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Middlesbrough Council Digital Incubation and Managed Workspace Demand Study Draft Final Report

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Draft Final | 13 February 2013

This report takes into account the particular instructions and requirements of our client.

It is not intended for and should not be relied upon by any third party and no responsibility is undertaken to any third party. Job number 227768-00

Ove Arup & Partners Ltd Central Square Forth Street Newcastle-upon-Tyne, NE1 3PL United Kingdom www.arup.com

001 | Draft Final | 13 February 2013

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Contents Page

Executive Summary 1

1 Introduction 3

1.1 Purpose of this study 3 1.2 Study objectives 3 1.3 Methodology 4 1.4 Structure of this report 5

2 Context and Drivers 7

2.1 Introduction 7 2.2 Site Context 7 2.3 National policy and industry drivers 10 2.4 Local policy 13 2.5 Summary 19

3 Supply Side Assessment 20

3.1 Introduction 20 3.2 Tees Valley office market overview 20 3.3 Existing managed workspace supply 21 3.4 Proposed development pipeline 24 3.5 Summary of supply side findings 25

4 Demand Assessment 27

4.1 Introduction 27 4.2 Overview of the evidence base 28 4.3 Recent digital sector evidence base 29 4.4 Property market assessment by JK Property Consultants 31 4.5 Primary Survey of digital businesses 35 4.6 Demand statement for managed workspaces across Tees

Valley: Rental levels and take up 42 4.7 Latent demand 43 4.8 Analysis of the demand case for Boho Five 44 4.9 Summary of demand findings 50

5 Market Assessment Findings and Recommendations 52

5.1 Overview 52 5.2 Findings: Market assessment and existing supply 52 5.3 Findings: Proposed development pipeline and role of Boho

Five 53 5.4 Recommendations 54



6 Outline Development Proposition 55

6.1 Introduction 55 6.2 Facility scale and configuration 55 6.3 Potential occupiers and size of business 56 6.4 Length of tenure 56 6.5 Range of services 57 6.6 Indicative floorspace composition 58

7 Indicative Costs and Revenues 59

7.1 Introduction 59 7.2 Capital cost profile 59 7.3 Funding mix 59 7.4 Target rents and rates 59 7.5 Occupancy Profile 60 7.6 Indicative operating revenue & costs for the outline

development proposal (Central case) 60

8 Economic Benefits 65

8.1 Introduction 65 8.2 Boho Five embedded within the local economy 65 8.3 Middlesbrough and Tees Valley economic benefits 66 8.4 Economic impact analysis approach 66 8.5 Economic impact results 66

9 Conclusions and Recommendations 68

9.1 Market assessment 68 9.2 Outline development proposition 69 9.3 Recommended next steps 69



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Executive Summary Middlesbrough Council and the Homes and Communities Agency (HCA) are investigating the potential to develop a Digital Incubation and Managed Workspace Centre within the vicinity of the St Hilda’s Enterprise Zone. The objective is to create a building that offers a high quality of tailored facilities and support to digital firms, together with discounts in business rates – to provide a compelling proposition to start-up companies in the rapidly growing digital cluster in Middlesbrough.

The proposed building is referred to as ‘Boho Five’. The project would be delivered in two phases; Phase 1 utilises public funds to deliver incubation and managed workspace and Phase 2, driven by the private sector, appropriate ‘grow on’ space.

This study undertakes a market assessment to inform the feasibility of developing a Digital Incubation and Managed Workspace Centre within the DigitalCity Boho Zone in Middlesbrough. The purpose of this study is to assess the potential market demand for digital incubation and managed workspace in Middlesbrough, particularly within the Boho Zone area and to develop an outline development proposition that reflects the market. The findings and recommendations of the study will inform the preparation of a full business case and application to the European Regional Development Fund (ERDF).

Boho Five has a strong fit with strategic policy objectives, and could reinforce the desired vision for the Boho Zone area of Middlesbrough. The proposed Digital Incubation and Managed Workspace Facility is well aligned with existing activities and the future strategic plans of DigitalCity Innovation and DigitalCity Business – both of which have demonstrated their effectiveness in achieving strong local economic benefits.

This study assesses the existing evidence base and collects new primary evidence through a targeted survey of digital businesses and engagement with key local stakeholders to develop a practical proposition which is deliverable. Arup have worked alongside JK Property Consultants to provide expert analysis of the local property market in order to underpin the demand assessment.

The primary survey of digital sector firms has established robust demand for both start-up incubation and managed workspace types (which relate to the type of space proposed for Phase 1 of Boho Five). There is evidence of demand for ‘grow on’ space (which relates to Phase 2 of Boho Five) but this is less strong than for incubation and managed workspace types.

A focus of the market analysis undertaken has been to examine the potential role of Boho Five as part of the wider network of existing and planned workspace facilities across the Tees Valley. This is particularly important in building upon the evidence base already developed in the Digital Action Plan and a number of studies commissioned by DigitalCity. The results of this analysis demonstrate that through appropriate differentiation of its offer, Boho Five could fulfil a valuable and distinct role within the wider network of workspaces.

Boho Five will respond to the need to provide further high quality space tailored to the needs of young digital start-ups from Middlesbrough College and Teesside University. It will act as a ‘spoke’ of the existing Boho One Hub – enabling a



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greater number of start-ups to be catered for, existing facilities to be used for efficiently and benefits in terms of the overall operation and delivery of DigitalCity’s services.

In relation to the planned pipeline of workspaces in the region, this offer is distinct from the Northshore Innovation Centre - focussed on ‘move on’ space for growing digital and science sector firms; and Darlington Growth Hub, providing a multi-sector start-up and entrepreneurship offer. There is a particular opportunity for Boho Five to work in synergy with the proposed Northshore Innovation Centre in Stockton – through beneficial cross referral of client SMEs and enabling each element of the workspace offer to achieve its specific objective (e.g. acceleration, incubation and cluster development).

The demand analysis demonstrates that a facility of 2,000 – 2,500 sqm of lettable space is a reasonable proposition for Phase 1 of Boho Five (comprising of incubation and managed workspace). An indicative floorspace composition for Phase 1 that is within this range has been developed, the operational viability of which has been demonstrated through a headline financial analysis. This is intended to be illustrative only, in order to provide a starting point for the design work. The floorspace composition of Phase 2 of Boho Five – comprising of ‘move on’ space – should be assessed once Phase 1 has been delivered and activity is embedded.

It is recommended, on the basis of the evidence of demand, to complete the Full Business Case and Full ERDF submission with a view to securing capital to build an effective Boho Five facility to cater for the needs of the burgeoning digital sector in Middlesbrough and wider Tees Valley. The success of negotiations to secure an operator and clear procurement and any State aid hurdles during the business planning and RIBA Stage D submission is of vital importance. It will be important for consideration to be given by the project partners and potential parties to addressing the on-going sustainability of Boho Five, beyond the design and build phases and this will be developed further by the full business case work and detailed design.



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1 Introduction

1.1 Purpose of this study This study undertakes a market assessment to inform the feasibility of the development of a Digital Incubation and Managed Workspace Centre within the DigitalCity Boho Zone in Middlesbrough.

The DigitalCity initiative has been highly successful in attracting and incubating new start-ups firms, building upon the dynamic nature of the sector and acting as a local catalyst for business growth. However, it is critical that a robust assessment of demand for an extension of its facilities is undertaken in order to inform the potential investment of public funds to deliver a Incubation and Managed Workspace Centre.

The overarching aim of this study is to:

Middlesbrough Council and the Homes and Communities Agency (HCA) are investigating the potential to develop a Digital Incubation and Managed Workspace Centre within the vicinity of the St Hilda’s Enterprise Zone. The objective is to provide additional incentives to digital businesses to locate in the area. The combination of high quality facilities and support, together with the discounts in business rates in the Enterprise Zone, has the potential to represent a compelling proposition to start-up companies in the rapidly growing digital cluster in Middlesbrough. The project is referred to as ‘Boho 5’ in the supporting project documentation.

The purpose of this study is to assess the potential market demand for digital incubation and managed workspace in Middlesbrough, particularly within the Boho Zone and to develop an outline development proposition that reflects the market. The findings and recommendations of the study will inform the preparation of a full business case and application to the European Regional Development Fund (ERDF).

1.2 Study objectives The primary objective of the demand study is to identify the need and demand for an Incubation and Managed Workspace Centre for the digital and creative industries on the site to the south of Bridge Street East. The site is within the vicinity of the St Hilda’s Enterprise Zone site in Middlesbrough. The demand study explores the likely type of space and alignment with the existing Boho Zone, taking into account the specific needs of the digital sector.

Assess the demand for a Digital Incubation and Managed Workspace Centre in the Boho Zone of Middlesbrough



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The study addresses the deliverability of an incubation centre on the site. In doing so, it:

• Identifies the need and demand for an Incubation and Managed Workspace Centre;

• Identifies the potential economic benefits that will be delivered by the Incubation and Managed Workspace Centre;

• Assesses the feasibility of the site as the preferred location; and • Assesses the potential for private sector ‘grow on’ space adjacent to the

incubation centre.

1.3 Methodology Ove Arup & Partners Ltd (Arup’s) approach to this study has involved a number of interlinking stages of work – as set out in the following diagram.

This approach has included assessing the existing evidence base and collecting new primary evidence through a targeted survey of digital businesses and engagement with key local stakeholders to develop a practical proposition which is deliverable.

Arup have worked alongside JK Property Consultants to provide expert analysis of the local property market in order to underpin the demand assessment.

Figure 1.1: Overview of approach

Source: Arup.

Demand is also investigated through a review of the existing network of employment space and the strategic fit of a new Incubation and Managed Workspace Centre located at the site to the south of Bridge Street East. The purpose of the review was to gather baseline evidence surrounding how existing innovation centres and associated grow on/incubator spaces (including Boho One) within Middlesbrough and the Tees Valley are performing, including occupancy rates and rental levels.

Review of Key Drivers and Strategic Fit

Market Assessment (Demand and Supply side analysis)

Outline Development Proposition

Economic Impact Assessment

Conclusions and Recommendations



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An important part of assessing the strategic fit was to understand how a new Incubation and Managed Workspace Centre at the proposed site could support the further development of the digital enterprise cluster and encouraging economic growth driven by job creation.

Engagement with key stakeholders throughout the demand study is crucial to shaping a practical development proposition which is deliverable. Engagement occurred early in the process and it is expected that the lines of communication will be sustained as the incubation and managed workspace develops. Local stakeholders were agreed with Middlesbrough Council and the Homes and Communities Agency. These included, amongst many others, influential members of the University of Teesside involved with their programme of Academic Enterprise, members of the Tees Valley Unlimited Enterprise Zone Group Board, contacts from DigitalCity and Middlesbrough College, and members of existing digital and creative businesses. The purpose of this engagement was to develop a wider demand statement from across the Tees Valley by targeting firms that could provide potential demand for each of the three types of floor space proposed; incubation, managed and ‘grow on’ space.

Indicative costs were developed - including the capital and revenue costs associated with the building and running of the facility. The outline financial analysis covered financial projections, profit and loss and cash flow. The purpose of the financial analysis is to provide Middlesbrough Council and the HCA with an informed view on the viability of the outline development proposition and to provide recommendations accordingly (including to influence the design work).

Achieving positive economic impact and change is an overarching objective of the work of both the Council and the HCA. Articulating the potential estimated economic impact of the project is also particularly important in building a compelling investment case for ERDF funds to enable the project to happen; this provides the context for undertaking an assessment of the potential economic impact of the outline development proposition, including projections for job creation, GVA and business starts/relocations/expansions.

1.4 Structure of this report The rest of this report is structured in line with the approach to meet the study objectives, this work sets out the:

• Market Assessment – sections 2 to 5 outline the market assessment for a Digital Incubation and Managed Workspace Centre. The market assessment provides an overview of the market demand for, and supply of, business support accommodation and comparable premises in the Tees Valley. The market assessment examines both the supply side and demand side of the market;

• Outline development proposition – sections 6 to 7 utilise the findings of the market assessment to shape an outline development proposition for a Digital Incubation and Managed Workspace Centre. This includes an analysis of indicative costs and revenues;

• Economic impact – Section 8 sets out an analysis of the expected economic impacts of the Digital Incubation and Managed Workspace Centre; and



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• Conclusions and recommendations - Section 9 outlines the main conclusions and recommendations of the study.



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2 Context and Drivers

2.1 Introduction This section provides an overview of the site context and a review of the wider national and local evidence base, drivers and trends for investing in the infrastructure to encourage digital, science and innovative start-ups in Middlesbrough and the Tees Valley.

2.2 Site Context

Overview The proposed site for the Digital Incubation and Managed Workspace Centre is situated to the south of Bridge Street East and forms part of the Boho Zone, within the Middlehaven area of Middlesbrough.

The site is situated 300m from DigitalCity’s Boho One business accelerator facility, 800m from the heart of Middlesbrough, 250m from Middlesbrough Train Station and 900m from Teesside University. The site is also located in close proximity to the A66 and Middlesbrough Dock, and within 30 minutes of the international airport.

The site benefits from being within the Boho Zone (as described in subsequent sub-sections) and close proximity to the St Hilda’s Enterprise Zone. It lies within the town centre policy area and is covered by the Middlehaven Development Framework.

Figure 1.2: Site location

Source: Arup using Bing Maps.

Proposed Boho 5 Site Outline



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The proposed development is seeking to capitalise on the success of the DigitialCity initiative, in particular by building upon the physical cluster of activity around the Boho One building in the Boho Zone. A brief overview of the initiative and existing cluster is provided below.

The DigitalCity Initiative and the Boho Zone area Similar to many other post-industrial areas, which have faced structural economic decline in recent decades, there is a need for the Tees Valley to develop new industries. The DigitalCity initiative is focussed on developing a self-sustaining and profitable cluster, which establishes Tees Valley and the North East as a core for world-class digital media and technology enterprises. DigitalCity’s strategy is premised on job creation, private-sector engagement and achieving self-sustainability. This is supported by a number of key partners including ERDF and Middlesbrough Council, who work closely with DigitalCity IDI, the University of Teesside and Tees Valley Unlimited. The initiative represents a set of closely aligned and mutually supportive actions delivered by two organisations: • DigitalCity Innovation at Teesside University; and • DigitalCity Business based at the Boho Zone, Middlesbrough. DigitalCity Innovation - led by Teesside University, and funded by the University, ERDF and the private sector - delivers the DigitalCity Fellowships, Digital City Placements and DigitalCity Community which seeks to create a symbiotic relationship between local community groups and university students and small or medium digital enterprises. This aims to allow small and medium enterprises to take advantage of six-month placement students, whilst also allowing recent graduates and local community groups to exploit the knowledge of individuals who ‘have been there and done it’. Since 2008, through DigitalCity Innovation, Teesside University has helped to create 184 new businesses and 190 new jobs in digital industries. DigitalCity Business seeks to drive a culture of cooperation and collaboration among digital businessesin the North East; helping individuals seeking to develop an idea and established entrepreneurs looking to launch a new venture through a concentrated influence of expertise. DigitalCity Business manages the Boho Zone, an area of 10 hectares specifically reserved for the development of digital technology infrastructure and office space. At the heart of this is the Boho One facility which is identified as an EU exemplar project. An overview of the Boho Zone is provided in the following box.



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The Boho Zone and the Boho One Hub Middlesbrough Council promotes the Boho Zone as the commercial quarter for digital media, digital technology and creative sectors. The Boho Zone is 10 hectares of City Centre land reserved for development of commercial property for housing digital technology companies. The area is situated only 30 seconds walk from the city train station, 10 minutes from the university campus and 30 minutes’ drive from the international airport. The area is covered by Town Centre Policy Area and significant parts are designated as the St Hilda’s Enterprise Zone. In pursuit of capturing the entrepreneurial and creative potential within Middlesbrough, a number of flagship developments have already been realised in the Boho Zone. Boho One was opened in July 2009 and consists of 32,000sq feet of high tech flexible office space with ultra-high-speed connections for digital media, digital technologies and creative businesses, with associated meeting facilities and networking spaces. The purpose of the building is to provide an accelerator platform, focused on cultivating high-growth potential businesses for 2 to 3 years. Two other recent developments, Bohouse and Platform Arts are providing live-work units for digital and creative freelancer and small micro-business setups.

The Enterprise Zone and support for the Digital Sector The Enterprise Zone located in close proximity to the proposed site makes provision for support of firms in the digital sector – specifically firms that:

‘utilise digital technology to develop, design or produce a digitally delivered, product or service – this excludes the normal application for administrative software’.

Applying this definition, the EZ documentation suggests that the digital output should comprise at least 50% of turnover so it can be classed as the primary focus of the business. Consideration should also be given to the elements of the ‘digital’ company that are going to be located within the Enterprise Zone, for example a call centre handling customer enquiries for a digital company does not fall within the remit of a digital operation. However, discretion may be acceptable where a company may not meet the above definition in full, but clearly adds demonstrable value specifically to the digital sector. In these cases and where uncertainty exists, professional advice should be sought to inform the judgement.

The goals of the proposed Digital Incubation and Managed Workspace Centre, along with the close proximity of the preferred site to the Enterprise Zone boundary, suggest revisiting of the EZ boundary is justified to maximise the benefits arising.



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2.3 National policy and industry drivers This section provides an overview of the main drivers that provide the impetus for the development of digital and innovation based companies in the Tees Valley and provides highlights of the recent evidence and trends.

Britain’s digital economy already takes the biggest share of national GDP in the G20, and government believes that UK Plc. has the potential to increase that share by a third by 2016. As a consequence, there is growing activity targeted at capitalising on the opportunities this brings in terms of employment and income. Science based firms; particularly those spin-outs that can bridge the gap between academic R&D and commercialisation with industry are of vital importance. Beyond the funds and resources offered by the academic Research Councils, European resources with the Framework Programme7 (FP7), the Technology & Strategy Board have a remit to bring innovation to the market and create economic value for UK plc.; the most recent policy initiative is the technology innovation centres (now called Catapult Centres). The Catapult Centres have a remit to work nationally; the local components of innovation and business creation are an important part of an integrated economic development and business growth strategy.

Local investment which can harness world class science, digital and knowledge expertise with local demand and talent is an important constituent in rebalancing the economy. There is a range of anecdotal and national statistics which point to an underlying trend towards more start-up businesses and an entrepreneurial business base as the UK economy remains fragile with a squeeze on output and employment and a reluctance to recruit, especially graduates and young people. As national data sets run at a time lag the evidence is working through the system.

The local picture illustrated in figures 2.1 and 2.2 overleaf is that business survival rates for firms in both Teesside and the North East are comparable to the UK as a whole; however there are fewer firms being created per capita. This justifies a policy rationale, interventions and targeted investment that can effectively encourage more new businesses to form locally, especially innovative firms that can compete and grow.

Overall Teesside compares reasonably well to the regional start-up rates, with an average start up rate of 24 businesses between 2004 and 2011, compared to the regional average of 28 new business start-ups across the same period. However, this trails the UK rate an average of 42 new firms forming per ten thousand (pre-recession). As expected, start-up rates were at their lowest during the recessionary period; North East, England and UK business start-up rates fell proportionately, whilst Middlesbrough levels dropped below pre-recession levels of business start-ups. In the period from 2010 to 2011, all spatial scales saw an uplift in business formation rates – indicating growth in start-up activity.

Figures 2.1 and 2.2 highlights recent evidence of start-up and survival rates achieved in Teesside in comparison to the regional and national averages.



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Figure 2.1: Business formation rate

Source: Office of National Statistics Business Demography and Mid-year population estimates, Arup analysis, December 2012

The table below highlights the business survival rates in Teesside compared to the North East and UK. Overall rates drop off step by step in line with trading patterns and by and large Teesside firms compare well with the national picture, albeit with a slight dip by year four and five of trading to 50% and 40% respectively.

Figure 2.2: Business survival rates

Source: Office of National Statistics and Arup analysis, December 2012

There are a number of salient points set out in recent published national evidence which provide insights to consider for Tees Valley digital, high technology and innovative small firms cluster development. In particular, a recent research study undertaken in relation to the flagship ‘Tech City’ initiative provides useful evidence.

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The ‘Tech City’ Initiative: Research Report Findings

The ‘Tech City’ initiative refers to the Coalition Government’s drive to accelerate the development of the high tech cluster that has been growing in east London since the 1990s - taking Silicon Valley as a model. According to recent research published, the cluster comprised of over 3,200 firms and 48,000 jobs in 2010.

In December 2012, the government signalled its commitment to the initiative by pledging £50million funding toward regenerating Old Street Roundabout, an intersection between two historic roads and the surrounding urban blocks in east London. The funding is expected to contribute towards a visionary project which will see the Roundabout transformed into Europe’s largest indoor civic space, dedicated to start-ups and entrepreneurs in East London; the space will host classrooms, co-working spaces and workshops equipped with the latest 3D printing technology.

Multi-national companies and educational establishments such as Microsoft, Cisco, DC Thompson, UCL, KPMG and IBM, have sought to endorse corporate commitments to Tech City in the form of SME cultivation in east London.

A comprehensive study of east London’s digital economy has recently been published. This explores the development of Inner East London’s high tech firms, sets out the aspiration for the cluster, and makes a series of detailed policy recommendations. This provides some useful findings in terms of understanding the critical elements necessary for success.

The key areas of concern identified by the study are:

• Skills gaps; • Access to finance; • Workspace, access and cost; • Connectivity; • Mentoring and management skills; and • Business development.

Many of these points are on the supply side and within a local economy’s ability to influence the cluster development, with targeted investment and expertise - for example, through the supply of suitable workspace.

The study’s engagement with tech firms indicates that as companies outgrow such spaces, they are concerned that they may have to look beyond the immediate area due to a lack of appropriate larger floor-plate spaces. In terms of an area’s ability to retain its growing firms and maximise the potential to embed and grow a high technology cluster, the provision of suitable move on space is critically important. London is a world city and the cluster in east London started growing far before the ‘Tech City’ initiative. A physical workspace, ‘Tech Hub’ has been established and this has benefited from substantial financial backing from its founding partners including Google in the private sector and high level political support.



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2.4 Local policy This section assesses the local strategic fit to develop an understanding of how the proposed Digital Incubation and Managed Workspace Centre could reinforce the desired vision for the Boho Zone area of Middlesbrough; supporting the further development of the digital enterprise cluster, economic growth, entrepreneurial culture and job creation.

The following strategic documents have been reviewed:

• Tees Valley LEP Statement of Ambition; • Digital Sector Action Plan; • Middlehaven Development Framework; and • TVU Enterprise Zone Plans.

The focus on the review has been to identify the most relevant considerations in relation to local strategic policy fit.

2.4.1 Tees Valley LEP Statement of Ambition Tees Valley Unlimited has established a Local Enterprise Partnership (LEP) within the Tees Valley to drive forward the economic regeneration of the area. The Statement of Ambition sets out the vision across the Tees Valley for the next 15 years, taking forward the work of the Tees Valley Vision (2002) and City Region Business Case (2006). The Statement builds upon the existing successes within the Tees Valley economy, working closely with the Homes and Communities Agency, the private sector and national government.

The document identifies the Tees Valley as being home to the largest integrated heavy industry area in the UK. It focuses on how to build on assets and local strength and to help support a more balanced and sustainable model of growth - to diversify the economy and create more jobs.

Driving the transition to the high value low carbon economy and creating a more diversified and inclusive economy are the two main ambitions outlined in the Statement. The proposed Digital Incubation and Managed Workspace Centre could contribute to the latter objective by creating the conditions for new firms to thrive.

The Northern Way’s work on City Relationships emphasises the importance of the ‘pull’ of the economic centre to the success of the city region. An opportunity therefore exists within Middlesbrough to attract office development around the success of Boho, Middlehaven and Teesside University.

The Statement of Ambition anticipates that the following objectives will be achieved within the next 15 years: an increase in the Tees Valley GVA from 77% to the national average level 82%; an increase in the employment rate from 65.2% to 70.4%, the creation of 1,000 new businesses and a rise of 5% in the number of people with higher level skills.



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2.4.2 Digital Sector Action Plan The Tees Valley Sector Action Plans were commissioned by Tees Valley Unlimited in December 2011. The Action Plans focus on the four priority sectors which were identified in the Tees Valley Unlimited Partnership Business Plan:

• Advanced manufacturing; • Health care; • Logistics; and • Digital.

The Sector Plans have been developed by the private sector, for the private sector. Throughout January to March 2012, a series of sector specific focus groups and workshops were undertaken with a wide range of businesses. Companies were asked to identify opportunities for, and barriers to, growth, and then define specific actions that would enable this growth – this research formed the detail of the relevant Sector Action Plans.

The Digital Sector Action Plan (June 2012) was developed by DigitalCity Business, a key partner in DigitalCity. The work involved three focus groups with 21 businesses in Middlesbrough, Redcar and Cleveland and Stockton. It is an important consideration in the future drivers, degree of local support and potential funding that can be generated to support the development of the digital, high technology and innovative small firm business base in the Tees Valley.

The research identified a number of core issues that need to be addressed to support a successful digital sector in the Tees Valley. One of the core issues identified is the need for business accommodation of the right type and in the right location. In particular, that there is currently a lack of purpose built business accommodation.

Specific findings indicate:

• Outside of the Boho Zone, there is a lack of high-quality, digitally focused business accommodation;

• Participants in areas such as Redcar and Cleveland and Stockton felt that the office space which they inhabit does not meet their requirements, especially in regard to: High-speed, business quality, Internet connectivity; An open networking environment; Appropriate office layout / working conditions;

• Despite this, the ability to work in a building with a supportive physical infrastructure which facilitates networking opportunities and offers ‘staff attractive’ features was perceived to be a direct benefit; and

• Business participants highlighted that they believed demand is apparent and also exists in a latent form.



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The business respondents identified the following features as key requirements for suitable and workable premises for firms in the sector, including the need for: • Competitive pricing to facilitate start-ups; • High speed internet connectivity; • Communal working and meeting space; • A professional environment; and • A collaborative environment.

These findings highlight both a perception of unmet latent demand across the Tees Valley and the key requirements for new space from the perspective of businesses active in the digital sector.

2.4.3 Middlehaven Development Framework The proposed Digital Incubation and Managed Workspace Centre will be situated within the Middlehaven area of Middlesbrough, which covers the area between Middlesbrough Town Centre, the A66 and the River Tees.

The redevelopment of the Middlehaven area will be delivered by Middlesbrough Council and the Homes and Communities agency (HCA). The Development Framework builds upon the original Greater Middlehaven Masterplan and seeks to develop the Middlehaven area into a vibrant mixed use area.

The proposed site for the Digital Incubation and Managed Workspace Centre falls within the Boho Character Area; an area where historic buildings are interspersed with newer office development, but where there are also a number of gap sites. Along Bridge Street East, where the development is proposed, a new public realm has been implemented and in 2010 the ‘Temenos’ sculpture by artist Anish Kappor was unveiled at Middlesbrough Dock. The Framework indicates that while the physical remains are impressive, the Boho area would benefit from active ground floor uses to stimulate acticity.

A number of opportunities, strengths, threats and weaknesses are identified to provide direction for the Middlehaven Vision. The proposed development site is identified as a Phase 1 Commercial-led mixed use within the ‘Boho- the Creative Quarter and Town Centre Extension’ section, and runs along the proposed ‘Great Walk’ which seeks to link the Railway Station with the College and Dock area. It is expected that the ‘Boho Brand’ and presence of a core of innovative businesses and individuals presents a clear opportunity for attracting additional digital and creative industries into the Boho Character Area. The entrepreneurial and innovative culture will be sustained within the area by providing adequate move on space.

The framework promotes a plan for action which requires the undertaking of three interrelated work streams including ‘promoting Middlehaven’, ‘actively supporting and facilitating development’ and ‘ensuring a well-designed place’.

The proposed development of the Digital Incubation and Managed Workspace Centre is therefore strongly aligned with the overarching vision of the Middlehaven Development Framework and the Boho Character area; although the site is designated as commercial-led mixed use within the plan, development of additional start up space within a digital incubation and managed



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workspace facility will produce a similar impact. Mixed-use developments are given greatest priority elsewhere within the Middlehaven area, particularly along West Street, East Street and Lower East Street, whilst residential-led mixed use is promoted most to the north east of the Middlehaven area, along Commercial Street and Vulcan Street. The site is sustainably located neighbouring Middlesbrough Railway Station and is located to enjoy the benefits of surrounding proposals in the Middlehaven area, including along ‘the Great Walk’ proposal.

The Framework also identifies a number of features which are deemed acceptable with regard to the visual appearance of a development at the site to the south of Bridge Street East. Due to the prominent location of the site, which is at the point of convergence between Gosford Street, Windward Way and Dock Street, proposed developments have the potential to be a landmark design of three to four storeys in height. Parking standards are also established within the document; a digital incubation and managed workspace facility falls under a B1 use class and therefore require 1 space per 55m2 gross floor area.

2.4.4 TVU Enterprise Zone Plans The Tees Valley Enterprise Zone is made up of 12 individual sites, with a total area of 423.8 hectares. At the St Hilda’s Enterprise Zone site rate relief is available. Although the proposed development site falls outside the boundary of the Enterprise Zone, initiatives imposed within the Zone will impact the proposed incubation and managed workspace facility.

Two key documents are relevant.

Enterprise Zone Implementation Plan (2011) The Implementation Plan seeks to diversify the economy through supporting the emerging and fast growing digital sector and building upon the two drivers set outin the Ambition Statement. The Enterprise Zone comprises a range of sites that offer complementary financial incentives with larger sites offering enhanced capital allowance aimed at attracting major industrial companies.

Tees Valley Unlimited establishes a number of strategies which seek to avoid displacement of economic activity within the Tees Valley area. One of these strategies aims to provide a tight set of criteria to be met by incoming occupiers seeking to benefit from the incentives, including specific sector focus for new business. The St Hilda’s site will offer locally funded business rate relief to the digital sector. This will be achieved through the use of a simplified planning initiative or a local development order, which will set out the sectors to benefit from a simplified planning regime. Whereas all new businesses will be eligible for business rate relief discount, existing business will be required to demonstrate future growth through a business growth plan. All businesses will then undergo a test for eligibility, which may be challenged by an Enterprise Zone panel.

The Tees Valley Enterprise Zone will be managed on a sub-regional basis through Tees Valley Unlimited and the LEP for the area. Much of the governance and management structures are already in place, established by Tees Valley Unlimited, including: the LEP Board, Investment Board and EZ Steering Group and Task and Finish Groups.



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Tees Valley Unlimited Partnership Business Plan Update (2012) The TVU Partnership Business Plan considers how the ambitions highlighted within the Statement of Ambition will evolve. A number of challenges which will affect development proposals within the Enterprise Zone, and more broadly across the Tees Valley are identified.

In particular, public expenditure will be severely limited and therefore grant or gap funding will be at a premium; requiring Tees Valley Unlimited to prioritise activities seeking public funding to ensure the best possible use of resource. To achieve sustainable progress, the key to future growth is recognised as making better use of existing assets and bringing forward new ways of working to unlock private sector investment in the economy. There is a need to make better use of collective resources and identify the organisation best placed to deliver for the region.

Eleven key actions are identified which seek to address the prominent issues, whilst achieving growth within each of the sectors. The principal action seeks to promote and develop the Tees Valley Enterprise Zone as a whole by detailing the two key incentives for location within the zone, which include Enhanced Capital Allowance and Business Rate Relief; it is expected that Business Rate Relief sites will encourage and support graduates from local universities to start up and grow their businesses in the Tees Valley. This will include the preparation of a Tees Valley Local Enterprise Partnership Infrastructure plan and Area Action Plan to reduce barriers to development and enhance the Zone’s strategic connectivity.

Other key actions include addressing and identifying potential inward investment and existing companies able to attract new capital investment, and to develop and access appropriate investment to unlock and attract economic activity in the Tees Valley. These will form part of the Tees Valley Unlimited Investment Plan, which is expected to be launched in early April 2013.

Implications for the proposed development Although the proposed development falls outside the boundary of the Enterprise Zone, initiatives imposed within the Zone support the objectives of the proposed Digital Incubation and Managed Workspace Centre.

The proposed development is aligned with the criteria desired by |Tees Valley Unlimited. Accordingly, there exists a robust rationale to consider amendment of the current Enterprise Zone boundary to include the proposed development in the BoHo Zone.

2.4.5 Middlesbrough Local Development Framework The Core Strategy was adopted in February 2008 and forms part of the statutory development plan alongside the Regeneration Development Plan Document and adopted Proposals Map for Middlesbrough.



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Proposals Map Within the Proposals Map, the development site is designated as being within the Town Centre, within the Middlehaven Principal Use Sector and in the Middlehaven/Dock Basin Regeneration Area.

Core Strategy This document forms part of the statutory development plan for the area. The Middlehaven locality constitutes the main priority for the Council; the Boho area, which links the town centre with Middlehaven, was regarded for the success it has created for both areas.

The proposed development contributes toward:

• Spatial Objective 6 - which seeks to deliver major regenerations schemes to create sustainable communities that will make a significant contribution to Middlesbrough’s role within the Tees Valley city region; and

• Policy CS1 Spatial Strategy - which seeks to encourage the economic (and residential) regeneration of the Middlehaven; and

• Policy CS7 – which establishes the Economic Strategy for the Middlesbrough area. The policy states that regard will be made to the ability of any proposal to contribute to the achievement of the Spatial Strategy or the successful regeneration of an area and to proposals which develop greater innovation to stimulate increased business start-up rates and levels of entrepreneurship.

Regeneration Development Plan Document This document identifies specific sites that are proposed for development and principal regeneration sites, including Greater Middlehaven in which the proposed development is situated.

Chapter 3 of the DPD introduces the regeneration of the Greater Middlehaven area as an important element in the delivery of the spatial vision. Within this chapter are a number of policies which relate to the development proposal; the proposed development meets the aspirations of Policy REG1 which sets out the desired mix and level of development to be established in the area. In terms of office space, proposed phasing suggests that 20,000 m² will be provided between 2004 and 2011 and 25,000m² will be required between 2011 and 2016.



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2.5 Summary The review of local strategic policy documents demonstrates that the proposed Digital Incubation and Managed Workspace Facility has a strong fit with strategic policy objectives, and could reinforce the desired vision for the Boho Zone in Middlesbrough. In particular, the proposed development will help to contribute towards creating a more diversified and inclusive economy, and to the creation of 1,000 new businesses between 2011 and 2026.

The proposed development is seeking to capitalise on the success of the DigitialCity initiative, in particular by building upon the physical cluster of activity around the Boho One building in the Boho Zone. The proposed Digital Incubation and Managed Workspace Facility is well aligned with existing activities and the future strategic plans of DigitalCity Innovation and DigitalCity Business – both of which have demonstrated their effectiveness in achieving strong local economic benefits.

Research undertaken by DigitalCity Business for the Digital Sector Action Plan identifies a number of core issues that need to be addressed to support a successful digital sector. These include the need for business accommodation of the right type in the right place. Not only is there an identified lack of high-quality accommodation, but also existing office space that is available does not meet user requirements. In particular, the research highlights quality internet connectivity and open networking environments as important requirements for occupiers. Overall there is a strong strategic case for support and further targeted investment in the digital industries and underpinning infrastructure in Middlesbrough.



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3 Supply Side Assessment

3.1 Introduction This section undertakes a supply side assessment of business workspace in the Tees Valley. The assessment has been undertaken by Arup as a desk-based exercise and is informed by property market analysis undertaken by JK Property Consultants.

The property market analysis focuses on the supply of similar managed workspace premises in the Tees Valley main conurbations rather than a full office market assessment. In addition to existing workspaces, the assessment also considers the pipeline of proposed future workspaces.

3.2 Tees Valley office market overview The office market in the Tees Valley reflects a scenario which many regions are faced with in the present market. Occupancy levels remain below long term averages with a large amount of obsolete office accommodation available, which will most likely remain unlet. There is also a limited supply of grade A space coming forward. For the purpose of this assessment the area referred to as ‘Tees Valley’ consists of the Council districts of Hartlepool, Middlesbrough, Stockton, Darlington and Redcar and Cleveland.

Recent activity within the Tees Valley has been limited to just a handful of large deals, such as 47,000sq ft of office space at Lingfield Point, Darlington to AMEC in 2012. Most activity appears to take place below 10,000 sq. ft. with serviced accommodation remaining relatively buoyant in the B1 market. Middlesbrough is the principal commercial location within the Tees Valley with the wider area possessing a strong industrial heritage.

There is a large amount of secondary and tertiary accommodation on the market which has no or limited opportunity of achieving lettings. Local agents estimate that there is approximately 450,000 sq. ft. of vacant office accommodation within the Tees Valley. With such a large amount of space available, rents continue to be depressed below long term averages with refurbished Grade A space available at £10 per sq ft and less, which is well below the point at which development is viable.

Many secondary and tertiary properties are presently marketed at headline rents of just £5 per sq ft. The net rents achieved will be lower due to incentive packages. Such depressed rents mean that there will be no further supply of new accommodation since the cost of development is higher than the value of the completed property. New Grade A accommodation, opposed to refurbished space, may be able to attract a higher headline rent. However, generous incentives will be required to attract occupiers to facilitate lettings.

The length of leases has reduced through the recession, as a result of tenants demanding greater flexibility in the terms offered by landlords. Break clauses are now far more common place with most new leases including tenant break options within the first six years of the term. Incentives are now being negotiated both at the start of a term and after break options should they not be executed by the occupier.



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Many properties which were successfully let just 10 years ago are now considered obsolete as tenants look for higher quality accommodation, which is of higher specification, has lower maintenance costs and is more environmentally friendly. In the Tees Valley there is a considerable overhang of old commercial properties which will struggle to attract lettings. This is reflected in the investment market where secondary and tertiary accommodation attracts much higher yields than Grade A offices, to reflect the much higher risk of carrying this type of property.

Serviced accommodation has through the recession faired reasonably well in comparison to normal office space. Some landlords have opted to convert properties into serviced accommodation or provide an element of serviced space within their office building to facilitate lettings and generate income in otherwise vacant and obsolete properties.

GVA recently identified serviced offices as the fastest growing sector of the global and European property market. This has been attributed to changing work patterns where flexibility is encouraged with firms using serviced offices as overspill for extra contractual work, hot-desking provisions for staff and for facilitating office set ups and relocations. New businesses are also attracted to serviced offices given their ‘easy in, easy out’ nature which requires little or no capital expenditure on decorations or furnishings. Serviced offices also allow small firms to utilise on-site facilities such as audio-visual technology, video conferencing and high speed 100mb broadband, which might not be available or affordable in self-contained accommodation.

3.3 Existing managed workspace supply Existing serviced offices in the Tees Valley are operated by a mix of local and regional operating companies. The presence of national and international companies who supply serviced accommodation operating in the Tees Valley is limited. These companies prefer to operate in larger locations such as Newcastle upon Tyne, Leeds and other principal cities of the UK’s regions.

A summary of existing managed work space the Tees Valley is provided below.

Queens Court Business Centre Queens Court Business Centre provides 10,000 sq. ft. (700 sq. m.) of fully inclusive office accommodation, situated in Middlesbrough City Centre, in converted premises. The provider is a local operator with other serviced office suites in Sunderland. Accommodation is of good condition but not prime and is marketed for general business use with no specialism being targeted. Secretarial support is provided inclusive of rents with tenants signing monthly licenses for accommodation.

Cadcam Business Centre The Cadcam Centre, operated by Bizspace, comprises 107,215 sq ft (9,960 sq m) of pavilion style office units and terraced starter business units, which were converted from small industrial units and ancillary offices. Units range from 538sq ft (50 sq m) to 36,059 sq. ft. (3,350 sq m). The main office building of these business premises was fully refurbished in June 2010.



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The remainder of the site has business space that enables customers to rent space either as high technology industrial units, studio space or general commercial units.

Queensway Business Centre Queensway Business Centre, also operated by Bizspace consists of a complex of modern purpose built commercial units in business premises totaling 25,728 sq ft (2,390 sq m). There are 39 business units providing space for lease in sizes from 205 sq ft to 2,000 sq ft (19 sq m to 185 sq m). The business space offers flexible managed workspace accommodation for companies seeking commercial property to let in office units, workshops, light industrial units, studio space, storage and a series of training, interview and general meeting rooms.

Cargo Fleet Offices There is a small provision of serviced offices, alongside traditional office accommodation available to let. The property extends to 35,000 sq. ft. Each floor provides approximately 12,000 sq. ft. and suites are available from 500 sq. ft. The Business Centre provision includes a manned reception, conference room facilities and all inclusive rents on an easy in and easy out basis.

The building, only five minutes drive from Middlesbrough centre, was formally the headquarters of British Steel. In 2010 the property was totally refurbished to provide new serviced accommodation and offices. It is understood that internal fitting out is being undertaken on a rolling basis, motivated by demand. There is therefore opportunity for bespoke units to be provided in this building.

Features include: bespoke office layout; manned reception; high quality finishes; ground floor Exhibition Space and Bistro; security; dedicated secure car parking (200 cars); flexible lease terms; and meeting rooms and common areas.

Belasis Business Centre Belasis Business Centre is a purpose built business complex of serviced offices for general business use. Accommodation is centred on a large open atrium and on-site café. The centre can accommodate organisations requiring between 1 and 540 workstations (93 – 41,292 sq. ft.) and benefits from four meeting/conference rooms accommodating up to 100 people.

The landlord, DBH Serviced Offices Ltd, operates a number of properties across the north of England. This property is located two miles east of Billingham town centre.

Evans Business Centre Located within the Skippers Lane industrial Estate this regional provider operates an industrial orientated business centre with a range of secondary offices varying in size from 110 to 385 sq. ft. are available with free onsite car parking. Space is let on a flexible licence agreement offering clients' two months’ notice at any time



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in which to vacate. All offices are equipped with telecoms and broadband services while facilities include self-storage units and small workshops.

Westminster Business Centre This regional operator also has property in York. Westminster Business Centre is located in Wynyard Business Park. Workspaces are available from £250 per month and include business rates and telephone lines with handsets. As well as access to the usual facilities such as common areas, kitchens, and parking and break out areas.

Cleveland Business Centre Centrally located Cleveland Business Centre provides serviced accommodation at rents of £15 per square foot. The centre has recently undertaken refurbishments of 1,000 sq ft of accommodation in an attempt to secure new lettings and will likely carry on refurbishments on a rolling basis. This centre does not provide much of the infrastructure available in most serviced offices, but provides a more simple service, which concentrates on small lettings of 300 sq. ft. ranging up to 300,000 sq. ft. rather than providing more expensive serviced accommodation. Options are available to tenants for furnishings and telecoms and there is a service charge for cleaning, security, parking and maintenance of common areas including kitchens and toilets.

Unsworth Road Bizspace, Hartlepool A 50,000 sq ft industrial style building offering flexible space on easy in-easy out agreements for workshops and offices, located south of Hartlepool on an industrial estate. This Business Centre has a mix of workshop and unfurnished managed office space in a variety of sizes. Facilities include conference rooms, fax and photocopying with secretarial and receptionist services provided.

The Innovation Centre, Hartlepool This centre offers high quality office and workshop accommodation able to host a wide variety of businesses but primarily for those in the field of technology. Offered on a flexible license basis with a range of services to include meeting room and gym facilities the centre is part of a wider development site aimed at companies looking for self-build opportunities of commercial properties.

Station Square Business Centre, Redcar This centre provides 39 offices and meeting rooms within a converted Grade II Listed railway station which has been renovated to provide office accommodation for small and medium-sized enterprises. With managed reception and on-site parking, the centre provides 38 managed offices with 24/7 access.

South Tees Business Centre A new development located just outside Middlesbrough on the A66. The centre has a strong technology focus and offers 16 workshops and 39 offices in a range



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of sizes. Secure on-site parking, in-house business advice, the centre is operated by the council and aims to assist businesses to grow while retaining them within the Borough of Redcar and Cleveland.

Stockton Business Centre The Stockton Business Centre is a facility provided by Stockton-on-Tees Borough Council as part of its package of providing support for Start-Up Businesses.

The Centre comprises of approximately 100 units for new start and growing businesses. Varying in size from just 8 to over 80 sq metres, the units, located on 4 floors, can be used as offices, studios or workshops.

Access is available 24 hours per day and the buildings are covered by the Council’s CCTV security systems. Clients occupy the premises on flexible terms with just four weeks notice required, and have access to the Centre’s Meeting rooms, Multimedia facilities and Leased-line Broadband.

Darlington Business Centre Located on busy arterial road within walking distance of the town centre, ground and first floor offices are available from 160 sq ft, or multiples to suit requirements. Lift, serviced reception, furnished, some parking available with leased internet and phone services.

Lingfield Way Business Centre A modern development which incorporates a mix of commercial uses including offices, manufacturing and storage. Offices range from 35 to 102 sq m (375 to 1,100 sq ft) and each have their own services with suspended ceiling and category II lighting, heating and carpets. Furnished offices are available on request. Workshops range from 88 to 167 sq m (950 to 1,800 sq ft) and benefit from sectional up and over shutter doors, 3-phase electricity, lighting and WC. All units have telecom and broadband services. New self-storage units are now available and range in size from 25 sq ft to 100 sq ft. Rent includes buildings insurance and service charges on easy in, easy out terms.

3.4 Proposed development pipeline There are a number of potential managed workspace developments in the North East. Consideration of these forthcoming developments is important in the context of assessing the potential take-up at the proposed Digital Incubation and Managed Workspace Centre

The Northshore Innovation Centre proposal is the most relevant to the proposed development. An overview of this and the Darlington Business Growth Hub proposal is provided below. The implications of these proposals are considered in detail in the demand analysis reported in Section 4.



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Northshore Innovation Centre, Stockton The planned Northshore Innovation Centre based in Stockton is expected to provide three stories of high specification ICT networked office floorspace. The tenure is likely to consist of a mix of small and large units with a modular system for flexibility. The total lettable floorspace is expected to be around 2,324m2.

The primary demand for the Northshore Innovation Centre is expected to be derived from Teesside University, Durham University’s Queens Campus and the digital start-up facility at 62 Dovecot Street. The primary focus will be on the more professional end of the digital sector (in particular, firms that have already been established and are seeking appropriate move on space to grow). Academic spin-outs are expected to focus on the pharmaceuticals and health, plus other high technology and innovative growth sectors.

Business Growth Hub, Darlington Darlington Council has plans to develop a multi-growth sector facility for start-up companies and small and medium enterprises aimed at the highest calibre of innovation and entrepreneurship.

The Darlington Business Growth Hub is expected to be situated in the Enterprise Zone of Central Park. This site was selected through a scoring process that balanced the sequential test in planning terms, with sustainability considerations, the proximity of the railways and A66 offer good edge of town transport connections. This location also presents an opportunity to associate with the Innovation Connector.

The Hub will seek to combine incubation elements with business growth which is relevant and realistic to market demand in Darlington. The Hub is expected to be flexible and not dedicated to a particular sector per se.

3.5 Summary of supply side findings The supply side assessment identifies that there are a number of workspace facilities operating across the Tees Valley. It is vital that these are fit for purpose and that form follows function, thereby it is to be expected that there are a range of facilities to reflect niche activity and local circumstances.

It is important to understand the issue of duplication of provision and why what may appear as duplication may not actually be so in practice. For instance in Tyne & Wear, it would be difficult to argue that creative businesses based in Sunderland should travel to Newcastle to access office space. Indeed, there is provision of similar high tech office spaces for creative industries funded by ERDF in both Newcastle and Sunderland suggesting that this was not considered duplication and setting a precedent for investment in similar provision in separate boroughs across a sub-region. The supply side assessment indicates the range of offers locally and across the sub-region and the need for a clearly defined and differentiated offer that meets local needs in the digital sector and is capable of attracting revenue.



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DigitalCity provides important context in terms of clustering of the digital sector in Middlesbrough. In particular, where initiatives have been implemented in a place where the sector is less mature than leading edge international destinations and the investment climate more challenging.

Though originally formed and supported by the public sector, DigitalCity is profoundly private-sector oriented. DigitalCity’s strategy has always been based on job creation, private-sector engagement and self-sustainability independent of public funding. Its first phase in 2003-10 ‘pump-primed’ the cluster using public funds. The current phase is successfully accelerating cluster development, developing the sustainable business model, and increasing private-sector engagement.

The Boho Zone provides business space for new digital and creative companies to grow, network and do business. The space has been successful with high levels of take up and is frequently recognised as an example of best practice in stimulating cluster development. In particular, it is successful in providing the wider wrap around business support and networking services that enable resident businesses to prosper. The facility is currently in a transition phase and is seeking to secure new sources of finance so that it can be financially self-sustaining by 2015.

These findings offer important lessons to take into account within the demand side and any business planning work. In particular, there is a clear implication that the offer needs to be distinctive from existing supply as well as competitively priced and offer quality provision where affordable. This is a challenge which the demand assessment takes into account in the following analysis.



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4 Demand Assessment

4.1 Introduction This section reports the findings of the demand assessment for a Digital Incubation and Managed Workspace Centre within the Boho Zone, Middlesbrough. The demand assessment is based on both a review of secondary evidence and new primary research conducted for this demand study. An analysis of the existing evidence covering local demand is undertaken. This includes new work that Arup have commissioned from JK Property Consultants on the property market assessment and key supply side and demand side metrics.

To supplement this evidence, and to obtain more specific data around the demand for an incubation and managed workspace facility within the Boho Zone, Arup undertook an online survey of high technology, digital and innovative firms in the area. An analysis of the results is provided in the following sub section 4.5.

The demand assessment examines the demand for the two proposed phases of the Digital Incubation and Managed Workspace Centre; encapsulating the potential demand for incubation, managed and ‘grow on’ space types.

Figure 4.1 provides an overview of the phasing of the proposed development and the respective types of space for which potential demand is considered.

Figure 4.1: Phase of development and demand type

• Incubation • Managed Space Phase 1

• 'Grow On' Space Phase 2



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4.2 Overview of the evidence base There is a valuable recent evidence base compiled for the digital sector in Middlesbrough and across the wider Tees Valley, particularly in relation to the DigitalCity Initiative. Analysis of these documents has provided contextual detail to the proposal for a Digital Incubation and Managed Workspace Centre. The information has also allowed for determination and forecasting of the relevant ‘demand generators’ including the supply of embryonic enterprises from existing Boho Zone facilities and the outturn of Digital Fellowships graduates from Teesside University.

This evidence base is supplemented by new primary evidence collected for this study, comprising:

• A property market assessment undertaken by JK Property Consultants; • An Online survey of high technology, digital and innovative firms in the

Middlesbrough area; and • Discussions with key stakeholders including members of the University of

Teesside involved with their programme of Academic Enterprise, members of the Tees Valley Unlimited enterprise zone group board, contacts from DigitalCity and Middlesbrough College, and members of existing digital and creative businesses.

An overview of the approach to developing the evidence base and assessing potential demand is provided below.

Figure 3.2: Overview of the Approach to Assessing Demand

Source: Arup.

Critically, this section also explores how the offer provided by an Incubation and Managed Workspace Facility and delivery of Phase 2 ‘grow-on’ space will connect to the existing and planned provision for firms in the digital sector in Middlesbrough and the Tees Valley.

Recent digital sector evidence base

Property Market Assessment

Primary survey of digital businesses

Discussions with key stakeholders

Analysis of the demand case for Boho Five



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4.3 Recent digital sector evidence base There is a valuable recent evidence base around the digital sector in Middlesbrough and across the wider Tees Valley.

4.3.1 DigitalCity Demand Evidence DigitalCity is a private-sector orientated initiative, based on the premise of job creation, private-sector engagement and self-sustainability independent of public funding. The DigitalCity programme represents a set of closely aligned and mutually supportive initiatives seeking to drive growth in the digital and creative sectors in the Tees Valley.

Three recent studies provide a valuable evidence base around the shape and needs of the local digital sector cluster.

Sector Mapping Exercise (2011) In May 2011, DigitalCity Business undertook a sector-mapping exercise for the digital and creative sectors in Middlesbrough. This established both the demand for, and the availability of appropriate office space. The analysis found that:

• 38% of all digital and creative businesses will consider relocating their offices in the next three years;

• Boho One was listed as a key benefit for companies being based in Middlesbrough; and

• 66% would like to move to suitable accommodation in central Middlesbrough.

Analysis of office space in and around the Boho Zone (2011) Analysis of office space in and around the Boho Zone was undertaken by DigitalCity in May 2011. The analysis considers two zones: Zone One represents business accommodation within a one mile radius or Boho One and Zone Two represents the wider area within Middlesbrough Town Centre.

Within Zone One, office spaces tend to have a lack of utilities, a lack of parking and no premises aimed specifically at creative or digital organisations. The study found that only one premises provided the networking capabilities. Also purpose built properties typically commanded a higher price than office space above retail outlets.

Within Zone Two, business accommodation is available in a wider range of facilities, with some incorporating the availability of internet, meeting rooms and professional reception services. No premises are aimed specifically at creative or digital organisations.

The report concludes that the nature of business accommodation freely available in the area demonstrates that there is a lack of facilities which could assist digital organisations.



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Independent Verification Report Boho Four Building (2011) This report, prepared by SJA Business Consultancy Ltd, seeks to validate the need for new business accommodation for incubation and next-stage digital sector based companies. The report examines the potential for a workspace facility consisting of spaces ranging from tables with networking sockets, hot desks, meeting areas and small flexibly adaptable units – linked to existing infrastructure associated with Boho One.

The report identifies that there were more than 80 companies on DigitalCity Business’s active support list in 2010 - all of which requiring varying degrees of support. Its analysis suggests that the limited availability of incubator space and subsequent accelerator firms space in the Tees Valley is a contributing factor in businesses often spending longer than is beneficial in current incubation facilities. The report states that existing Middlesbrough Council managed enterprise facilities were operating at 86% capacity when the study was undertaken.

The case is further made for the potential construction of additional digital incubation and managed workspace in the vicinity of Boho One to allow for agglomeration benefits. These include the critical mass factor of like-minded businesses and individuals working in close-proximity with opportunities to organically create networks that support, share and commercialise ideas.

4.3.2 Tees Valley evidence base

Tees Valley Business Accommodation Investment Review (2010) This report was prepared by GVA Grimley on behalf of Tees Valley Unlimited to review the supply and potential future demand for business accommodation in the context of the aims and objectives set out in the Statement of Ambition. The document provides estimates of estimate future demand for business space, analysis of existing accommodation provision compared to demand, and identifies the gaps in existing provision.

Demand is assessed by using past business creation and growth trends to present a series of forecasts for the type and nature of space required at both the Local Authority and Tees Valley spatial scales. According to the analysis, the number of new VAT registered businesses created in the Tees Valley averages 377 per annum. The Statement of Ambition outlines an aim to create 1,000 new VAT registered businesses in addition to existing trends over the next fifteen years; this equates to an additional 67 business per annum. The forecast therefore equates to 44 net new businesses required each year.

The analysis suggests that 24,122m² of business accommodation will be required by new businesses by 2015, and 79,392m² by 2025.



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4.4 Property market assessment by JK Property Consultants

The office market, including serviced offices and incubation accommodation in the Teesside Valley suffers from relatively low demand. Much of the explanation of the market and the examination of the specialist business centres are described in Section 3.

Set out below are two tables: a list of serviced offices; and a schedule of available office space.

Whilst the market is fairly transparent in the available information for office space, the operators of serviced offices will not release information of substance about the range and specific size of available space or rents, as they are in a highly competitive market sector and do not wish to incur the risk of providing information to competitors. It is likely that within the Tees Valley there is a significant percentage of serviced office accommodation still available, especially in those areas which only provide secondary accommodation or limited services to support occupiers. However many operators of all types of serviced accommodation may also be carrying large vacancy rates due to a mixture of the on-going difficult economic circumstances and a relatively wide selection of serviced accommodation being available in the market.

Many of the properties outlined below offer a range of unit sizes, typically from 200sq ft to 1,500sq ft, with some centres able to provide both larger and smaller units as landlords look to offer all encompassing property solution. The majority of units will provide accommodation between 300sq ft and 800sq ft, while purpose built or modern open plan properties will be easily adaptable to reconfigure offices to suit occupier demands.

The character of the DigitalCity accommodation as described by the client is entirely different to that which is presently available. The only accommodation that is closely similar is that of Boho1 which remains fully occupied.



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Figure 4.3: Serviced Offices

Property Name Floor Area (sq ft) Operator Sectoral Focus

Queens Court Business Centre Gilkes Street Middlesbrough TS1 5EH

10,000 Local Operator General Office Use

Cadcam Business Centre High Force Road Middlesbrough TS2 1RH

30,000 Bizspace Industrial/Manufacturing

Queensway Business Centre Queensway South Middlesbrough TS3 8BQ


Cargo Fleet Offices Middlesbrough Road TS6 6XH 35,000 Regional Operator General Office Use

Belasis Business Centre Belasis Hall Technology Park Middlesbrough TS23 4EA

40,000 Regional Operator General Office Use

Evans Business Centre Stephenson Court Middlesbrough

5,000 Regional Operator Industrial/Manufacturing

Westminster Business Centre Wellington House Wynyard Park TS22 5TB

20,000 Regional Operator (Size Estimated) General Office Use

Cleveland Business Centre 1 Watson Street Middlesbrough TS1 2RQ

30,000 Unknown General Office Use

Unsowrth Road, Hartlepool TS25


The innovation Centre, Queens Meadow Business Park, Hartlepool TS25

20,000 UK Steel Enterprise Industrial/Manufacturing

Redcar Station Business Centre, Station Road, Redcar TS10 1RD

15,000 Borough Council of Redcar and Cleveland General Office Use

South Tees Business Centre, Puddlers Road, Middlesbrough TS6 6TL

20,000 Borough Council of Redcar and Cleveland Industrial/Manufacturing

Stockton Business Centre, Brunswick Street, Stockton-on-Tees TS18 1DW

20,000 Stockton-on-Tees Borough Council General Office Use

Forsyth Business Centre, Woodland Road, Darlington DL3 7PL

20,000 Regional Operator General Office Use

Lingfield Way Business Centre, Yarm Road Business Park, Darlington DL1 4QZ

15,000 Unkonwn Industrial/Manufacturing

TOTAL 335,000



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Figure 4.4: Schedule of Availability - Offices in Middlesbrough

Property Name Floor Area (sq ft) Rent (£/sq.ft.) Comments

Centre North East Albert Road Middlesbrough

100,000 £8.00

Floorplates of 9,000 sq ft Recently refurbished accommodation on a rolling basis Suites available from 1,000sq ft

Manhattan Gate Middlehaven Middlesbrough

80,000 Not available Comprises of 5 new office buildings in a landscaped arena on the waterside of Middlehaven.

45/49 Albert Road Middlesbrough 4,500 £4.00

1st and 2nd floor office accommodation above retail property Low quality accommodation

2 Queens Street Middlesbrough 8,000 £8.00

Secondary office accommodation with Cat II lighting, perimeter trunking and comfort cooling.

Sylvan House 12/16 Woodlands Road Middlesbrough

9,000 £5.00

Recently refurbished secondary office accommodation available in small units from 1,350 to 9000sq ft Gasfired central heating Shared kitchen facilities

Rede House Corporation Road Middlesbrough

24,000 £7.00 Refurbished office accommodation avaiable from 3,000sq ft

St James House 139 Albert Road Middlesbrough

8,000 £7.50

Secondary office accommodation within a purposed build building of brick construction and mansard roof. Accommodation available from 1,000 to 8,000sq ft

Sun Alliance House 16/26 Albert Road Middlesbrough

25,000 £9.50

Fully refurbished accommodation providing comfort cooling, raised floors, suspended ceiling and lighting, refurbished common areas, two passenger lifts

Britannia House Brignell Road Middlesbrough

2,100 £4.75 Office suites from 700sq ft available and in multiples thereof

River Court Riverside Park Middlesbrough

2,700 £8.00

Offices suites with Gas Central heating, double glazing, suspended ceilings with Cat II lighting and allocated parking

116 Borough Road Middlesbrough 2,500 Not available Retail/office premises available by

way of assignment

48 Albert Road Middlesbrough 2,075 £8.00 Ground and first floor office with

street frontage



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Source: JK Property Consultants.

Victoria House 159 Albert Road Middlesbrough

3,600 Not available Self-contained fully refurbished town centre office suites

10 Albert Road Middlesbrough 1,000 Not available Tertiary first floor accommodation

above retail unit.

Zetland Buildings Middlesbrough 10,000 £6.00 Grade II listed building refurbished

with retail GF uses and offices above.

Unit 1 Cadcam Centre High Force Road Riverside Park Middlesbrough

7,700 Not available Detached office building also used as a serviced office facility

55/57 Albert Road Middlesbrough 3,000 £7.50

Tertiary office accommodation provided above retail units in City Centre

Acklam Green Centre Acklam Road Middlesbrough

10,000 Not available

1st and 2nd floor open plan office accommodation above youth club facility accessed via a separate entrance

5th Floor 28/32 Albert Road Middlesbrough

3,900 £10.00

6 storey office block providing open plan accommodation with comfort cooling, suspended ceilings WC and kitchen facilities

Thornton House Cargo Fleet Lane Middlesbrough

8,000 £5.00 Three storey tertiary office building with air-conditioning, perimeter trunking and suspended ceilings.

Eston Road Grangetown 3,800 Not available Tertiary office accommodation within

secure yard for parking

TOTAL 318,875



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4.5 Primary Survey of digital businesses

4.5.1 Overview This section sets out the findings from the primary survey of digital businesses and evidence of demand for new, additional space locally.

Two surveys were undertaken based on the location of the firm; those firms which reside within Boho One (18 firms) and non-resident firms in Middlesbrough and the surrounding areas accessing the services of DigitalCity (133 firms). A survey response rate of 44% and 46% respectively was achieved.

The questions and headline results of the survey are outlined below.

4.5.2 Survey analysis Two surveys were produced which were location-specific. Where a question is broadly common across both surveys, answers have been summarised collectively. Where a survey question is location-dependent, separate summaries are provided.

Firm Characteristics

Question 1: How Many Years has your Business been established? Companies were asked how long their businesses had been established. This question was posed to examine the number of business in embryonic phases and those that are entering ‘move-on’ phases.

Figure 4.5: Business age since incorporation

Boho One Resident Firms Non-Boho Resident Firms

<1 year 12.5% 10.2%

1-2 years 25.0% 27.1%

3-5 years 25.0% 20.3%

5+ years 37.5% 42.4%

Source: Arup.

Of those resident firms that responded, 37.5% of companies located within Boho One are over five years old and 62.5% of firms are over 3 years old. Demand for secondary ‘grow on’ space could arise from current resident firms.

In contrast, 37.3% of firms not currently residing in Boho One were companies which are less than three years old and therefore could be suited to location within Phase 1 incubation space.

These results may indicate that companies within the existing space at Boho One are remaining for too long in this Innovation Centre, restricting the entry of embryonic firms into desired incubatory space.



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Question 2: How many staff do you currently employ? Both Boho One firms and non-resident firms were asked about their current employee numbers. This was to allow categorisation of the size of firms to inform building configuration.

As expected, Boho resident firms employed low numbers of employees, typically between two and ten. This may indicate that there is weaker demand for very large incubation space and stronger demand for flexible small to medium sized offices when businesses are at an incubatory level. One response highlighted the presence of a small subsidiary company employing two people, whilst an additional 25 people were employed in its Reading Headquarters.

Figure 4.6 highlights that the majority of non-resident firms do not employ any additional employees; in this instance, co-founders or managing directors of small companies may not deem themselves employees. This category may also include self-employed workers. It is pertinent to note that firms are more likely to require small to medium flexible workspace with few companies requiring larger spaces.

Figure 4.6: Total number of employees at each Non-residential Firm

Source: Arup.

Question 3: What premises does your business currently use? ‘Non-residential firms’ which typically use DigitalCity services were questioned on the form of accommodation they currently use.

Of the 58 respondents, 43.1% are currently using their home to run their business. Offices were the second most popularly used business premises. Existing managed workspace and incubation facilities where used by 17 respondents (29.3% of all respondents).

An additional four respondents stipulated that they utilised accommodation which had not been listed in the survey. Two respondents, who employed one additional

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person each, utilised hot desk or virtual office space, whilst the remaining two respondents, who employed greater numbers of staff, used Lab and Warehouse space or Bohouse space.

Figure 4.7: Non-resident firms responses to 'What premises does your business currently use?'

Office Form Non-Resident Firms (Only)

Office 29.3%

Managed Workspace 17.2%

Incubation/Start-up facility 12.1%

Home 43.1%

Source: Arup.

The relatively high response rate for firms working from home indicates a potential strong pool of latent demand to underpin future up-take of appropriate premises for growing firms in Middlesbrough.

Future Requirements Businesses were asked to estimate their likely future requirements. This was to determine potential requirements if certain growth scenarios were achieved and whether companies would consider additional workspace within the Boho Zone.

Question 4: If your Growth Plans are met, how many staff do you expect to employ in 5 years’ time? Figure 4.6 below highlights the residential firm results to the question ‘if growth plans are met, how many staff do you expect to employ in 5 years’ time?’.

All respondents predicted a growth in employee numbers between 125 – 500%. Supply of ‘move-on’ space would ideally reflect the need for larger firms, although given the range in absolute employment levels (between 7 and 59 employees), space size would need to be flexible.



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Figure 4.8: Current Employees and Expected Employee Growth Numbers within Five Years, per Resident Firm

Source: Arup

Of the non-resident firms questioned (see Figure 4.9), a large number expect to experience high growth in employee numbers within the next five years. This could be a lead indicator in signalling the future demand for incubation and managed workspace for the firms which currently employ fairly low staff numbers.

Figure 4.9: Current Employees and Expected Employee Growth Numbers within five years, per Non-residential firm.

Source: Arup

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Question 5: Do you expect to move or require larger facilities within the next 5 years? Businesses were questioned whether they will require larger facilities within the next five years.

Of the Boho One resident companies which responded, 87.5% of firms highlighted their expectation to move to or require larger facilities in the next five years. This could suggest that location within Boho One inspires ambition with small enterprise to grow and expand and provides the support infrastructure for this to be achieved.

Non-residential firms which have a relatively large number of current employees could represent the demand for phase 2 ‘grow on’ space. However, the survey results indicate a balanced picture – whilst 40% of non-residential business do not expect to move or require larger facilities within the next 5 years, this is compared to 37% respondents who would expect to require larger space and 26% respondent who don’t know what to expect in 5 years.

Figure 4.10: Do you expect to require larger facilities within the next 5 years?

Response Resident Firms Non-resident Firms

Yes 87.5% 36.7%

No 0.0% 40.0%

Don’t know 12.5% 26.7%

Source: Arup.

Question 5a: If yes, what would be your broad requirements for a new facility if you relocated? Those firms who answered ‘Yes’ to requiring larger facilities within the next five year, were subsequently posed a question regarding their expected requirements for a new facility.

Figure 4.11 below summarises the broad requirements of residential and non-residential firms for a new facility if they chose to relocate. Modern, airy workspace that could be used to meet clients or deliver creative presentations or workshops was deemed the most favourable feature of new workspace. High speed internet access and location close to existing amenities or services near to Middlesbrough Centre were two additional requirements which were considered beneficial.



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Figure 4.11: Broad requirements of residential firms and non-residential firms for a new facility if the company relocated

Facility Requirement Residential Firms Requested

Non-residential Firms Requested

Workspace Configuration

Modern Workspace 2 4

Meeting Rooms 1

Small Offices 1

Large Offices 1 4

Affordable rents 1

Shared Space 1

Storage/ Workshop Space

3

Office Facilities High-Speed Internet Access

2 3

24 Hour Access 1

Local amenities/ Services 3

Plentiful Electrics 2

Source: Arup

Question 6: If a suitable space was available, would you consider a facility co-located with the existing Boho Zone as a location? From the survey responses, it is apparent that double the number of resident firms would wish to remain located within the Boho zone within a co-located workspace.

Almost half of non-residential firms would consider location within Boho One, whilst a quarter of respondents were not sure of their response. The non-residential firms who answered ‘no’ to location within a Boho Zone co-located facility were posed an additional question to address whether they thought ‘there were any other suitable facilities at present?’ Six respondents considered that their current residence allowed them better access to their client bases in Stockton (1 respondents), and Newcastle (2 respondents). One respondent considered that they would need greater access to passing trade than the level the Boho Zone could offer and another suggested that there were more suitable spaces in the wider Middlesbrough area.

Figure 4.12: Resident and Non-resident Firms responses to considering a facility co-located with the exisitng Boho Zone as a location?


Yes 85.7% 45.0%

No 0% 30.0%

Don’t Know 14.3% 25.0%



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Source: Arup

Question 7: Are you aware of any firms that are currently seeking space in the Boho zone? Residential and non-residential firms were questioned whether they were aware of any companies seeking space in the Boho Zone; to which ‘no’ was the majority response. Assuming the previously high positive response rate for location within the Boho Zone, it may simply be that without marketing, it is difficult for firms to perceive the need of other companies to locate within the area.

Of the firms who responded that they were aware of firms currently seeking space in the Boho Zone; three firms were aware of businesses requiring ‘Move-on’ space, two firms were aware of businesses requiring ‘Start-up’ space and one firm was aware of a company requiring both.

Figure 4.13: Residential and Non-residential response firms that are currently seeking space in the Boho Zone


Yes 12.5% 16.7%

No 87.5% 83.3%

Source: Arup

Question 8: Are you aware of any small companies leaving Middlesbrough as they expand? Residential and Non-residential firms were questioned whether they were aware of any companies leaving Middlesbrough as they expand, to which an average of 20% responded ‘yes’.

Of those non-residential firms who responded ‘yes’, there was an awareness of between 1 and 9 firms who had left the area.

Figure 4.14: Firms aware of others leaving Middlesbrough as they expand


Yes 12.5% 28.3%

No 87.5% 71.7%

Source: Arup

4.5.3 Summary of findings and implications The survey results have a number of implications for the overall configuration of the proposed Digital Incubation and Managed Workspace Centre:

• There are a greater proportion of younger (less than 3 years old) non-residential firms than there are Boho Zone residential firms. In parallel, there is a relatively high proportion (62.5%) of older (older than three years old) residential firms within Boho One. This may indicate that companies within



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the existing space at Boho One Innovation Centre are remaining tenants beyond phases which are beneficial, and may indicate existing ‘move on’ space is insufficient for their needs;

• The success of Boho One is clear; resident firms predicted a growth in employee numbers between 125 – 500%, whilst non-residential firms predicted a typical growth in employees of 160%.

• Of the resident firms who responded, 85.7% would consider a facility co-located with the existing Boho Zone as a location whilst only 45% of non-residential firms agreed to consider relocation within the existing Boho Zone if a facility became available.

• Modern, airy workspace that could be used to meet clients or deliver creative presentations and workshops was deemed the most favourable feature of new workspace if a company chose to relocate. High speed internet access and location close to existing amenities or services near to Middlesbrough Centre were two additional requirements which were considered beneficial;

• Of the firms who responded that they were aware of firms currently seeking space in the Boho Zone; three firms were aware of businesses requiring ‘move-on’ space, two firms were aware of businesses requiring ‘start-up’ space and one firm was aware of a company requiring both.

4.6 Demand statement for managed workspaces across Tees Valley: Rental levels and take up

4.6.1 Rental levels The average price per work station in the North East rose from £171.00 to £186.00 per month during 2012. Average work station prices nationally also rose from £285.00 to £294.00.

Most providers charge on the basis of ‘per work station’ rather than a price per square foot. A normal size per work station is estimated at 50 sq ft to 70 sq ft, depending on the quality of accommodation provided. Usually included in this rental charge are business rates, cleaning, 24/7 access, utilities and furnishings. Levies are then charges for internet connections, parking, postal/secretarial services, telephone line/handset hire charges and for the hourly hire of meeting rooms. Normal charges for these services are as follows:

• Internet and telephone connections: £50-£120 per work station per month, dependent upon provider and connection speed.

• Meeting room hire: £20 - £50 per hour. • Parking: £50 - £80 per week per space.



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4.6.2 Take up The current economic circumstance has had an adverse effect on take-up.

The sector was performing well prior to the 2008 economic recession, which has tempered take-up and investment in the sector which had been supported by start-up firms and expanding companies requiring immediate accommodation. However, the sector is continuing to perform relatively well due to the flexible terms thus avoiding more onerous traditional leases of 3 to 5 year terms. There is also an on-going change within large firms in the way work is conducted with home working, out-sourcing and hot-desking will all encourage further adaption of serviced offices as part of a mix of property requirements which will sit alongside traditional lease/owned property.

Demand for serviced offices decreased in the second quarter of 2012 (“Q2 2012”) with enquiries down by 8% from Q1 2012. This decrease is in line with the UK market overview where enquiry levels were also lower by over 10%.

Actual newly signed serviced office tenants were down on Q1 2012 by 15%. However when take up figures for the first half of 2012 (“H1 2012”) are compared against the same period of 2011 new tenants were up 21% in the region, which shows significant increasing popularity from year to year. However average number of workstations taken by new tenants reduced slightly over this period from 5.2 to 4.3 meaning the average tenancy size was getting smaller.

Commitment has remained relatively stable over 2011 and 2012 and has an average variation consistently between 7 and 12 months. Average lease length in Q2 of 2012 was 9.2 months, down on Q2 2011 by 1 month. However the average lease length in the region over H1 2012 remained at 10 months, which is longer than the UK average of 8 months.

In the North East existing serviced accommodation will continue to attract occupiers from large business looking for temporary accommodation during contracts or through relocation periods. Many serviced offices in the North East are positioned in prime locations targeting this market. However serviced offices can be an enabling factor to help the region’s economy recover, providing part of the much needed business infrastructure to increase enterprise and entrepreneurship, which is presently below national averages. Specialisations in the provision of serviced accommodation may also continue to develop further.

Data in this part of the report is available at www.officebroker.com

4.7 Latent demand An additional component of demand exists which by its nature is difficult to quantify or evidence. This is because latent demand needs to be unlocked, by effective supply-side measures such as training, education, inspiration, business support and the provision of facilities such as the proposed Digital Incubation and Managed Workspace Centre which has the potential to act as a real catalyst for growth.

Survey evidence would not be able to identify if an A Level student, an undergraduate or someone not in education, employment or training has the kernel of an idea that is developed and evolved over time. A potential entrant to the

http://www.officebroker.com/



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Digital Incubation and Managed Workspace Centre in Year 1of its operation may be 17 years old now living within Middlesbrough.

In this respect, latent demand cannot be accurately measured. Assuming that are 30 people with a gem of an idea, 10 of which proved to be successful and 5 required local premises such as that offered by the Digital Incubation and Managed Workspace Centre, then there is likely to be additional demand for the space. Focussing on local capacity and Teesside University graduates who could be retained in the area to start up new, innovative, small scale businesses is an important component of work to ensure a successful Digital Incubation and Managed Workspace Centre in Middlesbrough. These new business ventures have the potential to grow and take up purpose-built accommodation in Middlesbrough and create wider ‘spill-over’ benefits that cannot be identified or projected at this stage, yet offer additional potential to contribute to the occupancy of the Digital Incubation and Managed Workspace Centre and vitality of the area.

4.8 Analysis of the demand case for Boho Five

4.8.1 Primary ‘demand generators’ Boho Five will offer a high quality bespoke facility targeted at start-ups and growing SMEs in the growing digital sector in Middlesbrough. The offer will respond to the need for modern spaces that facilitate collaboration and networking for digital firms. These firms have a requirement for a specific type of space distinct from more generic B1 office provision that is available at other locations in Middlesbrough.

This section identifies the expected primary ‘demand generators’ for Boho Five. These are discussed further in the subsequent sub-section which explores the relationship of the facility with the wider network across the Tees Valley.



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Figure 4.15: Primary ‘demand generators’ for Boho Five

Source: Arup

4.8.2 Demand and relationship with wider network of existing and planned facilities in the Tees Valley

The identified sources of demand reflect how the facilities at Boho Five will be integrated into the existing and future planned network of facilities in the wider Tees Valley. Figure 4.16 identifies key existing and planned incubation and managed workspace centres, related educational establishments and the key relationships in terms of demand. In particular, this illustrates the differences in sectoral focus and business stages targeted by facilities in the wider area. These functional relationships have been developed through discussions and joint working with stakeholders.

Boho Five will have particularly strong relationships with existing facilities and activities in Middlesbrough.

Boho One and the wider Boho Zone will be a particularly important demand generator. The Boho Zone has developed into a significant business hub, based around the digital sector and the economic activity generated through the DigitalCity initiative. Boho One is the main hub of the Boho Zone and is focussed on business acceleration for digital start-ups. Demand for space at Boho One is high and there is currently a waiting list of nine firms seeking space despite a number of meeting rooms being converted to lettable spaces in recent months. The number of digital sector firms requiring space has increased over recent years with the growth of the DigitalCity initiative, all four buildings in the Boho Zone are achieving occupancy levels of 90-100%.

Boho Five is intended to use Boho One as a hub to provide further space for new start-ups. The purpose of Boho One is to act as a business acceleration facility for



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those firms with the greatest potential; at present it is full, over-subscribed and has a number of tenants which are remaining on the site too long. Not all start-ups will be suitable for Boho One, it is intended only for accelerating the highest growth potential firms. Boho Five will tackle this issue and enable the DigitalCity initiative to cater and nurture a larger number of firms per annum.

Boho Five will be located opposite Middlesbrough College and within five minutes’ walk of the existing Boho Zone facilities in Middlesbrough. The new facility will enable DigitalCity to capitalise on the young college outturn with an appetite for business and enable existing workspace facilities in the Boho Zone to be used more effectively.

Teesside University is also a primary demand generator for Boho Five. The university has strength in digital media courses and a strong track record in the leading edge provision of digital and enterprise based initiatives.

Through DigitalCity Innovation, the university works closely in supporting the on-going work of the DigitalCity Initiative to grow the digital and creative industries cluster. This scheme builds upon the strengths of Teesside University’s world-renowned expertise and reputation in digital media and technology, by promoting the availability of DigitalCity Innovation fellowships to individuals and teams with an original project idea to graduates of the University who reside in the North East of England. A business support grant of £4,000 is offered to help develop the idea and cover living expenses. Over the past 3 years the DigitalCity Fellowship scheme has created over 130 new companies and 200 new jobs. Approximately 20 to 30 businesses a year are created in the digital and creative sectors through the DigitalCity Fellowships.

The Institute of Digital Innovation (IDI), based at the university, fosters collaboration between academic research and digital sector business. As a major digital R&D environment, IDI is creating a business-friendly powerhouse ready to help develop exciting new products and services for the market. Companies also have access to a wide range of cutting-edge research and development facilities for the digital sector.

The university produces a number of start-ups and spin-outs each year, driven forward by both graduates and staff. Graduate businesses are generated through fellowships and mentoring at DigitalCity’s Boho Zone. Students can come through the Fellowships route or straight into the university’s incubation space at Victoria Road. Space at Victoria Road is highly popular and the university has to be selective in to whom space is offered; a 12-18 month incubation period in the space is also strictly enforced. Staff businesses are smaller in number and ‘lumpy’ in frequency – in the last year, 3 businesses have been created.

The businesses coming out of the university cover a broad range of activity but are primarily focussed around digital media, or innovative application thereof.

In addition to the existing network of facilities in the Tees Valley, the demand assessment has also considered the implications of proposed new facilities.

The most relevant to Boho Five is the proposal for an Innovation Centre on the Northshore in Stockton which also has a focus on the digital sector. The proposed offer at the Northshore Innovation Centre is distinct from that of Boho Five however. The Northshore Innovation Centre is focussed on providing ‘move on’ space rather than incubation space. The target market in the digital sector will be



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more established digital firms that want to grow in Stockton, rather than new start-ups fresh out of college. The newly opened incubation facility at 62 Dovecot Street in Stockton will be an important demand feeder for the Northshore Innovation Centre. The sectoral focus of the centre also includes the science sector, not only the digital sector.

Discussions have been held with DigitalCity and it is clear that Boho Five and the Northshore Innovation Centre in Middlesbrough are complementary and bringing forward both together could generate valuable synergies. Boho Five will enable a greater number of start-ups to be supported each year, to encourage business growth, and therefore, generate greater demand for larger ‘move on’ space. The Northshore Innovation Centre would serve a role in catering for firms that want a Stockton location, enabling facilities in Middlesbrough to cater for more firms. DigitalCity also has strong international connections with companies and investors in London and internationally.



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Figure 4.16



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4.8.3 Drivers of demand: to drive take up An analysis of the potential pipeline of demand for Boho Five from the primary demand generators has been undertaken to assess the extent to which this may drive take-up (see Figure 4.17).

This has been based on the assumption that the Northshore Innovation Centre is also developed, factoring in potential leakage. This demonstrates then even accounting for leakage and not including new college start-ups incentivised from Middlesbrough College, that there is sufficient demand to take up the proposed workspaces at Boho Five – with the 41 proposed units taking around three years to be taken up on this basis. The business case therefore models a more conservative occupancy time profile, with a maximum of 90% occupancy being achieved by Year 10.

Figure 4.17: Estimates of demand pipeline per annum – Boho Five

Demand Feeder Workspace Units

Average Firms moving out p.a.

Leakage factor

Potential firms demanding space at Boho Five p.a.

Boho One 28 19 25% 14

Teesside University (Digital Fellowships)

- 30 25% 22

Middlesbrough College

- -

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Source: Arup analysis. Note: Utilising previous trends in business birth rates and based on a company support period of 18 months. Figures include rounding.

There are also proposals for workspace located in Darlington (referred to as Darlington Business Growth Hub). The Darlington proposal is quite distinct from Boho Five however. The Darlington facility will be a cross sector facility targeted at a broader range of start-ups and SMEs with the objective of achieving flexible business growth stages and multi-sector offers. The emphasis will be on new start-ups seeking their first premises and to benefit from clustering. A key objective of the centre is also to unlock further growth and development around Central Park in Darlington. Displacement of demand from digital based firms from the Boho Five is likely to be limited as Boho Five will provide an offer which is tailored to the needs of the digital sector and enjoy close proximity to a strong existing cluster of activity.



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4.9 Summary of demand findings The findings of the demand assessment can be summarised as follows:

Demand Evidence

• The primary survey of both existing resident businesses at Boho One and non-resident firms accessing business support indicates that significant demand exists for further start up incubation units, managed space and smaller ‘grow on’ type spaces;

• The employee profile of firms currently resident in Boho One suggests that there is greater demand for flexible small to medium sized offices when businesses are starting up. There is less evidence of demand for larger incubation space;

• Given the business acceleration focus of Boho One, current occupants of the existing space are remaining for too long in the facility. A relatively high proportion of firms (over 60%) are older than three years;

• Existing resident firms could provide demand for smaller ‘move on’ space in the future if suitable space is available in close proximity to the existing Boho Zone cluster. Almost 90% of respondents expect to move to or require larger facilities in the next five years. Over 85% would consider a facility co-located with the existing Boho Zone;

• If the growth expectations of firms surveyed are realised then demand for ‘grow on’ space will arise from firms currently occupying smaller start up units. These firms could demand either larger managed space or ‘grow on’ space depending on their success;

• An additional component of demand exists which by its nature is difficult to quantify or evidence. This is because latent demand needs to be unlocked, by effective supply-side measures such as training, education, inspiration, business support and the provision of facilities such as the proposed Digital Incubation and Managed Workspace Centre which has the potential to act as a real catalyst for growth;

• The average price per work station in the North East rose from £171.00 to £186.00 per month during 2012. Average work station prices nationally also rose from £285.00 to £294.00. Usually included in this rental charge are business rates, cleaning, 24/7 access, utilities and furnishings. Levies are then charges for internet connections, parking, postal/secretarial services, telephone line/handset hire charges and for the hourly hire of meeting rooms.

• The current economic circumstance has had an adverse effect on take-up of office space in the Tees Valley. Accordingly, it will be important that the offer of the proposed development is sufficiently differentiated to capture its intended market niche in the digital sector.

Relationship with wider network of facilities in the Tees Valley

Boho Five will form an important element of the developing digital cluster in the Tees Valley. The proposed offer responds to a need for further incubation and managed workspace in Middlesbrough that is of the format and quality aligned with occupier requirements in the digital sector. A number of key ‘demand generators’ are contributing to demand for space – including the existing Boho One Hub, Middlesbrough Collage and Teesside University. In addition, there is



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expected to be further latent demand from businesses which are currently home based but which would take up suitable space if it were available.

Ensuring a collaborative approach and regional fit to managed workspace provision across the sub-region will be important in the success of Boho Five. It has been demonstrated that there is a good fit with both existing and planned related facilities in the Tees Valley if the offer is sufficiently focussed and differentiated – with a focus on young digital start-ups and existing firms seeking to grow.

Ensuring an appropriately differentiated offer is crucial not just in ensuring that Boho Five achieves a good fit with the wider network of innovation facilities but also in making the offer distinct from that of the wider B1 office market. Differentiation from the generic B1 office market offer will enable the centre to achieve the rents and occupancy levels required for long term financial sustainability of the facility. Differentiation should be sought through flexible leases, strong wrap around business support offer and high quality space that is conductive to collaboration and joint working.



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5 Market Assessment Findings and Recommendations

5.1 Overview This section provides a summary of the findings of the market assessment and a number of recommendations in further developing the proposal for a Digital Incubation and Managed Workspace Facility (referred to as Boho Five).

5.2 Findings: Market assessment and existing supply


• The employee profile of firms currently resident in Boho One suggests that there is greater demand for flexible small to medium sized offices when businesses are in start-up phase. There is less evidence of demand for larger incubation space;

• Given the business acceleration focus of Boho One, current occupants of the existing space are remaining for too long in the facility. A relatively high proportion of firms (over 60%) are older (> 3 years);

• Existing resident firms could provide demand for smaller ‘move on’ space in the future if suitable space is available in close proximity to the existing Boho Zone cluster. Almost 90% of respondents expect to move to or require larger facilities in the next 5 years. Over 85% would consider a facility co-located with the existing Boho Zone as a location;

• If the growth expectations of firms surveyed are realised then demand for ‘grow on’ space will arise from firms currently occupying smaller start up units. These firms could demand either larger managed space or ‘grow on’ space depending on their growth;

• Generally, the quality of the conventional B1 office accommodation in the area is poor. In total there is about 315,000 sq ft available, much of it is relatively low quality but with better quality rents in the range of £7.50 - £10.00 per sq ft;

• Generally new office rents will need to be about £18.00 per sq ft to make it profitable for development to go ahead but this will not happen unless there is a bespoke demand from an occupier. Thus no speculative office space will be built because of the financial constraints on lending;

• Lettings which have taken place in 2012 in the Middlesbrough office sector have been very low. Larger lettings that have taken place have either been at Lingfield Point, Hartlepool Marina or Wynyard Business Park.

• The rationale for developing Boho Five arises because of the need to have special space which can meet the occupiers’ needs and establish the right circumstance in which to create innovative activity. Much of the available



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space is not suitable for that purpose or is such a poor condition as to be unattractive and un-lettable.

• Notwithstanding the viability level of about £18.00 per sq ft to make building cost effective, the market rent in Middlesbrough is going to be no better than about £8.00 per sq ft for new build or refurbished space. This refers to a conventional B1 office offer however; and

• Boho One achieves a rent of around £16.50 per sq ft, including a service charge. This premium is achieved through provision of a distinct offer, in terms of both the building and associated sector specific business support activity.

5.3 Findings: Proposed development pipeline and role of Boho Five

• It will be important for the offer at Boho Five to be integrated into the existing and future planned network of facilities in the wider Tees Valley;

• The accompanying schematic map identifies key existing and planned innovation centres, related educational establishments and the key relationships in terms of demand. In particular, this illustrates the differences in sectoral focus and business stages targeted by facilities in the wider area. These functional relationships have been developed through discussions and joint working with stakeholders;

• Boho Five will have particularly strong relationships with existing digital facilities and activities in Middlesbrough. The facilities at Boho Zone, Middlesbrough College and Teesside University will be primary ‘demand feeders’;

• The relationship with the Boho Zone will be particularly important. Boho One is the main hub of the Boho Zone and is focussed on business acceleration for digital start-ups. Demand for space at Boho One is high and there is currently a waiting list of nine firms seeking space despite a number of meeting rooms being converted to lettable spaces;

• Boho Five should be designed to use Boho One as a hub to provide further space primarily for new start-ups, capitalising on proximity to the college. The facility will enable DigitalCity to capitalise on the young college outturn with an appetite for business and enable existing workspace facilities in the Boho Zone to be used more effectively;

• The purpose of Boho One is to act as a business acceleration facility for those firms with the greatest potential; at present it is full, over-subscribed and has a number of tenants which are remaining on the site too long;

• In addition to the existing network of facilities in the Tees Valley, the demand assessment has also considered the implications of proposed new facilities. The most relevant is the proposal for the Northshore Innovation Centre which is focussed on the digital and science sectors;

• The proposed Northshore Innovation Centre will have particularly strong relationships with existing facilities and activities in both Stockton and Middlesbrough. In the digital sector, the facilities at 62 Dovecot Street and Boho Zone will be primary ‘demand feeders’. The space provided will be ‘move on’ space, not start-up space;



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• Discussions have been held with DigitalCity and it is clear that Boho Five in Middlesbrough and Northshore in Stockton are complementary and bringing forward both together could generate valuable synergies. Boho Five will enable a greater number of start-ups to be supported each year, to encourage business growth, and therefore, generate greater demand for larger ‘grow on’ space – in Middlesbrough and elsewhere; and

• An analysis of the potential pipeline of demand from the primary demand feeders has been undertaken and demonstrates then even assuming relatively high levels of leakage there is sufficient demand for both facilities to come forward.

5.4 Recommendations In summary, Boho Five will form an important element of the developing digital cluster in the Tees Valley. The proposed offer responds to a need for additional start up incubation space, managed workspace and smaller ‘grow on’ space based in Middlesbrough that is of the format and quality aligned with digital occupier requirements.

Ensuring a collaborative approach and regional fit to managed workspace provision across the sub-region will be important in the success of Boho Five. It has been demonstrated that there is a good fit with both existing and planned related facilities in the Tees Valley if the offer is sufficiently focussed and differentiated – with a focus on digital start-ups, outturns from Middlesbrough College and Teesside University, and existing users of the Boho Zone.

Ensuring an appropriately differentiated offer is crucial not just in ensuring that Boho Five achieves a good fit with the wider network of innovation facilities but also in making the offer distinct from that of the wider B1 office market. Differentiation from the generic B1 office market offer will enable the centre to achieve the rents and occupancy levels required for long term financial sustainability of the facility. Differentiation should be sought through flexible leases, strong wrap around business support offer and high quality space that is conductive to collaboration and joint working.

It is recommended, on the basis of the evidence of demand, to complete the Full Business Case and Full ERDF submission with a view to securing capital to build an effective Boho Five facility to cater for the needs of the burgeoning digital sector in Middlesbrough and wider Tees Valley. The success of negotiations to secure an operator and clear procurement and any State aid hurdles during the business planning and RIBA Stage D submission is of vital importance. It will be important for consideration to be given by the project partners and potential parties to addressing the on-going sustainability of Boho Five, beyond the design and build phases and this will be developed further by the full business case work and detailed design.

The following section utilises the findings of the market assessment to shape a proposition to feed into the development of the full business case and detailed design work.



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6 Outline Development Proposition

6.1 Introduction This section utilises the findings of the market assessment to develop an outline development proposition in terms of the size, shape and form of the building for Boho Five. The outline development proposition is intended to be indicative only with its purpose being to provide a robust starting point for the design work and full business case.

Based on the demand analysis, it is our view that the overarching vision for Boho Five should be:

The following sub-sections provide specific recommendations on the scale and configuration of the building.

6.2 Facility scale and configuration The scale and configuration of the building is important in enabling the building to respond to market demand and in underpinning the financial sustainability of its operation in the long term.

The following recommendations are made:

• Boho Five should offer a quality of image and setting appropriate for the digital sector – demonstrating innovative use of layout, materials and setting;

• Spaces should be designed in a way that fosters increased interaction and collaboration between occupiers;

• Dedicated office units should provide flexibility for a firm to alter their floorspace scale easily and with minimum fuss;

• Phase 1 should provide for a combination of start-up space and managed workspace, serviced by meeting spaces that cater for formal and informal interactions. The demand analysis demonstrates that a facility of 2,000 – 2,500 sqm is a reasonable proposition;

• In particular, there is an important balance to be achieved between dedicated private business space, shared space for informal engagement and more formal facilities for meetings, networking and events. A target of 85% of lettable or revenue generating space should be applied; and

• The building should also offer tenants 24hour access (for example, by key fob) and be fully secured.

An innovative building, reflecting its target market of high growth digital firms. A high quality of finish and appropriate range of services and business support will be crucial in its ability to service the distinct niche that exists alongside the existing B1 office market offer in the area.



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6.3 Potential occupiers and size of business A clear target market, both in terms of occupier business activity and business stage is important in shaping the composition of the floorspace and the related wrap around services.

It is recognised that the initial tenants for Boho Five will be dependent on wider market conditions and the specific requirements of individual firms and start-up enterprises at the time when Boho Five is ready for occupation.

Notwithstanding this, the following recommendations are made in respect of maximising the performance of the facility in terms of achieving take-up of space:

• The offer should be differentiated from that of generic B1 office space –which in contrast is characterised by predominantly larger unit sizes and longer term leases – catering for more established firms that are willing to commit to longer leases, both operationally and financially;

• Boho Five should use Boho One as hub with a focus on further space for new start-ups;

• Start-up space should include both hot and dedicated desk space in an open plan format. Managed workspaces should provide for both early start ups of 1-2 people and larger spaces for more mature firms (potentially moving from Boho One following a period of acceleration); and

• Managed workspace units should be highly flexible to enable units to be joined or split. As a starting point however, a mix of units of 25 sqm, 50 sqm and 80 sqm should be set out. Larger units should make up no more than a third of total space.

6.4 Length of tenure The length of tenure offered to tenants is important in determining the status of firms that are attracted to the facility. There is an important balance to be considered between offering a proposition that is attractive to prospective target tenants and one that offers sufficient stability of income for the operation of the facility.

The following recommendations are made in respect of the length of tenure offered by Boho Five:

• The characteristics of the digital industry mean that the use of more short-term flexible inclusive license arrangements is typically used to help drive occupancy – inclusive monthly license agreements, covering all service charge items but excluding rates, some/all utilities, and telephone/broadband. This is particularly the case with smaller units targeted at early start-ups;

• Evidence from similar facilities in the DigitalCity cluster demonstrates the value of much shorter and flexible leases (easy in and out). In addition to the implications for the commitment of funds to leases, SMEs don’t want to commit to long leases as this adversely affects their ability to secure venture capital (due to the effect on their balance sheets). The use of short leases will also be important in differentiating the offer at Boho Five from the general B1 office market; and



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• There is a balance to be appreciated between charging a floorspace only and an all-inclusive rate to occupants of the building. From the perspective of attracting tenants, an all-inclusive rate is far more attractive to SMEs that typically prefer higher levels of certainty in their overhead costs. However, from the perspective of the operator of the centre, an all-inclusive rate will mean exposure to fluctuations in costs, in particular energy. Looking at evidence elsewhere, Boho One has experienced difficulties with all-inclusive rates and rising energy costs.

6.5 Range of services The range of services offered by the building is an important part of the facility’s overall offer to prospective tenants. The services offered and the way in which these are delivered is also a driver of the on-going operational costs of the facility.

The following recommendations are made in respect of services provided at Boho Five:

• Internet connectivity is critical. It is noted that DigitalCity’s Boho One, custom built to cater for the needs of digital businesses, is served by a 100mb internet pipe with each office having moveable power and ethernet floor sockets to cater for dynamic office set up;

• The proximity of the proposed site to the existing cluster at Boho One means that it may be possible to beam an internet connection into the new building therefore reducing capital costs;

• Firms in the digital sector require tailored business advice rather than a generic package. Sector-specific advice delivered by specialist organisations (e.g. DigitalCity) will be needed;

• It would make economic sense for the new incubation and managed workspace to draw its wrap around business support services from the existing resource deployed at Boho One to achieve revenue savings that contribute to the financial sustainability of operations;

• It is our view that the inclusion of a gym or café space would have adverse implications for the operational financial sustainability of the building. A serviced teapoint is a preferable solution;

• Whilst showers/changing rooms and storage for bicycles are often infrequently used in comparable facilities they are important in providing for a range of transport modes. The connection with Middlesbrough College and young target market could support higher than average use; and

• Parking is an important requirement for a building of this type; since the high number of different organisations within the facility generates a greater number of visitors than conventional B1 office with fewer occupiers. A minimum of 50 spaces is recommended.



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6.6 Indicative floorspace composition The demand analysis demonstrates that a facility of 2,000 – 2,500 sqm of lettable space is a reasonable proposition for Phase 1 of Boho Five (comprising of incubation and managed workspace).

Figure 6.1 shows an indicative floorspace composition for Phase 1 that is within this range. This is intended to be illustrative only, in order to provide a starting point for the design work. The operational viability of this space is demonstrated through the headline financial analysis provided in Section 7. The detail should be tested further as part of the full business case however.

Figure 6.1: Summary of development proposition – Phase 1

Core space No. Avg size sq m Total sq m

Start up space (open/semi open) - - 400

Small managed units 24 25 600

Medium managed units 12 50 600

Large managed units 5 80 400

Total managed units 41 1,600

Meeting rooms (flexible) 6 25 150

Total meeting rooms 6 150

Total 2,150

Other service space

Shared networking space Breakout/serviced tea point Entrance lobby Reception/waiting area Changing rooms/shower/WCs Post/copy/admin Store Comms room Parking (min 50 spaces)

Source: Arup.

The floorspace composition of Phase 2 of Boho Five – comprising of ‘move on’ space – should be assessed once Phase 1 has been delivered and activity is embedded.



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7 Indicative Costs and Revenues

7.1 Introduction This section presents the findings of the high level financial analysis which has been undertaken to demonstrate the financial viability of the proposed outline development proposition for Phase 1 of Boho Five.

The analysis can be used to inform more detailed business case work undertaken as the project is progressed.

7.2 Capital cost profile It is expected that the capital costs for Phase 1 of Boho Five will be in order of £3.5m, based on the delivery of similar types of facility elsewhere. This estimate does not take account of potential abnormal costs.

7.3 Funding mix The proposed facility would only be delivered through contribution of funds from the Homes and Communities Agency (HCA) and ERDF. The financial analysis is therefore premised on the capital cost being met from public funds with no requirement to service borrowing incurred to finance capital costs. This would need to be justified on the basis of economic benefits to the local area.

The capital costs have not been subject to a rigorous stress test on ERDF and HCA eligibility and this detail will need to be refined through further work.

Middlesbrough Council is currently constrained in its ability to provide a capital contribution. However, the Council will have a vital role in helping to manage the planning, development and delivery phase to ensure that Boho Five is successfully delivered.

7.4 Target rents and rates The financial projections are based upon each small business paying £178 per square metre in rent (£16.50 per square foot). This is comparable with current charges at the Boho 1 facility. It is assumed that ICT and telecons will be charged separately, according to bandwidth requirements and use. Utilities will also be billed separately, although occasionally it may prove to be more efficient to wrap this into a small service charge and provide an all-inclusive price, this can be tested further during the full business planning work.

The start-up space income is also modelled based on Boho 1 which has two categories of membership: hot desk access and dedicated desk access. Hot desk access membership cost £50 per month and dedicated desk access cost £75 per month; these costs are used in these financial projections.

It should be noted that, if the Boho Five site is included within the Tees Valley Enterprise Zone, tenants will be exempt from business rates though empty business rates will still be incurred by the operator.



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7.5 Occupancy Profile The occupancy profile is an important driver of the financial projections. It has a particular impact on the rentals achieved and, almost as importantly, reflects the empty property business rates costs which are modelled in the profit and loss.

As can be seen from the Figure 7.1 below, the occupancy rate is modelled as building up over a number of years with Year 10 representing the maximum occupancy profile. The high and low scenarios account for sensitivities.

Figure 7.1: Occupancy Profile

Occupancy rate (% occupied)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

Year 12

Year 13

Year 14

Year 15

High 40% 52% 63% 69% 75% 81% 86% 92% 95% 95% 95% 95% 95% 95% 95%

Central 35% 45% 55% 60% 65% 70% 75% 80% 85% 90% 90% 90% 90% 90% 90%

Low 30% 38% 47% 51% 55% 60% 64% 68% 72% 77% 77% 77% 77% 77% 77%

Source: Arup

7.6 Indicative operating revenue & costs for the outline development proposal (Central case)

The table below summarises the main financial results along with a sensitivity analysis where the case is considered with rental values decreased by 10% and 20% respectively.

Figure 7.2: Overview of 15 Year Financial Performance

Central case Central case -10% rent

Central case -20% rent

Average annual income £270,000 £249,000 £228,000

Average annual costs £198,000 £198,000 £198,000

Breakeven point (annual basis)

Year 3 (£3k) Year 4 (£4k) Year 5 (£2k)

Breakeven occupancy rate 55% 60% 65%

Maximum year end cumulative loss

£90,000 £125,000 £176,000

Cumulative breakeven point

Year 6 (£31k) Year 8 (£61k) Year 10 (£63k)

Maximum annual loss £57,000 £67,000 £77,000

Total profitability accrued by year 15

£1.1 million £0.8 million £0.4 million

Source: Arup

In summary, the maximum loss is accrued in Year 1 at £74,000, this position improves with time as occupancy, and hence rental income, rise and empty business rates decline. By Year 3, at an occupancy rate of 55% with income of £200,000 and costs of £197,000 the facility will breakeven and return a small margin of £3,000.



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The sensitivity analysis shows that with lower rent rates it takes longer to reach the breakeven rate though, perhaps most notably, with rental rates at 20% lower than that of Boho One then Boho Five would be able to breakeven at an occupancy level of 65%. Given the assumptions of the model, it would take a rental rate of just under £120/ sq m for the project to cumulatively breakeven over the 15 year appraisal period.

The following tables profile the operating income and costs of Boho Five over a 15-year period.



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Central Case: Rental Income and Operating Costs Income Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15

Hot desk access membership £8,400 £10,800 £13,200 £14,400 £15,600 £16,800 £18,000 £19,200 £20,400 £21,600 £21,600 £21,600 £21,600 £21,600 £21,600

Dedicated desk access membership

£6,300 £8,100 £9,900 £10,800 £11,700 £12,600 £13,500 £14,400 £15,300 £16,200 £16,200 £16,200 £16,200 £16,200 £16,200

Office space rents - Small office units

£37,297 £47,953 £58,609 £63,938 £69,266 £74,594 £79,922 £85,250 £90,578 £95,906 £95,906 £95,906 £95,906 £95,906 £95,906

Office space rents - Medium office units

£37,297 £47,953 £58,609 £63,938 £69,266 £74,594 £79,922 £85,250 £90,578 £95,906 £95,906 £95,906 £95,906 £95,906 £95,906

Office space rents - Large office units

£24,865 £31,969 £39,073 £42,625 £46,177 £49,729 £53,281 £56,833 £60,386 £63,938 £63,938 £63,938 £63,938 £63,938 £63,938

Meeting space hire £13,388 £17,213 £21,038 £22,950 £24,863 £26,775 £28,688 £30,600 £32,513 £34,425 £34,425 £34,425 £34,425 £34,425 £34,425

Total Income £127,546

£163,988

£200,429

£218,650

£236,871

£255,092

£273,313

£291,534

£309,755

£327,976

£327,976

£327,976

£327,976

£327,976 £327,976



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Central Case: Operating Costs Costs Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15

Building lease (peppercorn)

£100 £100 £100 £100 £100 £100 £100 £100 £100 £100 £100 £100 £100 £100 £100

Utilities and maintenance

£33,863 £43,538 £53,213 £58,050 £62,888 £67,725 £72,563 £77,400 £82,238 £87,075 £87,075 £87,075 £87,075 £87,075 £87,075

Empty Property Business Rate liability

£54,600 £55,440 £45,360 £40,320 £35,280 £30,240 £25,200 £20,160 £15,120 £10,080 £10,080 £10,080 £10,080 £10,080 £10,080

Security / Insurance

£35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000 £35,000

Consumerables £753 £968 £1,183 £1,290 £1,398 £1,505 £1,613 £1,720 £1,828 £1,935 £1,935 £1,935 £1,935 £1,935 £1,935

Staff and expenses

£40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000 £40,000

High speed broadband

£3,010 £3,870 £4,730 £5,160 £5,590 £6,020 £6,450 £6,880 £7,310 £7,740 £7,740 £7,740 £7,740 £7,740 £7,740

Marketing £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000 £10,000

Misc. running costs

£7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500 £7,500

Total Costs £184,825

£196,415

£197,085

£197,420

£197,755

£198,090

£198,425

£198,760

£199,095

£199,430

£199,430

£199,430

£199,430

£199,430 £199,430



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Central Case: Profit/Loss Profit/Loss -

£57,279 -£32,427 £3,344 £21,230 £39,116 £57,002 £74,888 £92,774 £110,66

0 £128,546

£128,546

£128,546

£128,546

£128,546 £128,546

Cumulative Profit/Loss

-£57,279

-£89,706

-£86,362

-£65,131

-£26,015 £30,987 £105,87

5 £198,649

£309,308

£437,854

£566,399

£694,945

£823,490

£952,036

£1,080,581



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8 Economic Benefits

8.1 Introduction This section sets out the analysis of economic impacts from the development of a new incubation and managed workspace and addresses the economic connections and benefits that can flow from achieving grant funding for Boho Five. The outputs and impacts are vital components with any successful case for HCA and European funding of this nature.

8.2 Boho Five embedded within the local economy There are a number of immediate networks which Boho Five is exploring, including mutually beneficial connections with the:

• Digital City Initiative and the evidently successful Boho Zone; The DigitalCity Strategy is set up within the Boho Zone and premised on job creation, private-sector engagement and achieved self-sustainability. The development of Boho Five would align with the thrust of the initiative and seek to provide additional capacity where the greatest demand exists.

• Tees Valley Unlimited and Tees Valley Local Enterprise Partnership; Tees Valley Unlimited advocate the case for reducing displacement of growing firms from the Tees Valley area, through supporting the emerging and fast growing digital sector. Developing connections between the proposed development and Tees Valley Unlimited could further incentivise enterprise; a clear correlation exists between the initiatives imposed within the Zone and the concept of the proposed incubation and managed workspace facility. Therefore, there is a strong logical argument to encourage refinement of the Enterprise Zone boundary to include the digitally-focused, Incubation and Managed Workspace Centre.

• Teesside University and its leading edge provision of digital and enterprise based initiatives. A mutually beneficial relationship could be cultivated between Teesside University and DigitalCity ‘Innovation Fellowships’ and the development of Boho Five; where Teesside University graduates and spin-out companies could be encouraged to take up space as well as a wider package of teaching and training.

• Effective engagement with Middlesbrough Town Centre and existing businesses to ensure that local people are aware of the opportunities to start, grow and expand businesses locally.

• Ensuring high quality connections with Middlesbrough Council and across site owner and operators of the proposed facility.

• In order to maximise the benefits and the direct impacts and outcomes analysed below it will be necessary for all of the project partners to work together as collaboratively as possible for the benefit of the local economy. It is recognised that this is easier to achieve for public sector partners with an active brief to generate economic benefits for Middlesbrough than for private enterprises which may lack time.



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8.3 Middlesbrough and Tees Valley economic benefits

The main economic benefits associated with the development of an Incubation and Managed Workspace Centre include the ability to create new high technology jobs, retain highly-skilled people within Middlesbrough and encourage the development of embryonic businesses.

The development of an Incubation and Managed Workspace Centre could enhance the offer and regenerate the physical fabric of the Middlehaven area of Middlesbrough beyond the clear successes of the Boho Zone and the DigitalCity initiative. The development blends with the objectives of the Middlehaven development framework and could generate even greater integration of the Boho Zone with Middlesbrough centre.

8.4 Economic impact analysis approach In considering the potential economic impacts arising out of the scheme in terms of new jobs created; number of new businesses created; businesses saved, relocated or expanded, the economic impact accounts for the reference case (the deadweight loss of what would happen in the absence of the intervention), leakage of benefits out of the local area and displacement of activity in the Tees Valley.

The economic impact analysis also accounts for income and supply chain multipliers.

8.5 Economic impact results The main economic impact results are set out in Figure 8.1, with the total outputs and net additionality analysis to identify the net impact in the Tees Valley.

Figure 8.1: Overview of Economic Benefits Delivered

Total outputs Net impacts

Number of new SME businesses in the Tees Valley 37 30

Floorspace of R&D premises developed 2,150 -

New jobs in the Tees Valley 144 118

Private sector expenditure on R&D levered £1.7m -

Net increase in GVA as a result of the Programme - £5.0m

Source: Arup

It is clear that the Incubation and Managed Workspace Centre would result in positive economic impacts. These benefits are considerable as these represent peak annual impacts compared to one off capital cost inputs for the main funding agencies (and operational cost considerations for local partners). In summary, the net impact is to create up to118 new local jobs and up to 30 new firms operating in Middlesbrough. The combined economic value is up to £5.0m in GVA per year.

The method underpinning the approach to establishing the net additional impact is set out below.



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8.5.1 Additionality For the purpose of net additionality analysis which is important to identify the scale of extra economic benefits that will be delivered, the following factors have been taking into account in the net additionality modelling.

The reference case accounts for deadweight loss of what would happen in the absence of intervention; this includes for example the amount of home working businesses that are in the early stages of business formation. A factor of 12.5% has been applied within the economic impact modelling. It could be argued that as the prospective site is currently an empty site, that the reference case is zero, it is more accurate to account for firms working elsewhere in the local area.

Leakage of benefits takes into account the amount of workers who will work in the Incubation and Managed Workspace Centre and live outside of the local area, as this facility is focussed on the local market and to collaborate, rather than compete with facilities across the Tees Valley this is modelled as very low at 2.5%.

Displacement of existing activity is higher, as this accounts for the fact that the rationale underpinning some of the motives and driving demand to establish the Incubation and Managed Workspace Centre is that currently there is a need in Middlesbrough for suitable, managed workspace for firms to grow into and expand. Therefore displacement of existing economic activity has been modelled at 20%.

The income and supply chain multiplier has been factored into the economic impact analysis at 1.2, this is based upon the empirical analysis underpinning projects that are generating employment in low demand areas as evidenced in the ‘Additionality Guide’ (English Partnerships, ‘a standard approach to assessing the additional impact of interventions’ 2008).



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9 Conclusions and Recommendations

9.1 Market assessment The findings of the market assessment can be summarised as follows:


• Existing resident firms could provide demand for smaller ‘move on’ space in the future if suitable space is available in close proximity to the existing Boho Zone cluster. Almost 90% of respondents expect to move to or require larger facilities in the next 5 years. Over 85% would consider a facility co-located with the existing Boho Zone as a location;

• If the growth expectations of firms surveyed are realised then demand for ‘grow on’ space will arise from firms currently occupying smaller start up units. These firms could demand either larger managed space or ‘grow on’ space depending on their growth;

• Generally, the quality of the conventional B1 office accommodation in the area is poor. In total there is about 315,000 sq ft available, much of it is relatively low quality but with better quality rents in the range of £7.50 - £10.00 per sq ft;

• Generally new office rents will need to be about £18.00 per sq ft to make it profitable for development to go ahead but this will not happen unless there is a bespoke demand from an occupier. Thus no speculative office space will be built because of the financial constraints on lending;

• Lettings which have taken place in 2012 in the Middlesbrough office sector have been very low. Larger lettings that have taken place have either been at Lingfield Point, Hartlepool Marina or Wynyard Business Park.

• The rationale for developing Boho Five arises because of the need to have special space which can meet the occupiers’ needs and establish the right circumstance in which to create innovative activity. Much of the available space is not suitable for that purpose or is such a poor condition as to be unattractive and un-lettable.

• Notwithstanding the viability level of about £18.00 per sq ft to make building cost effective, the market rent in Middlesbrough is going to be no better than about £8.00 per sq ft for new build or refurbished space. This refers to a conventional B1 office offer however; and

• Boho One achieves a rent of around £16.50 per sq ft, including a service charge. This premium is achieved through provision of a distinct offer, in terms of both the building and associated sector specific business support activity.



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9.2 Outline development proposition The findings of the market assessment have been used to develop an outline development proposition in terms of the size, shape and form of the building for Boho Five.

Based on the demand analysis, it is our view that the overarching vision for Boho Five should be:

An innovative building, reflecting its target market of high growth digital firms. A high quality of finish and appropriate range of services and business support will be crucial in its ability to service the distinct niche that exists alongside the existing B1 office market offer in the area.

The demand analysis demonstrates that a facility of 2,000 – 2,500 sqm of lettable space is a reasonable proposition for Phase 1 of Boho Five (comprising of incubation and managed workspace). An indicative floorspace composition for Phase 1 that is within this range has been presented in Section 6, the operational viability of which has been demonstrated through the headline financial analysis provided in Section 7. This is intended to be illustrative only, in order to provide a starting point for the design work.

The floorspace composition of Phase 2 of Boho Five – comprising of ‘move on’ space – should be assessed once Phase 1 has been delivered and activity is embedded.

9.3 Recommended next steps It is recommended, on the basis of the evidence of demand, to complete the Full Business Case and Full ERDF submission with a view to securing capital to build an effective Boho Five facility to cater for the needs of the burgeoning digital sector in Middlesbrough and wider Tees Valley. The success of negotiations to secure an operator and clear procurement and any State aid hurdles during the business planning and RIBA Stage D submission is of vital importance. It will be important for consideration to be given by the project partners and potential parties to addressing the on-going sustainability of Boho Five, beyond the design and build phases and this will be developed further by the full business case work and detailed design.

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