Historically overshadowed by the activities of larger corporates and multinationals, small and medium-sized enterprises (SMEs) are now being recognised for their significant contribution to the growth of the UK economy. But, what are the reasons behind this evolution and are we creating the right physical environment in order for them to thrive?

By Adam Varley, Director Office Advisory, LSH Leeds

Bruntwood's Platform, Leeds

THE IMPACT OF TECHNOLOGY

Technology, more specifically the internet, is changing the way businesses operate. The advantage of being bigger in order to be more efficient and profitable is rapidly being eroded.

Instead, technological advancements such as Cloud Computing have reduced overheads and lowered barriers to entry, spurring entrepreneurialism and leading an explosion of start-up’s. Automated business processes have also enabled larger organisations to become more streamlined, improving productivity while simultaneously reducing headcount

With the number of businesses employing less than 50 individuals having risen by 25% since 2012, SMEs have become an integral part of the UK economy. This is a trend which shows no signs of slowing, as new technologies such as Artificial Intelligence, Big Data and the Internet of Things become increasingly commonplace in the modern business environment.

THE NORTHERN POWERHOUSE EFFECT

The North of England – where office market activity has historically been underpinned by back office moves from blue chip organisations owing to its comparatively lower operational costs – has one of the highest concentrations of SMEs of any UK region; over 1m in fact, with a combined annual revenue of £214.9bn in 2016.

Fuelled by a clear commitment from the Government to supporting the organic growth of local businesses, including strong financial support in the form of the Northern Powerhouse Investment Fund, cities such as Manchester, Liverpool and Salford have become thriving hot-beds of SME-activity.

With consistently above average take-up for smaller units, this trend has been clearly reflected in the occupier markets over the past few years. Furthermore, over the 12 months to Q3 2017, the eight key markets of the Northern powerhouse have seen well over 1,000 deals of below 5,000 sq ft, making up 82% of transactions.

EVOLVING WORKSPACE REQUIREMENTS

Historically, the majority of new supply that has come through the development pipeline has been aimed at larger corporates, ideally sole occupancy with large floorplates.

The challenge for landlords is to react to the evolving workspace requirements brought about by this change in business structure in order to capitalise on the growing level of demand.

To a certain extent, this has already begun. Long lease structures traditionally favoured by institutions are becoming less common, with the average lease length now between three and five years. The historic cynicism surrounding covenant strength is also lessening.

Fuelled by the rise in popularity of CoWorking spaces from the likes of Work:Life and WeWork, the somewhat dated business model of the serviced office market is also undergoing a massive shake-up.

SPACE TO GROW

While serviced office and CoWorking space typically caters for between one and 10 employees, what of the 43,465 businesses across the North of England that employ between 10 and 50 members of staff?

Some forward-thinking landlords have begun to realise that they can maximise the use of second-hand space by targeting this growing cross-section of businesses.

This new concept of flexible workspace is typically provided in shell specification together with capped services and all inclusive rent and service charge deals, enabling tenants to occupy the space with maximum ease and minimal risk.

Bruntwood’s Platform in Leeds is one such example. With a variety of evolved workspaces that can accommodate a mix of small, creative businesses, start-ups and SMEs, along with bigger, larger corporates, the 120,000 sq ft, 13-storey grade A office building provides the flexibility to grow within the building throughout the lifecycle of the business.

Elsewhere across the North, landlords are also responding to difficulties in attracting larger occupiers by repositioning existing buildings. Q11 Quorum Business Park in Newcastle was recently sub-divided into smaller suites and is now almost fully let, with Q10 due to be carved up to accommodate smaller grade A requirements following its success.

Urban Splash’s iconic Grade II Listed Park Hill scheme in Sheffield has also seen unprecedented levels of demand, with just 4,425 sq ft remaining from of a total of 30,000 sq ft.

As such, enquiries are now being taken for Phase 2, which includes proposals for circa 27,000 sq ft of commercial space.

SUPPORTING A THRIVING ECONOMY

While businesses of a certain size will always require larger floorplates, SMEs are a critical component of the future success and vibrancy of the Northern Powerhouse economy and are likely to have a transformative effect on the UK’s commercial property market in the years ahead.

Landlords therefore have a vital role to play in nurturing our thriving SME sector by providing high-quality, flexible office space which is capable of responding to the ever-changing needs of modern businesses.

This article was first published in our Northern Powerhouse Office Market Report 2017.

The number of technology, media and telecoms (TMT) businesses taking office space in Leeds has grown by 96% over the past year, significantly more than in any other city across the Northern Powerhouse, according to Adam Varley, Head of Office Agency in our Leeds office.

Such is the scale of the growth that Leeds’ TMT businesses have eclipsed activity from occupiers in the traditionally dominant legal, financial and professional services sector, which has almost halved over the past year.

This change in fortunes could simply be a hangover of the global economic downturn, but the city’s strong emerging TMT talent pool, proactivity and collaboration between the universities and Leeds City Council, affordable rents and relatively low living costs, as well as the impact of recent major developments such as Victoria Gate, First Direct Arena and Trinity Leeds, all serve to elevate its ranking and offer.

Leeds has a strong emerging talent pool that matches the profile of the TMT sector and there is evidence of genuine proactivity and collaboration between the universities and the local authority, through initiatives such as the £38m Nexus innovation and enterprise centre and the launch of the Leeds Tech Hub Fund which has recently announced its commitment to a £2m Tech Hub, which will be based at Platform above Leeds railway station.   

However, landlords and developers must continue to adapt their strategies to suit the changing needs of these emerging businesses.   

To ensure Leeds maintains this momentum and stays at the forefront, the property community must remain vigilant of the ever-changing market and prepare itself to deliver the kind of spaces that allow Leeds to keep hold of businesses that are already thriving there and attract new talent from outside the city region.   

Occupiers in this sector typically prefer to cluster around other like-minded businesses and have a more agile working environment, such as Allied London’s Leeds Dock or Boultbee Brooks’ Concordia Work, while also opting for shorter-term, flexible leases that give them the freedom to upscale and downscale nimbly.   

While there is still a nervousness among some within the property industry to embrace the style of working environments this sector demands, there is evidence within the city that carefully designed, stripped back, exposed services buildings can work and deliver a better performance than more 'traditional' office environments. The challenge for developers and landlords is to recognise these nuances of the sector and structure themselves accordingly, thereby enticing TMT businesses and entrepreneurs to move there, grow there and stay there.

South Yorkshire suffered a huge economic blow after the demise of the steel industry in the 1980s. For years it seemed the damage was irreversible, but against the odds the area managed to retain its reputation as a manufacturing hub - and now that reputation is going from strength to strength once more, and it is all thanks to one scheme.

The region scored a major coup early on in 2017 when both McLaren and Boeing committed to bring manufacturing facilities to the Advanced Manufacturing Innovation District (AMID) on the Sheffield-Rotherham border.

In February, McLaren Automotive signed a deal to construct a R&D (research and development) and production facility at the AMID. The car manufacturer is setting up a composites technology centre - its first purpose-built facility away from its campus in Woking, Surrey - in a £50m deal structured through a partnership between McLaren, the University of Sheffield and Sheffield City Council.

According to McLaren chief executive Mike Flewitt, the firm needed a facility at which it could produce carbon-fibre chassis. “We evaluated several options to achieve this objective but the opportunity created by the Advanced Manufacturing Research Centre (AMRC) at the University of Sheffield was compelling,” he says.

Only weeks later the AMID consortium struck gold again, this time signing aeronautics giant Boeing to a facility where it will produce high-tech components for the next generation of three of its aircraft models.

Long-term prosperity

Boeing chose the AMID because it has a long-standing relationship with the University of Sheffield, dating from 2001 when the two came together to create the AMRC - the world-class machining and materials research campus that will be home to McLaren. The proposed 25,000 sq ft Boeing Sheffield facility will be built alongside the AMRC.

“Our decision to start manufacturing high-value components in the UK is a step-change in our engagement and a further example of Boeing’s commitment to grow here, supporting the UK’s long-term prosperity,” says Boeing Europe president Sir Michael Arthur.

SHEFFIELD’S ADVANCED MANUFACTURING INNOVATION DISTRICT

• A 2,000-plus-acre centre of excellence for innovation-led advanced manufacturing
• A £31m centre researching advanced materials for the aero and automotive sectors, supported by £10m from the Sheffield city region, set to boost the local economy by £100m
• Opportunities for collaboration on a 100-acre site being developed by the University of Sheffield
• New housing development with land and planning consent for 4,000 homes
• Forward-funded commercial development in more than 100 acres of ready land
• Longer-term opportunities for student accommodation and the PRS
• University-led collaboration in research and development

Councillor Leigh Bramall, deputy leader of Sheffield City Council and cabinet member for business and economy, believes attracting McLaren and Boeing is “further proof that the AMID is the place for leading manufacturers to come, not only for research and development and industrial collaboration, but also for production”, and that further such deals will follow.

His confidence is understandable. The AMID is a vast, production-led district that was successful in attracting high-calibre occupiers even before the coup of McLaren’s and Boeing’s deals. Broadly, the AMID encompasses three sites totalling more than 2,000 acres to the east of Sheffield city centre. Two straddle the Sheffield Parkway, which links the city centre and the M1, while the third extends through the historic heavy industrial sites of the Don Valley, taking in the site of the old Don Valley athletics stadium.

The most developed is Harworth Group's’ Advanced Manufacturing Park (AMP), south of the Parkway. The 100-acre site already houses Rolls-Royce and Castings Technology International and will be the new home of McLaren Automotive.

It forms part of the wider Waverley scheme, Yorkshire’s largest-ever mixed-use development. This 740-acre former industrial site, which once housed the Orgreave colliery and coking works, is being transformed by Harworth into a community boasting 4,000 homes as well as shops, restaurants, schools, leisure and public facilities, and parks, in addition to the AMP.

To the north of this, is the site of Peel Holdings’ short-lived Sheffield Airport, which operated from 1997 to 2008 and has been relaunched as the Sheffield Business Park. This is now home to the University of Sheffield’s AMRC, where Boeing and McLaren will operate.

Spectacular complex

The centrepiece of phase one is Factory 2050, which was formally opened earlier this month. The spectacular circular complex is described as “the UK’s first fully reconfigurable collaborative research facility, dedicated to digital assembly and flexible component manufacturing”. Teams at Factory 2050 are already working with manufacturing partners on projects spanning robotics and automation, digitally assisted assembly and manufacturing informatics.

For phase two of the Sheffield Business Park, which will be built on the site of the disused runway, Peel has consent for 900,000 sq ft of mixed-use space with enterprise zone status.

The third element of the AMID is in the Don Valley, where Sheffield Hallam University, Sheffield Teaching Hospitals NHS Foundation Trust and Sheffield City Council will work together to develop the Olympic Legacy Park on the site of the former Don Valley Stadium.

“Our team has led the charge to create a place that draws in and develops world-class people and a place where the world’s leading companies come to explore new technologies and operating methods and to deliver research and technology into the UK’s supply and value chains,” says Bramall.

So what does all this mean for the Sheffield market? Adrian Lunn, director at Lambert Smith Hampton in Sheffield, believes that this year’s spate of high-profile deals has changed perceptions of Sheffield.

“We’re seeing companies actively looking to place R&D and high-tech uses in the area,” he says. “They’re saying ‘we’ve got to be as close as possible to this’.”

One of the reasons the approach has been so successful is that it builds on Sheffield’s traditional strength in materials science and precision engineering. “We’re never going to compete with Leeds in financial services or with Manchester in media, but what we’re good at is manufacturing,” Lunn says. “We’re building on the existing skills base, and the universities have been key to that.”

Lunn adds that the AMID is already having a measurable impact on the market. New space at the AMP is quoting a rent of £7.50/sq ft - £2/sq ft higher than sites elsewhere. That £2/sq ft difference is a significant one. At that higher level, development of more new space is financially viable without the need for subsidies. And that means further phases of development could be self-sustaining.

“At that level, it stands on its own two feet - it could finance new development,” Lunn says. “When a city’s time has come, it’s a wonderful thing.”

Sheffield’s time came and went. Now, it appears to be enjoying its second coming.

This article was first published in Property Week on 20 April 2017 - click here to view the original article.

Just as coffee shops become the major takers of high street space in the last decade, will the new need for space for coworking drive organic change and growth in our town and city centres or will we see a ‘corporate approach’ evolve as it becomes more popular, asks Josh Levy, Head of Office Agency in our Manchester office.

Coworking is defined as the use of an office or other working environment by people who are self-employed or working for different employers, typically to share equipment, ideas and knowledge.  

Businesses and individuals typically commit to flexible memberships rather than licences or short-term leases, in return for access to a workstation with a personal mailbox, storage and landline services, as well as meeting room hire, catering facilities and often a calendar of networking events, for a specified amount of time.

In the seven years since it was officially launched, the number using the model has grown to more than 100,000 and could rise to one million by 2018. The ‘coworking’ model was originally used as a way to manage property costs in London, but has become increasingly popular in the Northern Powerhouse, albeit, largely in the form of more traditional serviced offices, incubation centres or small office suites offered on inclusive ‘easy in/easy out’ licences.

However, this is all changing – coworking demand is on track and set to take over in 2017 and beyond. Although it is still early days, the number of micro businesses (the greatest users of coworking space) is increasing and now equates to 96% of all companies in the UK.

One operator to fully embrace the coworking ethos in the North is pay-per-minute work, meeting, social and event space concept Ziferblat, which is adding to its award-winning Edge Street facility in Manchester's Northern Quarter with the acquisition of 6,000 sq ft at MediaCityUK's the Tomorrow Building. Ziferblat charges 6-8p per minute depending on location (8p in Liverpool). It also charges by the hour for meeting rooms depending on size, from £30 to £550 per hour.

Elsewhere in Manchester, after experimenting with the concept at the old Granada Studios, Allied London realised that it is not just the micro business that would benefit and has invested in the 160,000 sq ft XYZ scheme. Designed with coworking and interaction at its core, this was created to disrupt the financial district of Manchester and has successfully done so, with demand far outstripping supply.

In the regions, Manchester seems on the tip of everyone’s tongue with new entrants Head Space and WeWork taking root. Others now have northern cities on their radar too.

A model is evolving. Coworking space should offer the promise of collaboration with a business community ideology that is supportive and inclusive. Privacy is not forgotten and can be a major issue as users could find themselves working alongside competitors. Hence some developers are introducing vetting procedures for space users.

Coworking is still very much an emerging form of asset class and changes are needed if it is to have the same impact on property as Starbucks and the rise of the coffee shop. One example of this is traditional leases which do not usually permit businesses to ‘share’ occupation of their premises with businesses outside their own corporate structures. Fundability is also an issue where institutional leases are required to determine viability.

Think identity, buzz, community and amenity – by adding these organically into a building, it will enhance its potential with minimal impact on a landlord’s lettable space. In order to remain current, competitive and meet the burgeoning demand, the property industry must acknowledge the importance of this growing trend and react quickly.

This article originally featured in our Northern Powerhouse Office Market Report 2016/17 and was updated for CoStar News in March 2017 - click here to view the full report.