Tim Allen, Julian Woolgar and Patrick Scanlon advise landlords, developers and investors on what attracts technology and creative businesses as occupiers
The current decade, marked by rapid global economic change, has seen technology and creative industries flourish against the backdrop of the financial crisis. The Tech City cluster in London was made up of 15 companies in 2007; today there are an estimated 1,300 (Knight Frank: Global Cities Report 2015).
Growth and opportunities have been delivered in areas outside the central business districts and which were previously considered to be fringe markets. For owners and investors lucky or canny enough to have secured space in these areas at the right time there have been significant rewards: for example, rents in Shoreditch have grown by 54% since 2010.
What commercial and legal factors should landlords, investors and developers consider when deciding how to compete for technology occupiers or draw them to new districts?
Location and clustering
Recruitment and retention of high-value knowledge workers is vital to success in the technology and creative industries and supplying real estate that appeals to these workers delivers competitive advantage. As well as design and fit-out, location is key in property selection. Knowledge workers tend to prefer city locations with good transport links and proximity to a vibrant cultural scene and affordable housing.
Clustering offers early-stage technology businesses a network of project partners, support and marketing opportunities. However, this trend is not universal. Some technology businesses that serve a specific industry are locating to their customer base and away from technology clusters. The concentration of fin-tech businesses in Canary Wharf is a good example of this. Such hybrid businesses offer landlords in these areas a degree of diversification and a flexible secondary occupier market.
Nano cores and collaboration
Developers, landlords and investors are attempting to replicate and improve on the appeal of existing technology and creative areas by creating clusters of mixed-use buildings that are managed and marketed as an estate. Such “nano cores” offer a means by which global funds can be attracted to invest.
However, one of the lessons of the creative economy has been the power and flexibility of smaller-scale collaboration. Smaller landlords and developers wishing to draw technology businesses to new districts should consider grouping together with neighbours to deliver mixed-use estates that appeal to technology and creative businesses. The scope and formality of such collaboration is a matter for negotiation. At one end of the spectrum is a loose commercial understanding between owners; at the other, a legally binding joint venture arrangement controlling letting policy, use, marketing and estate services.
Demand and supply
The appeal of core technology areas such as Shoreditch and Old Street Roundabout has meant that major corporates with an interest in the technology industry have begun to compete for space. A number of these have attempted to ensure that their arrival complements the area and their presence is an advantage to growing technology businesses looking to increase customer scale. However, the purchasing power and requirements of these new arrivals fuels demand for limited stock.
On the supply side, developers looking for debt finance in order to deliver new stock in established technology areas are often required to demonstrate minimum periods of secure income that are not compatible with the lack of covenant strength and need for scalability common to many early to mid-stage technology businesses. This has constrained the supply of new stock despite strong demand. The resulting increase in price point means that early- to mid-stage technology businesses are often forced to consider new areas.
A balancing act
Landlords, developers and investors looking to capitalise on demand from technology and creative industries should start by focusing on delivering the preferences of knowledge workers that drive those sectors and the stage of business that they wish to attract.
Collaborative medium-term projects between neighbouring owners to deliver estates that appeal to tech businesses could be a means by which smaller players can compete with the larger-scale offer of the “nano-core” projects and draw occupiers away from the increasing prices and gentrification of more established areas.
Finally, technology businesses have helped to rebalance the London office market and have supported rents through the downturn. However, the short-term advantage of increased demand offered by this category of occupier should be balanced against the risks that landlords and investors might face if, or perhaps when, the market changes and the current increase in uptake of space in the sector plateaus or begins to fall back.
What influences the demand for space and requirements of landlords?
Early-stage technology businesses
- Sudden changes in business scale can occur which are associated with the success (or otherwise) of pitches, funding rounds, mergers or acquisitions.
- Their demand for flexibility and limited capital mean that traditional tests of covenant strength and lease options do not apply well. However, some could become significant players and landlords may have to re-assess their requirements.
Mid-stage technology businesses
- Landlords are now offering these more stable businesses all-inclusive leases and enhanced in-house services, resulting in a hybrid legal document combining the contractual agreements common to many incubators and a traditional lease.
- Landlords who can offer flexibility on break rights, rights to expand and flexible rights to assign and underlet will have an advantage over those still tied to traditional leasing options. However, flexibility could affect asset value and may be inconsistent with funding requirements.
Large-scale technology businesses
- Businesses at the top end of the sector have their own requirements (including recruitment and retention) that affect building choice, design and layout; but their market position means there is greater flexibility on location and the advantages of clustering are not so relevant.
- The size of requirement can mean that, in the short term, only central business districts have sufficient choice of stock, with the result that some of the largest technology players have been relocating to areas familiar to accountancy, finance and law firms with more standard layouts.
Tim Allen is an associate at Bristows and Julian Woolgar and Patrick Scanlon are partners at Knight Frank
