Last month in this note we predicted that UK industrial real estate would start to challenge offices for pole position in the commercial property market, based on IPD performance. The latest figures support that view. The November IPD capital value indices showed the industrial index rising 1.6% month-on-month, overtaking offices on 1.4% growth. This is encouraging news for industrial landlords, although one month does not make a trend. Offices have put in a solid performance for quite some time, and it is no longer the case that central London is supporting the figures. In recent months outer London and South East offices have delivered solid IPD figures. This is because the office sector has enjoyed a renaissance lately, thanks to changing work patterns. In the UK the density of office space per worker has dropped as low as is realistic, while the new wave of tech firms driving the economy value offices and see them as places that allow staff to mix and generate new ideas. With services accounting for around three quarters of UK GDP, we believe offices should be a key target for property investors in the new cycle. While retail is also part of services GDP, our expectation is that the economy will rely less on the consumer and more on the corporate world to drive growth, which favours offices. Consequently, we set out below our tips for office investment in 2014.

1. RESEARCH
UK MARKET OUTLOOK
JANUARY 2014
Offices – where to find value
in 2014
Last month in this note we predicted that UK industrial real estate would
start to challenge offices for pole position in the commercial property
market, based on IPD performance. The latest figures support that view.
The November IPD capital value indices showed the industrial index
rising 1.6% month-on-month, overtaking offices on 1.4% growth.
The market in a minute
This is encouraging news for industrial
and more on the corporate world to drive
Investment volume for 2013 tops
£48.5 bn, up 45% on 2012.*
landlords, although one month does not
growth, which favours offices.
make a trend. Offices have put in a solid
IPD capital growth index
rises for seventh month in a row
in November.
Offices saw the highest capital
growth in 2013, up 5.08% on a
12 month basis.**
performance for quite some time, and it is
no longer the case that central London is
supporting the figures. In recent months
outer London and South East offices have
delivered solid IPD figures.
Consequently, we set out below our tips for
office investment in 2014.
1. he bigger cities will offer the best
T
returns. Britain’s cities grew up to a
Victorian economic pattern whereby the
big conurbations were ringed by smaller,
a renaissance lately, thanks to changing
feeder cities, which provided resources or
work patterns. In the UK the density of
sub-production to the mother city. The
office space per worker has dropped as
big centres have successfully re-invented
low as is realistic, while the new wave of
themselves as creative, technology and
tech firms driving the economy value offices
Retail finished the year with a fall
in capital values, down 0.53%.
This is because the office sector has enjoyed
service industry hubs. The feeder cities
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and see them as places that allow staff to
* Based on Property Data figures
** Based on the IPD monthly capital growth index
quarters of UK GDP, we believe offices
mix and generate new ideas.
With services accounting for around three
relied too much in recent decades on
call centres and the public sector, so an
embattled consumer and government
cuts have bitten hard. In London the
should be a key target for property investors
upswing is at an established stage, but
in the new cycle. While retail is also part of
there is still the opportunity to catch
services GDP, our expectation is that the
more of the cycle in Birmingham, Leeds,
economy will rely less on the consumer
Manchester, and the South East.
FIGURE 1
IPD capital growth index
Month-on-month change
1.0%
0.8%
FIGURE 2
UK investment volume
£60bn
£50bn
0.6%
0.4%
JAMES ROBERTS
Head of Commercial Research
“ ffices have put in a solid
O
performance for quite some
time, and it is no longer the
case that central London is
supporting the figures.”
Follow James at @KF_JamesRoberts
£40bn
0.2%
0.0%
-0.2%
£30bn
£20bn
-0.4%
-0.6%
£10bn
-0.8%
ND J F M AM J J A S O ND J F M AM J J A S O N
2011
2012
2013
Source: IPD
£0bn
2007 2008 2009 2010 2011 2012 2013
Source: Property Data

2. RESEARCH
UK MARKET OUTLOOK
JANUARY 2014
2. 014 will be the year for edge of CBD
2
researchers in Knight Frank’s international
locations. In London and New York the
“cutting space per worker down to 175
strongest lately have not been the
sq ft”. In the UK densities are so low
traditional CBD cores, but gentrifying
“n the UK
I
densities are
so low that the
arrival of new
working areas
like break-out
space, and even
exercise areas,
means that space
per worker could
start to rise.”
network we often hear comments about
office sub-markets that have performed
(typically 100-125 sq ft per worker) that
fringe areas. This reflects the growing
the arrival of new working areas like
importance of new technology and
break-out space, brain storming rooms,
creative industry companies in the office
and even exercise areas, means that
market, who often prefer a mixed-use and
a trendy environment. Also, up to now the
enterprise zones have made little impact,
but a rising economic tide will bring
them into focus, and we expect the more
successful ones to be those in edge of
CBD locations in the regional cities.
3. ook out for communal offices. Another
L
trend emerging in the Big Apple which
we may see appear on this side of the
Atlantic is the rise of communal offices.
WeWork, a US firm that operates in this
area, has been expanding steadily in
New York in recent years. These offices
sit somewhere between a serviced
office and a tech incubator, where
entrepreneurs rent desk space and work
surrounded by people running other
businesses. This could offer new life to
older buildings in fringe locations.
4. verage space per office worker
A
will start to rise. When speaking to
for the first time in decades space per
worker could start to rise. The size of
the individual’s work station is unlikely
to increase, but increasingly the office
is less about the desk and more about
creating new spaces for colleagues to
interact. This is where we will see growth
coming through.
5. xpect grade B supply to come under
E
pressure in city centres. While demand
is traditionally strongest for grade A early
in the cycle, we see start-up businesses
playing a bigger role in this cycle.
Inevitably the cheapest options appeal to
start-ups, and the rise of wifi and cloud
computing make grade B more practical
than was the case in previous cycles.
Also, with the housing market improving
and planning controls relaxed, we expect
developers to target town house type
office buildings on the margins of CBDs
for conversion to residential.
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James Roberts
Head of Commercial Research
+44 20 7861 1239
james.roberts@knightfrank.com
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