilitate development. These circumstances are therefore determining demand for land from other developers for office land. We are not aware of any enquiries for office land for bespoke development. Development by owner occupiers is also limited in the current market due to the ability to commit to expensive development projects and to secure bank funding in this regard. b. Office Buildings Discussions have been held with a number of agents active in the office market within Derby and recorded enquiry data received from three agents in this regard which has been subject to analysis.

24 23 We would summarise very briefly in respect of the information provided by agents as follows; i. Russell Rigby & Co. Enquiry data was provided for the years 2008, 2009 and Key issues are noted as follows; Enquiry levels for 2008 and 2009 were at similar levels of 19,230 sq.m. (207,000 sq.ft.) and 25,252 sq.m. (218,000 sq.ft.) respectively. Enquiry levels for 2010 have been recorded at a lower level of 6,921 sq.m. (74,500 sq.ft.). In 2008 around 80% of the enquiries were indigenous, in % of enquiries indigenous and in 2010 approximately 90% of total enquires received were indigenous. In 2008 conversion rates of enquiries into actual take up was circa 2,322 sq.m. (25,000 sq.ft.) of space equating to a conversion rate of 12%. In 2009 around 9,569 sq.m. (103,000 sq.ft.) was converted in to take up equating to a rate of 47%. It is noted however that this data is somewhat skewed by a single letting to the NHS of 4,645 sq.m. (50,000 sq.ft.); however even if this letting is discounted this still equates to a conversion rate of 24%. In 2010 the take up of space recorded was 650 sq.m. (7,000 sq.ft.) which equates to a 9% conversion rate. The majority (around 80%) of enquiries were for units of less than 464 sq.m. (5,000 sq.ft.); however there are significant enquiries seeking units is excess of this and up to 4,645 sq.m. (50,000 sq.ft.). From discussions with Russell Rigby it is also known that there are a number of enquiries equating to circa. 2,973 sq.m. (32,000 sq.ft.) which have been in the market prior to 2008 all of which generally remain active. In addition there are also a number of other enquiries seeking space of around 93 sq.m. (1,000 sq.ft.) in unsuitable/unsustainable locations that are clearly highly unlikely to be ever satisfied and therefore have not been recorded. In summary therefore if we assume an average conversion rate over the 3 year period of 15%, around 85% of total enquiries remain unsatisfied. It is noted however that a number of enquiries may be recorded with other agents and there is likely to be some element of duplication. This issue will be addressed through comparison with other agents enquiries in an attempt to identify those which are recorded with more than one agent.

25 24 ii. King Sturge Levels of enquiries recorded for 2008 and 2009 provided as part of the schedule are primarily records of larger enquiries in excess of 4,645 sq.m. (50,000 sq.ft.). Total volume of floorspace in 2008 is recorded at 19,973 sq.m. (215,000 sq.ft.) and in 2009 at 21,600 sq.m. (232,500 sq.ft.). For 2010 up to February 2011, 32 enquiries were recorded for a total volume of floorspace of 36,928 sq.m. (397,500 sq.ft.). Of this level of enquiries it is noted that 10,405 sq.m. (112,000 sq.ft.) is noted as unlikely to come to Derby and therefore realistically the level of enquiries for new office accommodation in Derby is 26,523 sq.m. (285,500 sq.ft.). For 2008 all enquiries were major occupiers and all indigenous to Derby. For 2008 approximately 62% of total enquiries were indigenous and for 2010/11 around 65% of total enquiries were indigenous. It is noted that for 2010/11 26 out of the 32 enquiries are known to be registered with other agents and on this basis it is considered that out of the total number of instructions around 12,495 sq.m. (134,500 sq.ft.) may be considered as additional enquiries and not duplicated within data being recorded by other agents. Conversion rates have not been provided in respect of enquiry levels and no further comments can therefore be made in this regard. iii. Salloway Chartered Surveyors Enquiry data has been provided for the years 2010 to February 2011 and also for We would comment as follows; Total number of enquiries for 2009 is around 37, nine of which remain active and 28 are recorded as dead. The total floorspace sought by the live enquiries equates to 16,722 sq.m. (180,000 sq.ft.). Of the live enquiries, 55% are indigenous to Derby with the remaining 45% being national. The enquiries for 2009 generally fall within the categories of training, public sector, energy, finance and government departments. With regard to 2010 a total of 42 enquiries were received seeking floorspace of 65,100 sq.m. (700,750 sq.ft.). It is noted that the total volume of floorspace has been skewed by a number of larger enquiries in excess of 4,645 sq.m. (50,000 sq.ft.) equating in total to around 37,160 sq.m. (400,000 sq.ft.). Discounting the larger enquiries reduces the volume of floorspace to 441,800 sq.m. (442,750 sq.ft.).

26 25 17 of the enquiries for 2010 are known to be local and the primary sectors within which enquiries are based include training, charitable organisations, rail sector, call centres, recruitment and marketing. The majority of enquiries are seeking accommodation of less than 464 sq.m. (5,000 sq.ft.). There are a significant number of enquiries seeking units up to and in excess of 929 sq.m. (10,000 sq.ft.). Analysis of the 2010 enquiries notes that at least 10,242 sq.m. (110,250 sq.ft.) are enquiries that are registered with other agents and therefore there is duplication in this regard. iv. Innes England Limited Limited enquiry data has been provided by Innes England and we would report on the data received as follows; 147 enquiries were received in 2007, with 88 enquiries recorded within The breakdown of sectors for enquiries received in 2008 is noted as follows; - 19% rail/engineering - 22% professional - 6% public sector - 8% finance - 24% training/charitable organisation - 16% other private sector - 5% other In addition, 56% of total enquiries were indigenous, 33% were from the Midlands area and 11% were nationwide. Conclusions Most of demand was seeking office accommodation of up to 464 sq.m. (5,000 sq.ft.) however there were a number of larger enquiries in excess of 2,787 sq.m. (30,000 sq.ft.). From the information provided by the various agents we would draw the following conclusions; There is some duplication of enquiries recorded with various agents and this is identified to be between 10,219 sq.m. (110,000 sq.ft.) to 14,030 sq.m. (151,000 sq.ft.). If we assume that an average of 12,077 sq.m. (130,000 sq.ft.) is recorded with various agents within Derby and therefore duplicated the net number of new enquiries which remain active is in the region of 9,290 sq.m. (100,000 sq.ft.) to 12,540 sq.m. (135,000 sq.ft.), the average number of active enquiries equals 10,915 sq.m. (117,500 sq.ft.).

27 26 Between 50% and 60% of enquiries are generally indigenous to Derby the remainder being from a wider Midlands and nationwide basis. The main source of enquiries were from the training/recruitment/charitable, rail/engineering and professional sectors. The majority of the enquiries are seeking space up to 464 sq.m. (5,000 sq.ft.) although there are also a significant number of enquiries seeking space up to and well in excess of 929 sq.m. (10,000 sq.ft.). There are also several enquiries in the 4,645 sq.m. (50,000 sq.ft.) size range. We further understand that there is a further 3,066 sq.m. (33,000 sq.ft.) of future requirements likely to arise due to lease expiry/break options being exercised within the following 5 years which may add a further 600 sq.m. (6,600 sq.ft.) or demand to total enquiry levels. Total levels of demand which remain active within the market are therefore anticipated to be 11,530 sq.m. (124,100 sq.ft.). c. Innovation/Managed Office Schemes From discussions with the University and also Friar Gate Studios, demand for space within all centres with the exception of Friar Gate Studios has generally outstripped available supply of accommodation with waiting lists for space maintained on all centres. This changed during the latter part of 2009 and also for 2010 where between 20% and 30% of units are available within all the innovation centres. As previously noted, a number of units are being held void within Friar Gate Studios and Network House pending refurbishment works. It is further noted that there are currently no waiting lists for space within any of the innovation centres. Friar Gate has run at slightly lower occupancy levels than the University centres; however it is noted that Friar Gate Studios is intended to provide move on accommodation to the innovation centres and is therefore dependent upon some element of tenant growth and churn. The University Innovation Centres and Friar Gate Studios all confirm that demand for space is generally from within the Derby and wider Derbyshire area with few enquiries from outside of the area. 5.0 TAKE UP RATES The take up of office accommodation within the Derby City Council boundary area has been analysed utilising a range of information sources. Discussions have been undertaken with property agents active within the Derby office market including Innes England, Fisher Hargreaves Proctor and Russell Rigby & Co.. We have also reviewed market information prepared in February 2011 by King Sturge. The consensus view of all agents contacted provides for take up rates to be in the region of 13,935 sq.m. to 16,722 sq.m. (150,000 sq.ft. 180,000 sq.ft.) per annum.

28 27 Information detailed by King Sturge however notes that levels of take up of office accommodation within the City during 2010 were relatively high with total office space transactions in the region of 36,974 sq.m. (398,000 sq.ft.). It is noted by King Sturge however that this report has been distorted by a number of major transactions including the following; 9,290 sq.m. (100,000 sq.ft.) leasehold disposable at Heritage Gate to the Council during September 2010 by way of a 3 year lease to facilitate the refurbishment programme at the Council House on Friar Gate. Leasehold assignment of 6,689 sq.m. (72,000 sq.ft.) from A2 Rolls Royce at Jubilee House on Pride Park in December Leasehold disposable of 5,295 sq.m. (57,000 sq.ft.) to Derby Primary Care Trust at Cardinal Square on a 7 year lease in March and October If the above transactions are excluded from take up rates the take up rate for 2010 is in the region of 15,700 sq.m. (169,000 sq.ft.). Thomas Lister have undertaken our own assessment of take up rates for the three years from 2008 up to an including 2010 utilising the Focus web database. The results of our analysis are identified in the table below; Take Up Rates Compiled Using Focus Web Database Year to Feb March to 2011 June 2011 Total No. of Transactions Total Volume of 14,591 sq.m. 25,461 sq.m. 31,837 sq.m. 2,390 sq.m. Floorspace (157,066 sq.ft.) (274,066 sq.ft.) (342,698 sq.ft.) (25,727 sq.ft.) No. of Freehold Transactions No. of Leasehold Transactions New/Refurbished Offices Total - Out of Town City Centre Second Hand Offices Total - Out of Town City Centre No. of Transactions for 37 transactions 32 transactions 24 transactions 9 transactions Various Size of Units < 186 sq.m. < 186 sq.m. < 186 sq.m. < 186 sq.m. 21 transactions 18 transactions 9 transactions > 3 transactions > 186 sq.m. < > 186 sq.m. < 186 sq.m. < 464 > 186 sq.m. < 464 sq.m. 464 sq.m. sq.m. 464 sq.m. 6 transactions 7 transactions 7 transactions > 1 transactions

29 28 Year to Feb 2011 > 464 sq.m. < 929 sq.m. 3 transactions > 929 sq.m. > 464 sq.m. < 929 sq.m. 2 transactions > 929 sq.m. 464 sq.m. < 929 sq.m. 4 transactions > 929 sq.m. March to June 2011 > 464 sq.m. < 929 sq.m. 0 transactions > 929 sq.m. The key issues noted from the findings in the table above are noted as follows; The number of transactions has continued to fall from 2008 during both 2009 and 2010; however the volume of overall floorspace transacted has increased year on year. With regard to data for March to June 2011, utilising this as reflective for the year would result in circa. 39 transactions completing and significantly lower volume of floorspace than for the previous three year period. These calculations are however highly speculative and such data should be treated with caution. We would note that the volume of floorspace transacted has been somewhat distorted in both 2009 and 2010 by a number of large and uncommon transactions, which for 2009 was the letting of the HQ Training Centre on Locomotive Way to Derby College extending to 8,721 sq.m. (93,870 sq.ft.). If this transaction is excluded from the data, the total volume of floorspace transacted during 2009 reduces to 16,740 sq.m. (180,196 sq.ft.) which is more in line with average take up rates. With regard to the evidence for 2010, clearly this includes the three large transactions noted above. If the three large transactions are excluded from total volume of floorspace transacted the average take up for 2010 is 10,563 sq.m. (113,698 sq.ft.). Although it is noted that this take up is below average levels, it may be that the Focus web database does not have all transactional evidence recorded and therefore we assume that take up rates are in accordance with the levels recorded by property agents active within the Derby area. The number of transactions are primarily undertaken on a leasehold basis which is consistent with current economic and market circumstances where few businesses are in a position to undertake expensive freehold acquisitions or be able to secure finance in this regard. With the exception of 2008, the majority of transactions are for second hand accommodation with transactions being of a similar number for both out of town and City centre for second hand property. This is with the exception in 2008 where there were a higher number of transactions for new and refurbished offices however this is assessed to be due to a higher number of transactions being undertaken for new build offices being completed on Pride Park and other out of town locations which were subsequently disposed of. Within all years, the highest number of transactions for new/refurbished accommodation was for property situated out of the City centre, which reflects the lack of new build and refurbishment schemes which have actually be undertaken within the City centre.

30 29 Within all years, the majority of transactions undertaken were for units of less than 186 sq.m. (2,000 sq.ft.) and up to 464 sq.m. (5,000 sq.ft.) with significantly fewer transactions being for larger office accommodation. These results are unsurprising on the basis that the majority of the supply of available office accommodation is for small office units. The evidence relating to take up rates along with evidence of demand for offices is utilised to seek any imbalances between supply and demand. One of the drawbacks in applying take up rates is that these clearly do not reflect latent demand which may exist particularly where there is a shortage in supply of high quality accommodation in specific locations and for a range of unit sizes as has been identified within Section 4 of this report. The application of take up rates along with demand data is considered within the next section of this report in seeking to identify any imbalances between supply and demand for office accommodation within the City. With regard to the type of companies that are acquiring property within Derby, we have undertaken a brief analysis of transactions completed in 2008, 2009, 2010 and 2011 to end of June There are evident a number of trends which occur in each year and these are noted as follows; The majority of occupiers taking office space within Derby are indigenous to the City however there are some exceptions such as in 2008 the Alzheimer s Society and Pick Everard. In 2009 the majority of activity was also indigenous with the exception of companies such as Pertemps and Remploy. The majority of occupiers taking space within all three years were associated with providing training and recruitment or associated within the transportation, aerospace and high technology sectors. There was limited activity from the financial and professional services with few transactions recorded for banking and financial services and professional services was almost none existent. 6.0 IMBALANCES BETWEEN SUPPLY AND DEMAND In this section of the report an analysis is undertaken of supply, demand and take up rates to identify any mismatches between these conditions and thus an imbalance in the market. We would therefore summarise key findings from the relevant earlier sections of this report as follows;

31 30 i. Supply Position With regard to allocated sites for office development there is at least hectares (38 acres) of land allocated for office use within Derby although this encompasses an area outside of the City centre; however which would compete with supply within the City centre. It is anticipated that this land could accommodate around 70,604 sq.m. (760,000 sq.ft.) of new offices and thus new supply to Derby. It must be noted however that this is potential future supply and that there is no certainty of delivery with the majority of the allocated sites perhaps with the exception of the former Derbyshire Royal Infirmary and Castleward sites. With regard to schemes with planning consent in place for new office development there are nine projects providing a combined amount of floor space of circa. 72,152 sq.m. (776,646 sq.ft.). On the basis that planning permission is in place for these schemes it is anticipated these developments could be delivered within the short term, within the next 5 years. ii. Available Office Space The total volume of floorspace available is estimated to be in the region of 61,043 sq.m. (657,000 sq.ft.). It is further estimated that around 23,225 sq.m. (250,000 sq.ft.) of this floorspace is within the City centre with the remainder being within the wider Derby area. Over 65% of existing property stock is less than 186 sq.m. (2,000 sq.ft.) and around 60% of stock is less than 92 sq.m. (1,000 sq.ft.). In accordance with recent research assuming that around 41% of total available accommodation is Grade C quality and provisionally unsuitable to meet modern occupier demand, the total supply of suitable space may be in the region of 36,010 sq.m. (387,630 sq.ft.). With regard to innovation centres/managed office schemes the current available supply of space within the five schemes is currently in the region of 1,188 sq.m. (12,783 sq.ft.). iii. Demand Analysis With regard to land, from discussions with various agents active within the market there is limited demand for office land for development at this time. With regard to demand for office space analysis of enquiry data has estimated that on average there is around 11,530 sq.m. (124,100 sq.ft.) of active enquiries which remain unsatisfied within the marketplace. This level of demand is therefore required to be considered in addition to take up rates and is considered within section v. below.

32 31 There are a significant number (around 20%) of enquiries seeking accommodation in excess of 929 sq.m. (10,000 sq.ft.) which cannot be accommodated from existing supply within the market. Discussions with the University in respect of the four innovation/managed office schemes has identified that demand for space has generally outstripped available supply with waiting lists maintained on all centres with the exception of Network House. This position changed during 2009 and 2010 where average void rates on all of the centres were running at around 20%-30%. Enquiries for units within the centres has also dropped and there are currently no waiting lists for any of the University schemes. With regard to Friar Gate Studios, this is generally run at slightly lower levels of occupation at around 70% which in part may be on the basis that this space is designed to provide move on accommodation to occupiers who are in a position to move out of the University centres. In addition, as previously noted a number of the units are being held vacant pending a refurbishment programme. In summary therefore there have been consistent and strong levels of demand for space within the innovation and managed office schemes albeit enquiry levels reduced during 2009 and Enquiry levels during 2011 have increased and indications are that demand and occupation of the innovation centres is likely to resume to pre-recession levels though pending completion of refurbishment works in Network House and Friar Gate Studios. iv. Take Up Rates Average take up rates for office accommodation within Derby has been relatively consistent during the last 3 years at between 13,935 sq.m. to 16,722 sq.m. (150,000 sq.ft. to 180,000 sq.ft.) per annum. This is with the exception to 2010 where the level of take up has been somewhat distorted by a number of major transactions. If these transactions are discounted, take up rates for 2010 are in the region of 15,700 sq.m. (165,000 sq.ft.). v. Supply and Demand Analysis Analysis of any potential mismatches in demand and supply based purely on take up rates assuming an average take up rate of 15,328 sq.m. (165,000 sq.ft.) is summarised as follows; - Supply of existing property excluding Grade C/poor quality property is 36,010 sq.m. (387,630 sq.ft.). This equates to 2.3 years of supply however would note includes no Grade A stock. - Assuming only 59% of available stock within the City centre is of appropriate quality this provides a supply of 13,703 sq.m. (147,500 sq.ft.) equating to 0.9 years supply assuming take up rates and that all take up will be accommodated within the City centre.

33 32 - If we add to the existing supply of office accommodation, consented supply is 72,151 sq.m. (776,646 sq.ft.) and this provides a total stock of 108,161 sq.m. (1,164,216 sq.ft.). This equates to 7 years supply of office accommodation although is noted that this would be available on a phased basis. - Concentrating on a City centre supply only, total supply including consented schemes is estimated to be around 85,853 sq.m. (924,146 sq.ft.) which equates to 5.6 years supply again on a phased basis in the short to medium term. - The allocated sites including within the City and wider Derby area is estimated at 70,604 sq.m. (760,000 sq.ft.) which equates to 4.6 years supply primarily over the medium and longer term. The total potential supply are 178,765 sq.m. (1,924,276 sq.ft.) which equates to 11.7 years supply of office accommodation within the City. As noted earlier within this report, the analysis based purely on take up rates is not considered to be a wholly accurate reflection of the market given that research undertaken in respect of demand has identified pent up demand for Grade A office accommodation within the City centre which has not and currently cannot be satisfied. Assuming therefore that actual levels of demand which may be converted into take up rates of offices within the City if new supply were available is estimated to be in the region of 11,530 sq.m. (124,100 sq.ft.). Actual levels of demand (based on active enquiries and take up rates) for office accommodation within Derby is therefore estimated to be circa. 26,857 sq.m. (289,100 sq.ft.) analysis is as follows; - Applying demand to the existing property stock excluding Grade C accommodation equates to a supply of 1.3 years supply. - Adding the existing supply of office accommodation to consented supply based on the data above provides 4 years supply of office accommodation, although it is noted that this would be available on a phased basis. - Concentrating on existing City centre supply only, level of demand in the market would equate to 0.5 years supply. - In terms of total potential supply of offices including those allocated sites, consented schemes and available space based on total demand projections equates to 6.6 years supply of office accommodation within Derby. With regard to the consented supply only, based on current demand projections this equates to a supply of 2.7 years and therefore consideration should be given to phasing delivery of these schemes over a 2 to 3 year period.

34 33 Summary In terms of the need for a longer term pipeline supply, clearly some of the allocated sites may take a number of years prior to coming forward. If however demand remains relatively constant for offices within Derby, consideration will be required to be given to providing additional land and potential office schemes which will provide a pipeline supply over a longer period and at least for the next 10 to 15 years up to New provision of office accommodation is required if demand for larger offices in excess of 929 sq.m. (10,000 sq.ft.) is to be met. 7.0 IDENTIFICATION OF RENTAL AND CAPITAL VALUES Rental and capital values achieved on the disposal of office accommodation within the Derby City Council boundary area has been assessed through liaison with local property agents active within the office market and also through obtaining transactional evidence from the Focus web property database. Rental and capital value evidence for the years 2008, 2009 and 2010 is identified in the table below; Rental and Capital Values for Offices for Rentals City Centre sq.m. ( 8-9 per sq.ft.) Year sq.m. ( 8-12 sq.ft.) sq.m sq.m. ( 8-12 sq.ft.) 199 sq.m sq.m. ( 8-12 sq.ft.) 172 sq.m. Pride Park sq.m. ( sq.ft.) ( sq.ft.) ( sq.ft.) ( 16 sq.ft.) Other Out of Town sq.m sq.m. 161 sq.m. 129 sq.m. (new/refurbished) ( sq.ft.) ( sq.ft.) ( 15 sq.ft.) ( 12 sq.ft.) Capital Values Investment Yields 8.5% 7.75%-8% 7.5% 7.5% Values 1,926 sq.m. 1,830 sq.m. New/Refurbished ( 179 sq.ft.) ( 170 sq.ft.) Second Hand 1,453 sq.m. ( 135 sq.ft.) 1,399-1,668 sq.m. ( sq.ft.) 1,830 sq.m. ( 170 sq.ft.) 1,216 sq.m. ( 113 sq.ft.) 839 sq.m. ( 78 sq.ft.) 1,830 sq.m. ( 170 sq.ft.) 1,216 sq.m. ( 113 sq.ft.) The analysis of the evidence of rental and capital values detailed in the table above can be summarised as follows; Data for 2011 is up until 30 th June 2011 and evidence is therefore very limited. It is difficult therefore to give much reliance to this data, which is likely to change as the

35 34 year progresses. On this basis analysis has concentrated on the full years evidence base for 2008, 2009 and Rentals for City centre accommodation have remained fairly static over the 3 year period between per sq.m. ( 8-9 per sq.ft.). Rentals at Pride Park remained relatively static during 2008 and 2009 at per sq.m. ( per sq.ft.); however have seen an increase during 2010 at 199 per sq.m. ( per sq.ft.). This may be due to some recovery within the market and also as the supply of available office accommodation on Pride Park begins to become short. With regard to investment yields, prime investment disposals in 2008 were achieving around 8.5% and at their highest level for the last 10 year period primarily due to the onset of the recession. During 2009 yields improved slightly to around 7.75% although activity levels remained relatively low, which is probably reflective of the country being in recession and very few freehold investment transactions being completed. With regard to 2010 the economic climate improved and moved out of recession. Investment yields also improved slightly to around 7.5%. In terms of disposals of new property, recorded values of between 1,830 sq.m. to 1,926 sq.m. ( per sq.ft.) were consistent during 2008 and With regard to 2010 values have remained relatively consistent at 1,830 sq.m. ( 170 sq.ft.) although this relates to out of town stock given no new Grade A supply being delivered within the City. The freehold values of second hand accommodation varied during 2008, 2009 and 2010; however the quality of second hand property can vary significantly and it is likely that the range of values achieved reflects differing quality of space and cannot therefore be considered as accurate representations of value of second hand property. We have also been unable to identify sufficient evidence in order to make comparison of types of property and associated sales values to be able to draw any conclusions as to the average sales values for second hand space. Based on the findings of our research, we would estimate that the rental values for high quality new office accommodation within the City centre would be in the region of 199 per sq.m. ( per sq.ft.). It is considered however, that in order to achieve rentals of this level, tenants incentives will require to be granted including rent free periods of between 6-12 months. With regard to investment yields for Grade A space, clearly there is no evidence in this regard within the City centre. Assuming therefore occupation by good regional/local covenants on a leasehold basis, yields may be achieved in the region of 7-7.5%. In terms of values on a floor area basis and based upon values noted above, values may be in the region of 2,155 sq.m. ( 200 sq.ft.)

36 COMPARISON OF DERBY WITH OTHER KEY CITIES A comparison has been undertaken of Derby with other key cities within the Midlands region and also with Sheffield which is located to the north of Derby within Yorkshire. Sheffield is however within a close enough distance to potentially compete with Derby and has some similarities in terms of the market and economy with Derby. In order to undertake this comparison of the cities noted above, we have identified key economic data along with factors relevant to the office market, the key details of which are shown in the table below; Derby Leicester Nottingham Sheffield Birmingham Population 244, , , ,800 1,016,800 Deprivation 69 th 20 th 13 th 63 rd 11 th Ranking Economically 77% 63% 65.2% 65.9% 77.4% Active Population Weekly Earning (median) Unemployment 7.7% 10.5% 5.2% 6.7% 11.8% Rate Benefit 5% 6.5% 5.2% 5% 5.1% Claimant Count Retail Ranking 26 th 16 th 7 th 28 th 3 rd Availability of 15% 11% 14% 7% 16% Office Stock, as Percentage Total Stock as at 2010 Office Take Up 2010 Total Years Supply of Stock Based Upon Availability Total Percentage Availability of Offices as Proportion of Total Stock 13,395-16,722 sq.m. (150, ,000 sq.ft.) 28,241 sq.m. (304,000 sq.ft.) 53,139 sq.m. (572,000 sq.ft.) 36,231 sq.m. (390,000 sq.ft.) 15% 11.9% 14% 7% 16% ,150 sq.m. (669,000 sq.ft.)

37 36 Average City Centre Office Rental Values Sq.m. Office Yields 2011 Derby Leicester Nottingham Sheffield Birmingham sq.m. 210 sq.m. 160 sq.m. 275 sq.m. sq.m. ( 14 sq.ft.) (19.50 sq.ft.) ( 15 sq.ft.) ( ( 9 sq.ft.) sq.ft.) 7.5% 7.25% 6.75% 6.25% 6% In addition to the data contained above, we would also provide a summary in respect of each of the comparable cities as follows; i. Leicester The local economy within Leicester is diverse and is not overly dependent on any one sector or large employer. Nonetheless, there is a high proportion of public sector employment, education and health at around 25.2% and manufacturing at 14.8%. The local economy has undergone significant restructuring over the last 20 years with substantial losses in manufacturing jobs and growth in service sector employment which currently stands at around 18.8%. Service sector employment continues to grow along with specialisation in high technology manufacturing and new science parks in both Leicester and Loughborough which will assist in strengthening this area of the economy. Leicester has a relatively low average weekly pay, part of which is reflected by a high proportion of City residents more likely to be working in elementary occupations or process, plant and machinery operatives. Only 11% of employees within Leicester are employed as managers or senior officials which is lower than the regional average. With regard to the office market, it is noted that there is an increasing demand for offices within the City centre and an imbalance in the growth of office stock with significant increases in offices in out of town locations and a stagnation in the City. The overall demand and supply assessment undertaken in the Leicestershire Economic Assessment dated May 2010 refers to a 2008 PACE study, which identified a requirement of 100,300 sq.m. of new office development within the City up to With regard to other key features of the economy, the wider Leicestershire sub region has a healthy retail offer that experiences relatively little loss of expenditure to shopping centres outside of the area. This is part due to the completion of the Shires and extension of this within the High Cross Centre and Foss Park out of town centre. With regard to housing, a wide variety of property types and tenures at a range of prices are generally available and prices have been sufficiently high to contribute to economic buoyancy. It is noted however that the Strategic

38 37 Housing Market Assessment has identified a need for more affordable housing in both urban and rural areas. In summary therefore in comparison to Derby, Leicester has a larger City population, higher levels of deprivation and considerably lower weekly earnings. Take up rates for offices within the City are however higher than for Derby with higher rentals and slightly lower investment yields. Leicester has one of the lowest stock availability of offices than all of the comparative cities with the exception of Sheffield but has a slightly higher supply than all cities with the exception of Birmingham. It is also noted that the availability in the Leicester market is traditionally dominated by second hand floor space with the delivery of new stock relatively limited. ii. Nottingham The local economy within Nottingham has traditionally been dominated by public sector organisations with the top five employers within Nottingham all being public sector including Nottinghamshire County Council and Nottingham City Council. On this basis Nottingham is likely to be severely affected by the public sector funding cuts. The local economy has undergone significant restructuring over the last 20 years with a real growth in science and technology with a number of companies making the Sunday Times Microsoft Tech Track 100 List which annually ranks Britain s fastest growing private technology companies based on sales growth over the last 3 years. The creative industries sector has also seen significant growth with over 60 events taking place in the City during Research undertaken by Business Link identified that between January and October 2010, 1,968 business started up in Nottingham compared with 1,626 over the same period in This represents a 21% increase in start ups compared to an average 14.4% rise across England. In terms of retail, Nottingham is ranked 7 th in the UK which has seen an increase in ranking in part due to the good range of retail offer in the City, but also in respect of the redevelopment of the Broadmarsh Centre and also the extension to the Victoria Shopping Centre. With regard to the office market, this has remained buoyant over the past few years, although activity in 2009 was boosted by take up by the public sector. The first quarter of 2010 saw a balance return to the market with both public and private sector occupiers active. Availability rates of office accommodation have increased over the past few years primarily due to new Grade A stock coming to the market and increased take up in this regard. This take up in Grade A stock has resulted in a significant volume of poor quality space being released on to the market.

39 38 Nottingham has a relatively diverse range of housing across all tenures with a high concentration of apartments within the City centre and most prime areas being around the Lace Market and the Castle. There are however significant areas of poor quality housing such as within St. Ann s and Snenton for which the City Council have been seeking to address. In summary therefore Nottingham in comparison to Derby has the larger population but more significant areas of deprivation ranking at 13 th in the 2007 indices. Weekly average earnings for the City are also considerably lower than for Derby. Nottingham does however have a very strong office market with a number of developments such as Ng2 and a number of City centre developments providing high levels of Grade A stock to the City which have subsequently attracted occupiers including NPower and Experian to the City. Based on levels of activity, office rentals within Nottingham are considerably higher and investment yields lower than for transactions recorded within Derby. It is also noted that the night time/leisure/retail offer within Nottingham provides a wider range of facilities and the City therefore has a retail ranking of 7 th and a thriving night time leisure economy. iii. Sheffield Sheffield has a considerably larger population than Derby and is ranked the 63 rd most deprived City only marginally lower than Derby at 69 th. Sheffield s economic base was traditionally heavily dependent on the steel making industry and other heavy manufacturing which has continued to decline over the last 20 years. There has been significant redevelopment within Sheffield boosted in part by the tram system within the City centre, the expansion of the University, high technology investment around the Sheaf s Square Campus and proposed improvement and expansion of the retail quarter within the City. With regard to office activity, there is a relatively buoyant occupational market with a good supply of Grade A and good quality second hand stock. The predominance of office market activity is within the City centre although it is noted that almost 60% of Grade A stock is contained within five buildings. Sheffield has a good supply of private sector housing offering a range of types and tenures both within and outside of the City. It is noted however that there is a need for more affordable housing provision. With regard to leisure activities and the night time economy, this is more established than Derby, with a relatively buoyant night time economy based upon the range and quality of facilities available within the City.

40 39 In summary, in comparison to Derby, deprivation levels are similar but weekly earnings are considerably lower. With regard to the office market however take up rates are higher than for Derby, rental values within the City higher and investment yields some three quarters of a point lower than that achieved within Derby. Sheffield has a relatively low availability of office stock and similar total years supply of offices disregarding poor quality space within the City. Sheffield like Derby is therefore in need of new supply of Grade A office accommodation to be delivered to the market in order to continue to support levels of occupational activity. It is this occupational activity which is clearly lacking within Derby City centre. iv. Birmingham During the last 20 years the Birmingham economy has undergone rapid transformation which has now been recast as a mostly serviced based economy. This transformation has been more rapid than that experienced within the national economy and the West Midlands regional area. However between the years 1995 to 2005, Birmingham s economy began to fall behind progress made elsewhere in the UK as the City experienced a significant loss of jobs including at MG Rover between this period. Recently Birmingham s unemployment rate overtook that of Liverpool s and is currently the highest out of the eight English core cities being Birmingham Bristol, Leeds, Liverpool, Manchester, Newcastle Upon Tyne, Nottingham and Sheffield. Despite the rapid growth in the service sector, Birmingham and the wider West Midlands have been reliant on the mature industry of car making and engineering which has continued to decline sharply year on year from 1998 and continued through the recession. Had it not been for the significant development and investment in the service sector the overall economic performance of Birmingham would have been far worse than the actual fall and underperformance in the Birmingham economy when compared to other cities. It is further noted that the growth in the service sector within Birmingham is primarily in professional and business services rather than the financial services sector which remains relatively small. Birmingham is more dependent on public services employment than the UK average and this is likely to have severe impacts for the City in terms of reduced public spend and increasing employment. Key development projects within the City such as Eastside, Arena Central and the A38 Central Technology Belt are likely to be severely compromised by the banks reluctance to finance such projects in the immediate and short term. With regard to the office market, Birmingham has experienced increased levels of activity in an occupier led market, although the number of investment transactions

41 40 has fallen during The value of total investment transactions did conversely increase by 82% in the same year. The supply of Grade A stock coming to the market has dwindled and there is not anticipated to be any major speculative office development within The supply of Grade A office accommodation may therefore only increase by between 4,645 sq.m. to 92,900 sq.m. (50,000 sq.ft. to 100,000 sq.ft.). During 2010 around 16,720 sq.m. (180,000 sq.ft.) of new offices were delivered to the market of which 60% was in a single building, the Cube. Just over half of the space within the Cube has now been let to a single occupier. Birmingham has an extensive and established night time and leisure activity and also capitalises on business events and tourism through the ICC and NEC venues. In terms of housing, there is a reasonable supply of housing across the City although Birmingham does suffer with a number of significantly deprived areas particularly Ladywood, Aston and Nechells. The City also experienced significant apartment development which resulted in a significant over supply within the apartment market at the time of recession, financial crisis and housing market crash. In summary, Birmingham is a significantly larger City than Derby with a deprivation ranking of 11 th and considerably lower weekly earnings than Derby. Birmingham has the highest unemployment rates than all of the cities compared within this report partly which is due to the reliance on the car making industry and is also likely to be further exacerbated through the public sector spending cuts which will see a loss of jobs within Birmingham City Council and the loss of the Regional Development Agency. With regard to the office market there are limited new schemes currently coming forward in the market many of which have been frustrated by lack of development finance and the supply of Grade A stock has and continues to dwindle. There is however renewed local and regional developer interest in acquiring good quality secondary stock which has helped to maintain levels of activity within the market. Birmingham City centre has also undergone rapid transformation in terms of its retail and leisure offer with developments such as the Bull Ring being one of the largest shopping centres in Europe. The relatively buoyant office sector and facilities on offer mean that a number of young professionals reside in the City centre within new apartment developments, however there is also significant commuting in to the centre from other areas such as Edgbaston, Harborne and other neighbouring Authorities including Solihull, Lichfield, Bromsgrove and Worcestershire. Summary In summary, Derby is the least deprived out of all of the comparative cities and has considerably higher weekly earnings.

42 41 With regard to the office sector, Derby notably has the least established and the least levels of activity than any other City with the lowest level of office take up rates, lowest rentals, highest yields and lowest supply of stock disregarding poor quality space. It is notable that even Leicester which suffers from a poor supply of Grade A office accommodation demonstrates higher levels of activity than for Derby, considerably higher rentals and marginally lower yields. On this basis, given the positive attributes associated with Derby there is clearly a major opportunity to kick start and re-establish the office sector within the City supported by other measures necessary to attract both employers and residents to live and work within the City. 9.0 CONCLUSIONS AND RECOMMENDATIONS The conclusions and recommendations of this report are noted below as follows; i. Conclusions The conclusions drawn from this report are as follows; Derby is a City demonstrating relatively strong economic performance within the last decade, being the least deprived City in the East Midlands with the exception of Lincoln. Derby has relatively high average weekly earnings ranking 16 th out of 64 cities and significant amount of the total workforce employed in the advanced manufacturing sector. Derby has a relatively low concentration of employment in banking, finance and other services and high levels of employment in large firms. The potential weaknesses with the Derby economy are the reliance on large employers such as Rolls Royce for employment and supply chain activity along with high levels of employment within the public sector. This issue is particularly relevant given the position with Bombardier and likely significant job losses. There are also issues with low levels of skills and proportion of the population with no qualifications at all which require to be addressed to ensure a suitably skilled source of labour. Weakness in the economy may also be addressed through diversification, expansion of the business space in growth sectors such as financial services, investment and banking and other high technology businesses. The Derby City centre office market lags behind Nottingham and Leicester in terms of existing supply of Grade A accommodation and development activity. The lack of an office market in the City centre can partly be explained through the establishment of Pride Park which caused some displacement of businesses from the City centre and primarily serviced demand for offices in Derby. Despite there being a revived focus from the developer market to deliver new schemes within the City centre these failed to materialise even during the peak of the market in 2007/2008. Issues that have been a barrier to new development in the City primarily relate to lack of developer and occupier confidence, whereby occupiers will

43 42 not commit on a pre-let basis until development is coming out of the ground and they are confident of delivery. Developers however are unable to commence development until a number of pre-lets are in place effectively de-risking projects and enabling finance to be secured. In the current economic climate institutional/bank finance is very difficult to obtain and many banks either do not have the resources to lend on development projects or are risk adverse making all funding decisions on ability to repay as oppose to rent value considerations. Ability to repay debt clearly requires a significant number of pre-lets to be in place and on this basis development within the City has stalled. It is also noted that in order to attract new employers, appropriate skilled workforce and residents to the City a comprehensive range of housing, leisure, cultural services and amenities are required along with a high quality environment. This matter is in part being addressed by the City Council with a number of new facilities being delivered in the City to provide such facilities. In terms of supply of office land and accommodation, we note that there is around hectares (38 acres) of land allocated for office use which may accommodate around 70,604 sq.m. (760,000 sq.ft.) of offices. It is further noted however that there is no certainty of delivery of these sites or associated timescales for delivery. There are currently ten schemes with planning consent for office development within the City providing a total amount of floorspace of 72,151 sq.m. (776,646 sq.ft.). In terms of available office accommodation in Derby this is currently estimated to be 61,043 sq.m. (657,000 sq.ft.) of which 23,225 sq.m. (250,000 sq.ft.) is within the City centre. The majority of accommodation in out of town centres is new or refurbished stock whereas the majority of City centre stock is older, second hand properties much of which has been on the market for a considerable amount of time. Around 65% of existing property stock is less than 186 sq.m. (2,000 sq.ft.) and around 60% of total stock is less than 92 sq.m. (1,000 sq.ft.). Only 13% of accommodation is in excess of 464 sq.m. (5,000 sq.ft.). Technological advancements and change in business culture has led to changing requirements for more modern accommodation. The majority of second hand accommodation in Derby is Grade B or C with around 41% of offices being Grade C and therefore unable to meet the requirements of modern businesses. On this basis it is anticipated that total supply of suitable office accommodation able to meet occupiers requirements may realistically be in the region of 36,010 sq.m. (387,630 sq.ft.). Furthermore the actual supply of suitable quality accommodation within the City centre may be closer to 13,703 sq.m. (147,500 sq.ft.). With regard to innovation centres/managed office schemes there are five centres within the City four of which are operated by the University. All of the schemes currently have space available and total estimated space within the five centres is currently in the region of 1,188 sq.m. (12,783 sq.ft.). This available supply is

44 43 somewhat unusual with the majority of centres running at nearly full occupation with waiting lists for space on three out of the five centres. This can largely be explained due to the need for some units to be retained on a void basis pending programmes of refurbishment to be undertaken at these centres. In terms of demand and source of enquiries, all of the centres report that the majority of enquiries are indigenous to the Derby and wider Derbyshire area. With regard to office buildings, the volume of active enquiries estimated on a conservative basis is in the region of 11,530 sq.m. (124,100 sq.ft.) per annum. Around 80% of enquiries are for offices of less than 929 sq.m. (10,000 sq.ft.). There are however around 20% of enquiries seeking offices in excess of this size. The breakdown of enquiries are heavily skewed towards the training/charitable organisations, rail and engineering sectors. With regard to the innovation/managed office schemes, demand has generally fallen for space within these centres during 2009 and 2010 where void rates across all centres has increased and there are currently no waiting lists for space within any of the innovation centres. All centres report that generally demand for space has always been accommodated within one of the centres and yet the majority of enquiries are indigenous to Derby and the wider Derbyshire area. Take up rates are anticipated to be in the region of 13,935 sq.m. to 16,722 sq.m. (150,000 sq.ft. to 180,000 sq.ft.) per annum. The majority of transactions are on a leasehold basis and the majority for properties less than 464 sq.m. (5,000 sq.ft.). Analysis of actual take up indicates the majority of occupiers taking office space within Derby are indigenous to the City and many involved in the recruitment, training, charitable, rail and engineering services sector. Actual levels of demand for office accommodation within Derby based on evidence provided of demand from agents and take up rates are anticipated to be in the region of 26,857 sq.m. (289,100 sq.ft.). The years supply of office stock excluding Grade C accommodation equates to 1.3 years supply. Around 4 years supply of office accommodation exists based upon current demand and take up if the consented supply of offices is brought forward to the market. With regard to the total potential supply of offices including allocated sites it is anticipated that there is around 6.6 years supply of office accommodation within Derby. There is however currently limited availability to meet demand for offices of 929 sq.m. (10,000 sq.ft.) or above.

45 44 It is noted therefore there is the potential for demand to quickly exceed supply in any improving market conditions and thus increase demand and take up rates (particularly given anticipated levels of pent up demand). Derby may therefore be in a position where there may be a lack of supply of Grade A accommodation within a period of 4 years if no new schemes come forward. Consideration therefore needs to be given to increasing the potential delivery of offices in the short to medium term although consideration will need to be given to phasing given the consented schemes currently awaiting for delivery in the market. Increasing supply therefore potentially needs to be considered for the period to 3-5, 5-10 and years accordingly. In respect of values achievable for office accommodation within Derby based on transactional evidence rentals for high quality new build office accommodation within the City centre is anticipated to be in the region of 199 per sq.m. ( per sq.ft.). It is considered however that tenants incentives such as rent free periods of circa months are likely to be granted in order to achieve rentals at these levels. With regard to investment yields for Grade A space clearly there is no evidence in this regard within the City centre. Assuming therefore occupation by good regional/local covenants on a leasehold basis, yields are anticipated to be achievable in the region of 7%-7.5%. In terms of values on a floor area basis assuming BREEAM excellent accommodation, values may be in the region of 2,155 sq.m. ( 200 per sq.ft.). Comparison has been undertaken of Derby with other cities within the Midlands and Sheffield and it is noted that Derby is the least deprived out of all of the comparative cities and considerably higher weekly earnings. With regard to the office sector, Derby notably has the least established and lowest levels of activity than any other City, with the lowest level of office take up rates, lowest rentals and highest yields. The City also has the lowest supply of stock disregarding poor quality space. The position in Derby particularly relating to why the highest earners live outside the City may in part be due to the historically poor quality housing offer, lack of appropriate leisure, cultural and retail facilities. It is noted that this has in part been addressed by the Westfield Centre and there are other proposals to improve the availability of City centre housing and the leisure offer and clearly a comprehensive strategy to provide a wide range of high quality facilities will be required if employers and residents alike are to be attracted to Derby. ii. Recommendations Based upon the findings of our report the following recommendations are made; Derby is recognised as having some linkages with East Midlands Airport through occupiers based in and around the East Midlands Airport and also trading within Derby. The activities of the East Midlands Airport and businesses with an interest therein along with any potential expansion opportunities should therefore continue to be monitored and reviewed with ongoing communication open/maintained with the East Midlands Airport in order for Derby to seek to capitalise on any opportunities which may becoming forward.

46 45 Based upon recent research, linkages were identified with other cities including Sheffield, Milton Keynes and Peterborough in terms of occupier activity and trading. Consideration to enhancing linkages and relationships with these Local Authorities should be given to ascertain any opportunities for promoting business opportunities across Local Authority boundaries. Continue with measures to pursue opportunities which will encourage the diversification of the economic base, including the promotion of the innovation centres and ongoing liaison with the University and educational/training institutions in seeking to assist in this process. Promotion of the Regeneration Fund as a vehicle to facilitate delivery of Grade A accommodation to the City centre in seeking to establish a thriving office sector to the City. The Regeneration Fund should seek to overcome barriers currently preventing developers from undertaking development such as enabling finance to be secured to facilitate construction in situations where bank finance is not available. Continue to promote the delivery of a comprehensive range of housing and other leisure facilities, cultural services and amenities to encourage residents and businesses to the City. To undertake research to identify a longer term potential supply of office accommodation. Consideration to be given to looking at mechanisms to facilitate the refurbishment and improvement of the City centre stock given that a high proportion of this is classified as Grade C and much of which is unsuitable for occupation by modern businesses. This may be particularly important given the impending relocation of the Council out of Heritage Gate which will leave a significant volume of second hand offices vacant and available on the market and the loss of a major employer to this area of the City. Consider to maintain and regularly update market analysis data to monitor the market and capitalise on opportunities and also to be in a position to respond to changing market conditions. It is further noted that the regular events hosted by Marketing Derby may provide the appropriate forum to gather required information in this regard... Date: 13 th July 2011 Rachel Lister BSc (Hons) MRICS Thomas Lister Limited 11 The Courtyard Buntsford Gate Bromsgrove B60 3DJ

47 46 APPENDIX I - SCHEDULE OF AVAILABLE SUPPLY

48 47 APPENDIX II - TRANSACTIONAL TAKE UP DATA FOR 2008, 2009 AND 2010

49 48 APPENDIX III - INFORMATION SOURCES