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Read on for this blog, written by Stuart Hardisty, IED Director. Stuart will be delivering a seminar on this topic at Regen 2017, being held in Cardiff on 3rd October.

A crisis is brewing: are we fuelling a future employment space crisis?

There is growing awareness that the UK is not delivering the commercial employment property needed to underpin a healthy and growing economy. At the same time, what is not talked about so much is how public policy is exacerbating the situation with an overwhelming focus on delivering housing, including measures that further reduce the stock of employment space.

So my concern is that whilst the housing crisis is well understood, are we unintentionally fuelling a future employment space crisis? If so, how can we act now to ensure it does not escalate out of control? Where will all these new residents work, or are we happy to create more and more dormitory settlements? All key questions.

Away from the IED, in my day job I work with local authorities to help them understand the future employment sites and premises requirements across their geographic areas. This work identifies needs arising from the forecast expansion of their local economies, and also to ensure there is adequate provision to sustain the health of existing businesses in the area. 

The theoretical approaches identify ongoing demand for office and industrial space.  These are confirmed with evidence of current live requirements, unsatisfied enquiries and consistent anecdotal evidence of ‘latent’ demand, with new employment premises being quickly occupied when made available. The challenges appear to be primarily on the supply side, delivering against this demand, and are growing in number and severity – these include:

Land ownership – substantial tracts of allocated employment land are in the hands of owners and developers with little or no desire of delivering or investing in employment premises. This is, in essence, land banking whilst holding out for higher value uses.

Viability – end values for completed employment development are often below the cost of land and construction in many parts of the UK. This is not limited to areas seen as weak in economic terms – it includes parts of the south and east of England often viewed as highly successful economically. The removal of empty rates relief in 2008 combined with the financial crash had already decimated speculative development. The viability challenge combined with land owners seeking the far higher values on offer from non-employment uses means the prospects for improvement are virtually non-existent in all but the strongest locations. Where sites are unviable there is no prospect of commercially financing development and the delivery of sites with significant infrastructure costs are practically impossible.

Dilapidated and ageing stocks – many areas have survived on industrial and business property that was delivered (often with some form of public investment) in years gone by. Much of this stock is now reaching or beyond its useful economic life. The advent of minimum energy efficiency standards from April 2018 could also speed the loss of ageing stocks from economic use. Frequently this older stock is being lost to non-employment uses rather than being redeveloped or refurbished for employment purposes, as it is uneconomic to do so. It is very challenging to change the ‘tone of value’ in an area, a vicious circle is therefore created where low rents and values become the norm making viability on new schemes even more difficult.

Permitted Development Rights (PDRs) – there has been concern for some time about the implications of PDRs in the office sector. Over recent months I have heard examples of office occupiers not having leases renewed in order that the landlord can redevelop the building for residential uses. There is increasing concern that the extension of PDRs to light industrial premises from this month will reduce available employment stocks, at the very time when delivery of new stock is so challenging. There is also concern that it will lead to residential development in inappropriate areas that threatens the ongoing use of surrounding areas for employment uses.

These issues combine to erode the existing stocks of both office and industrial space across local economies whilst preventing delivery of new stock in many locations. Where development is coming forward it is often in unsustainable locations and only when there is an end user in place, often one that is driven by a business imperative to fund new property and willing to take a hit on the property deal itself. Whilst this is achievable for some businesses, it is suitable only for the few. It frequently involves long lead-in times, and means that inward investors looking for short lead times find a lack of opportunity and many allocated strategic sites are effectively undeliverable. 

If these trends continue, over the course of time we will see an eroding of commercial employment stocks and an inability to accommodate new and growing businesses, and hence failing to ensure a thriving economy with jobs for our growing population. So how should we respond?

One option is we leave it entirely to the market and hope employment values rise, through a shortage of supply, leading to a new wave of speculative development. This can be done through regeneration leading to a shift in rental values. However, there is little evidence of this on the horizon in many areas. With opportunities to secure higher value uses via five-year land supply arguments and with the potential of a new methodology for determining housing numbers driving housing requirements even higher in many areas, the prospect of employment development becoming attractive remain distant. The value gap between residential and employment is just too great. The alternative is we recognise there is a market failure at work and the market left to its own devices is not going to deliver a socially optimal level of commercial employment space in many parts of the UK, so as a result there will need to be intervention to deliver this. 

For many years the policy focus has been on using mixed use development to cross fund lower value uses such as employment. However, this is not delivering on the ground, certainly not at the required scale. Employment land parcels within major mixed use strategic sites are not coming forward; developers are indicating viability challenges within higher value (often residential) uses and seeking to reduce planning obligations whether it be employment areas or affordable housing. That does not mean we should abandon this approach. We should look at innovative ways to co-locate residential and employment space, but we probably need to do more.

Exactly what intervention is required needs to be the subject of a conversation that is not yet being widely held. Perhaps it is an acknowledgement that the policy focus needs to be broadened from housing alone: looking again at the potential consequences of PDRs, opening up the debate about the use of public land for lower value uses such as employment, rather than all roads leading to housing delivery.

Maybe there is a need for changes to the planning system such as employment allocations in local plans being absolute to remove any hope of higher value uses. Maybe there is a need to consider how the public sector can more actively engage in the delivery of employment space, either through joint ventures, direct development or other funding routes. There will undoubtedly be other potential solutions, but the conversation needs to happen quickly to head off this brewing crisis at the pass.

Stuart Hardisty is Director of the Institute of Economic Development