Strong economic growth has brought big challenges. Success has placed significant pressure on demand for employment space, housing and infrastructure investment. Our analysis shows that supply of commercial space and housing is failing to keep up with demand.

Following strong take-up of commercial space over the last three years, including by some big international names, we expect the availability of office and research and development space to bottom out next year and this will restrict choice for occupiers of all sizes (Figure 1). These challenges risk constraining further growth if not addressed.

Without further development, existing businesses may not find the space to expand, new businesses could choose alternative locations and employers will struggle to attract and retain a workforce who cannot afford the cost of local housing.

^{Source: Savills Research}

^{Source: Oxford Economics, Cambridge University: Innovation in Numbers (February 2016), DCLG, Cambridge and South Cambridgeshire Local Plan Examination, Objectively Assessed Housing Need: Further Evidence (November 2015), Savills Research, Centre for Cities Outlook 2016}

Employment growth

On a global stage, Cambridge is a science, technology and innovation centre and has attracted some of the largest global companies including AstraZeneca, Microsoft and Gilead Sciences. Innovation is also strong. Cambridge is first with 101.9 patents granted in 2014 per 100,000 people, far above the UK average of 3.6 according to the Centre for Cities.

As a result, Cambridge and South Cambridgeshire have seen employment grow by 31.3% in the 10 years to 2015. Data from Oxford Economics also shows that almost 20% of Cambridge and South Cambridgeshire economy is driven by the professional, scientific and tech sectors.

The attraction of Cambridge is for like-minded companies to cluster, which is most relevant for the life science and technology sectors. As technology advances, there is significant opportunity and growth within the dominant sectors in Cambridge.

Professional, scientific and technology output per head by 2020 will be over £58,000 in the UK (excluding Cambridge and South Cambridgeshire) according to our calculations using Oxford Economics data. In comparison, Cambridge will be around £70,000, 20% higher, and South Cambridgeshire at approximately £77,000 per employee, will be a third higher. However, this assumes continual growth.

^{Source: Savills Research}

Role of the University

The University of Cambridge has the third most successful university innovation ecosystem in the world behind Stanford and Massachusetts Institute of Technology (MIT Skoltech Initiative Report 2014). The city has been incredibly successful in establishing, nurturing and growing spin-outs from the colleges.

Cambridge University Computer Lab alumni have accounted for over 240 companies alone. Also, recent statistics have shown that the follow-on funding for the University of Cambridge spin-outs has amounted to £1.4 billion. However, there is more that can come from this and the comparison to MIT, with around 11,000 students, shows the potential achievable scale within an appropriate funding environment. A 2011 survey of living MIT alumni found they have formed 25,800 companies and had revenues over £1.2 trillion per annum. This revenue is only 20% less than the UK’s total GDP in 2015.

Beyond Cambridge

The ‘research triangle’ is important but a linear axis of bioscience has emerged between Cambridge, through Hertfordshire and into London, specifically around King’s Cross and the Euston Road, where medical research clustering is significant.

South Cambridgeshire remains the most concentrated for the life science sector in the UK and a major cluster in Europe. The strength of this cluster will support further related development to the south of the city.

However, competitive locations exist throughout the UK. Reading, for example, remains the UK number one technology cluster, based upon the number of companies, with one in five enterprises being tech sector companies, more than three times the national average according to KPMG. Of course, Cambridge remains the major bioscience cluster.

Office/R&D property market

Cambridge benefits from the two main sectors of technology and bioscience “colliding”. The shift to bioinformatics and the computer modelling of drug discovery places Cambridge in a sweet spot of growth, ahead of the rest of the UK and potentially Europe.

Where is this best accommodated, encouraged and/or developed further? Constraining factors for Cambridge will include the affordability of commercial floorspace.

While uncertainty over Brexit has prompted a slowdown in leasing activity so far this year, the mismatch of supply and demand remains. There is currently anticipated requirement from more than a dozen companies looking for more than approximately 50,000 sq ft each.

For occupiers wanting even more space, only design and build options are available. This entails a wait of around two to three years for the development to emerge which may prompt the company to seek space in competing cities.

Demand from smaller startups and incubator-style occupiers within Cambridge remains resilient and specialist pioneering research in the life science sector has led to pharmaceutical companies and technology firms aggressively acquiring companies and growing.

At the same time, a number of established Cambridge and international names are continuing to expand within the city as their business needs change.

Most notably, we have seen a shift in bioscience companies clustering south of the city, with the Science Park continuing to also attract these uses as well as technology firms. AstraZeneca have committed to a complex of circa 850,000 sq ft at the Biomedical Campus to be operational by 2017, and recently acquired a further 55,000 sq ft of office space in the city centre as well as space at Cambridge Science Park and more recently at Chesterford Research Park.

Most recently, Illumina have committed to 150,000 sq ft of offices and laboratory accommodation at Granta Park, and Gilead are on-site at Granta Park building out 100,000 sq ft. Without matching supply, availability of space is set to fall by 90% from end-2012 to end-2017 (see Figure 1 above).

The northern side of Cambridge, with the Science Park, Cambridge Business Park and St John’s Innovation Park, remains the area of highest density of office and R&D occupiers within the City. There remain few commercial development plots suitable or capable of housing significant development.

^{▲ The Robinson Building, Chesterford Research Park}

Rental growth

The consequence is that rents will continue to grow (Figure 3). Lack of supply is likely to drive prime rents even higher and tighten lease incentives, as competition for existing accommodation heightens. Furthermore, the lack of supply in the city centre is forcing some occupiers to look at wider locations, such as the business parks or further afield.

Rising rental levels will resonate throughout the Cambridge office market as it will continue to be driven by smaller companies, which provide the backbone of the Cambridge ecosystem. It is estimated that around 20,000 of the 27,000 companies are employing fewer than 10 employees. These companies will look to grow and continue to establish their base in Cambridge, but, after personnel costs, rent will account for a significant proportion of their annual cost. Appropriately priced and affordable office space, in all locations throughout the market, is vital.

Cambridge rents have been more cyclical than compared to Oxford. In the early part of the last decade, Cambridge rents were 25% higher than Oxford. However, both markets moved in-line between 2002 and 2008. Since then, Cambridge has moved higher relatively quickly. Whilst Oxford rents have remained static, top Cambridge rents are now over 50% higher.

^{Source: Savills Research}

Labour cost

The link between salaries and residential prices is vital for Cambridge. We’ve compared the salaries of scientists employed by three global bioscience companies with a presence in Cambridge and Boston, US.

The difference in salaries accounting for exchange rate and personal taxation shows that UK-based scientists are paid 40% less than their US counterparts. However, the cost of housing is broadly similar in both cities.

Latest pricing data shows that a home in Boston costs around £500 per sq ft in the city centre and £200 per sq ft outside. This compares with an average cost of about £400 per sq ft in Cambridge and £274 per sq ft in South Cambridgeshire.

Hence, if part of the attraction of Cambridge to global companies lies in the relative cost of the scientists, this competitive edge may recede as housing costs grow and affordability bites further.

^{Source: Savills Research}