Are office rents in Birmingham really higher than in Manhattan?

About a decade ago, at an industry dinner, I found myself sitting next to a Treasury official. After a few pleasantries, we got into a conversation about Britain’s economic problems. He felt a lot of them were rooted in our overly restrictive planning system and its rationing of land. I broadly agreed, but thought his approach a little too strident, a little too ideological. But he then lost me completely at his next assertion. “Did you know,” he said, “that office space in Birmingham is more expensive than in Manhattan?”

I laughed out loud. I tried to convince him that this was not true, but it’s very hard to argue with someone who has read a figure in a report from a source regarded as trustworthy (it was a document produced by a respected think tank a decade or so ago, although I have heard it repeated more recently). And while I agreed that housing delivery was being held back, I wasn’t quite so sure about offices. Then it suddenly dawned on me what was happening.

Firstly, Americans tend to quote office rents as an average of those achieved in a basket of “grade A” buildings – the top third or so of the market, perhaps more. In Britain, we use “prime” rents. These are the entirely theoretical rents that would be achieved by a building in the best location, judged by surveyors. The vast majority of buildings – often all – have been, or will be, rented at much lower prices.

Secondly, there’s the geographic differences. Even when British surveying firms quote average or grade A rents, they tend to refer to Central London or to the city centre of Birmingham or Manchester. Cheaper offices in the suburbs, or business parks on the outskirts, are not included. Meanwhile, New York or Paris rents will sometimes be quoted as an average for the city as a whole. Clearly, comparing them is deeply misleading.

Finally, and perhaps most importantly, there is the existence of rent free periods. These exist all over the world, of course, but they are particularly prevalent in Britain. Agents will talk of an office lease having a “headline” rent of £50psf. But often the “incentives” are kept secret. If it’s two years – not unusual – and the lease is for a decade, then the real rent is actually £40psf.

This is done to try to hide the real level of rent from other market participants, as this is where most of the negotiation tends to focus. So, when markets need to adjust, it’s often incentives that “move out”, whereas “headline rents” can remain static. But the “effective rent” has obviously reduced, but most advisors are quite adept are hiding this, or at least burying it somewhere in reports.

Some, of course, do provide this data – often those who have tenant companies as clients, as they have more of an interest in market transparency. And those who do are quite clear: offices in Birmingham are not more expensive than Manhattan. Midtown New York is probably the second most expensive place to rent an office in the world; Downtown is about 20th. Birmingham is around 50th, nesting in around the same position as Denver, Nashville and Perth (Australia).

And as for London – is it particularly expensive? Yes. The prime West End is probably about the 3rd most expensive, whereas the City is somewhere around the 20th – a very similar pattern to New York. And the other cities that populate the top 20 are all ‘gateway’ cities like London, not smaller cities in the rest of the UK.

So why is this myth so prevalent? It’s to do with the mostly justified campaign to reform the planning system. Now it’s pretty obvious to me that this has a central role in the UK’s endemic undersupply of housing. I’m not quite so sure it’s so much of an issue for offices, although many developers would argue the system is arduous, expensive and complicated. Most boroughs would like to have more offices, not less – and it is hardly difficult to build office towers - at least in the City or East London, or Birmingham or Manchester.

It may well be an issue, but perhaps not quite as centre stage – except perhaps in the West End, where there are significant heritage restrictions, although some of these are self-imposed by the Great Estates which own much of the underlying land. But if you’re in favour of liberalised planning, perhaps you just take any data point that fits your argument and run with it.

Having said that, it could become more of a problem in the future. Vacancy rates in offices are rising, there is a growing redundancy problem with so many buildings failing to meet modern requirements and environmental standards, and there is some evidence that, with hybrid working, more employers are focussed on the best quality offices in the most accessible locations (perhaps taking slightly less space in the process). As a result, the coming decade will bring huge challenges around office repurposing and redevelopment. The broader question is whether we have a planning system that can deal with this new set of challenges.