Birmingham is well-positioned to exploit the change in the role of cities as economic drivers, with demand for space in the office market likely to remain robust.
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Cities of the future
With growing numbers of office jobs set to be automated, forward-thinking investors should carefully consider the sustainability of the cities to which they are exposed. While we strongly believe Birmingham is a robust office market, not all cities are equally well equipped to benefit from the growth of the knowledge-based economy.
Technological change is reshaping demand for office space. According to Deloitte, 35% of UK jobs are at high risk from automation over the next two decades.1 A high proportion of these jobs will be office-based, with routine, lower value-adding roles set to be the most affected. Demand from more knowledge-intensive, higher value-adding office-based activities is likely to prove more robust.
Office markets that compete primarily on cost are structurally challenged. The type of economic activity accommodated by offices in such locations is particularly at risk from automation. Office occupation for back office operations or government administration is likely to diminish over time. These trends will impact some markets, including various smaller UK cities, particularly hard.
By contrast, Birmingham is the type of office location likely to succeed. With the shift to a service-based economy, the role of cities as hubs of interconnected, knowledge networks has become increasingly important. With the largest concentration of business outside of London,2 Birmingham has the scale and density to facilitate the generation of agglomeration effects through the sharing of information, particularly tacit knowledge that cannot easily be codified. Importantly, much of the city’s business activity is in higher-value added economic activities such as professional services; notably insurance and legal services. Birmingham is witnessing growth in the technological sector too, with nearly 37,000 people employed in digital jobs.3
Birmingham should be well positioned to build on the existing concentration of knowledge-intensive, private sector jobs as it has a good track record of attracting highly-skilled workers. Birmingham has five universities, including the University of Birmingham and Aston University, and produces 25,0004 graduates a year. Furthermore, the city boasts impressive retention rates, aided by a healthy labour market for graduates, as well as the broader credentials of the city region.
The attractiveness of Birmingham as a place to live is further underlined by fact that it is the most popular destination for those moving out of the capital, ahead of other major cities such as Bristol and Manchester.5 Generally, cities where highly-skilled workers want to live, learn, work and play are likely to have more robust demand. Over the last two decades, Birmingham has transformed itself into such a location.
In an era of continued globalisation, cities that are able to attract and retain highly-skilled talent will be further advantaged if they have an international profile and are well-connected. Birmingham benefits from its airport, where 50 airlines offer 143 direct routes, including daily flights to New York, Istanbul and Dubai.6 Following the runway extension in 2014, long haul traffic increased by 21 per cent in 20157, giving businesses in Birmingham greater access to the global economy.
While connectivity to the capital is currently good, with regular train services in less than 90 minutes, HS2 will see a meaningful reduction in journey times to just 49 minutes8, and increased capacity. Ten years from now, this should facilitate business interactions with London and should provide a spur to regeneration in and around the Curzon Street area of the city centre. The redevelopment of New Street Station has provided a significant improvement in functionality while demonstrating the transformational change taking place in the city. Heavy investment in the tram network also enables businesses to draw on larger labour pools and enhance the level of interaction between companies.
With adaptability a key criteria for successful cities in the knowledge-based economy, the presence of forward-thinking policy makers is critical. Significant devolution of power to the West Midlands combined authority should provide the region with an opportunity to accelerate growth and encourage inward investment.
These credentials give us more confidence in the long-term robustness of demand for office space in Birmingham than the majority of other office markets. But investors need to give consideration to both demand and supply factors. Birmingham has a dense, well-established core with a highly differentiated offer to out-of-town markets. This will provide scope for good rental growth over the long term.
However, strong out-performance will not come from passively allocating investment to the Birmingham office market. Real estate is a local asset class in which access to information is a competitive advantage. Investors with the greatest city-level expertise and that are the most deeply embedded in markets are best positioned to create value through asset management and by sourcing the most attractive buying and selling opportunities. Those expert operators in Birmingham willing and able to make large conviction calls are best placed to deliver investment performance.