Good to grow - how landlords are capitalising on TMT boom

3rd June 2016

Innovative firms are offering bespoke, adaptable space for young companies with changing space requirements.

The London office market has always had a healthy representation of tech and media (T&M) occupiers. But over the past few years, some parts of the capital have started to resemble Silicon Valley thanks to the influx of T&M companies, particularly start-ups.

According to research published by JLL in April, there are 45,000 more tech businesses in London now than there were four years ago – which means the equivalent of one new tech company has been created every hour since 2012. This start-up boom has been great news for landlords.

JLL’s figures show that between 2013 and 2015, T&M companies leased a whopping 7.9m sq ft of London office space – nearly double the amount of space taken by T&M occupiers in the three years to 2012. But there is a flip side to all of this. In the three years to 2015, the amount of space T&M companies signed up for reduced significantly. Media companies took 22% less space on average and tech companies took 44% less space.

This reduction has been driven by the rise of smaller tech companies looking for a smaller office footprint and greater flexibility, both in terms of space and lease lengths. So what do landlords looking to grab a piece of the action need to know about catering for this rapidly growing sector?

In the tech industry, global technology behemoths such as Google and Facebook prefer to occupy campus-style accommodation. Tech start-ups also aspire to work in an environment where there is a sense of community and a spirit of collaboration.

Incubator space
The capital has already seen a growing amount of tech incubator/accelerator office space introduced to the market, in addition to the new generation of co-working space provided by the likes of WeWork to meet this demand.

Now, increasingly landlords are offering – or considering – more campus-style space. One such example is Canary Wharf Group (CWG). It set up Level39 around three years ago on one floor of One Canada Square and the initiative has been so successful that it has been rolled out to two further floors, with around 200 start-ups currently occupying around 80,000 sq ft.

Plans are also afoot to deliver a 110,000 sq ft fintech incubator space in Wood Wharf. John Garwood, group company secretary at CWG, says that the company initially launched the space in an attempt to diversify the occupier base at Canary Wharf, which has traditionally been seen as a home for financial services companies.

But he admits that even he has been surprised by how successful it has been at attracting tech occupiers that would not have had the Wharf on their radar a few years ago. He believes the secret of its success is the campus ethos it embodies.

“What it offers is a community, a community where you can start out as a little idea and grow into a company,” he elaborates. “As your company grows you can go through the different layers of facility that we offer and end up with an office space.”

These layers feature a range of different options including hot-desking or fixed desks, with prices starting at £325 a month for a hotdesk membership. “Flexibility is key with young start-ups,” explains Garwood.

“They can’t commit to long leases because they don’t know what the future is going to hold. As a landlord, we can offer them a smooth transition from one bit of space to another so that they can grow at Canary Wharf.”

The Shoreditch effect
Office space at Level39 is very unlike space in the rest of the group’s estate. The developer set out to create “funkier” interiors to attract tech occupiers, making the space more akin to something you would find in Shoreditch than Canary Wharf.

“As a landlord, just like a tailor, we have to offer a bespoke service,” says Garwood. “You have to adjust your product to meet the aspiration of occupiers.”

Serviced office provider TCN is trying to do exactly that at Piano House – a 40,000 sq ft Victorian warehouse in Brixton. Piano House is billed as a creative hub that offers a range of options from single desk in a co-working environment to growth space and larger, more traditionally sized offices.

“For the past 10 years, demand in Brixton has been predominantly for space for two to 10 people, with less demand for spaces of more than 2,000 sq ft,” says Richard Pearce, chief executive officer at TCN.

“As the tech revolution has taken hold in the last two years, demand has been for larger spaces for growth companies. “We believe this is down to the changes in working trends driven by tech, along with the expense of central London offices, lack of suitable size and the style of space.”

At Piano House, TCN has introduced break-out spaces, a café and restaurant facilities, and is also offering tenants the chance to get involved in events and collaborative opportunities that enable them to network and grow as businesses, says Pearce. This type of offer is something that Rachel Francis-Lang, real estate partner at law firm Lewis Silkin, expects to see more landlords providing in the future.

“The tech, media and creative sectors have been the real trailblazers in terms of flexible working arrangements and finding new ways to utilise space,” she says. “Landlords and occupiers are now beginning to tap into what’s already a dynamic market. The institutional landlords are becoming more relaxed too and are often offering specific terms for desk lets in leases from the outset.

This is providing greater peace of mind to occupiers who are looking for ways to utilise their spare space as they become more agile themselves.” Fergal Walsh, principal at Gensler, agrees that landlords are becoming more flexible in their approach and opening their doors to a greater number of tech occupiers.

“A significant tranche of occupier leases that were signed in the 1980s are now coming to a conclusion, and landlords across London are recognising the opportunity to update and repurpose their buildings specifically as tech incubators,” says Walsh.

“The primary modifications, however, are most evident in the lobby areas and the perceptible presence of security. Occupiers don’t want a hostile security guard in the reception area, which has initiated a transition towards a concierge desk to greet and direct visitors.”

Worth the investment
While this may require a level of investment from landlords, what they get in return more than justifies the outlay, according to Richard Howard, head of emerging London at Cushman & Wakefield.

“There is always a slight mismatch because landlords want long leases and strong covenants and these guys don’t offer that, but what they do offer is a dynamic workforce coming into the space,” he says. That’s why a growing number of landlords are starting to look at providing some element of flexible workspace within their schemes, says Shaun Simons, director in the city fringe team at Colliers International.

“We encourage landlords to put serviced office or co-working businesses into their buildings,” says Simons. “If you’ve got 10 floors in a building, it’s seen as a positive among tenants to have serviced office or co-working space because that gives tenants growth space within a building.

“It’s those buildings that are providing a campus environment that are often getting more traction than those that aren’t, because tenants large and small want to be part of the same community. Tenant behaviour has changed and as a result buildings have had to adapt. Everyone is trying to do the same thing, but the buildings that are the most authentic are the most successful.”

As such, T&M companies are not looking for your conventional office fit-out. They are after ‘cooler’ interiors, lots of break-out areas, opportunities to collaborate with other occupiers, as well as added extras such as educational events or health and fitness classes. It is not just a case of setting aside a floor in a building where you are going to offer occupiers more flexible terms. Not as simple as it seems

“From what I’ve gathered there are landlords interested in how they might offer this kind of space, but it’s not as simple as it might seem to run one of these spaces,” says James Nicholson, who leads Knight Frank’s central London tech and creative team.

“What you have to do is provide an environment that goes beyond just straightforward flexible desk space.” Landlords that are able to get their heads around the demands of the T&M sector will be well placed to cash in on further projected strong take-up from T&M occupiers going forward, with a number of businesses expected to grow their footprint.

In BNP Paribas’ Media Tech London Survey – published in February 2015 – 40% of participants said they were looking to take additional floor space in the next three years. Of those looking to increase their floor space, the average increase was expected to be 53%.

BNP Paribas estimates that this represents around 2.8m sq ft just for media and tech companies in London alone by the end of 2017. There is talk that the tech bubble is about to burst, which would inevitably have an impact on the future office requirements of tech occupiers.

But in the meantime there is a huge opportunity for landlords that offer the right type of space and the right level of flexibility to cash in on the rapidly growing tech sector.

 If you are looking for office space please call Gryphon Property Partners on 0203 440 9800 or click on the following link - Office space