Sixty years ago the world’s wealth was leaving big cities and heading to the countryside. There was a legitimate fear that the major global powerhouses were going into decline as the rich made their way out of town for a better quality of life.
But fast-forward several decades and cities are being re-populated. Led by the financial sector until the collapse of Lehman Brothers, the resurgence of the city is now being driven by the Creative Halo.
James Roberts, head of commercial research at Knight Frank, says businesses comprising knowledge workers – the advertising agencies, media companies, architects and of course, tech firms of this world – are now leading the gentrification of our cities.
“These occupiers have always existed in the fringe but they have been growing rapidly over recent years, with many taking on the proportions of big corporates,” says Roberts. “Amazon didn’t exist in London four years ago. Now it has taken a 430,000 sq ft prelet on the City fringe.”
This creative cluster of occupiers is singled out in KF’s Global Cities report, a 48-page tome looking at the future wealth and changing needs and demands of the world’s major cities, as a phenomenon of which the real estate industry needs to be aware.
Creative Halo effect
KF says the Creative Halo has transformed the edge of central business districts from cheap backwaters to the driving force of the post-Lehman city economy. Its growth is leading other businesses to relocate to previously neglected areas, with offices, homes and shops being developed in former industrial districts, effectively building new cities within cities and pushing up both investment values and rents (see table).
Traditionally, a new property cycle begins in the core and spreads outwards, but over the past five years the reverse has started to happen. Since 2010, the City core in London has seen rental increases of 9%. Shoreditch, in the centre of London’s Creative Halo, on the other hand has recorded a 54% growth in rents.
But on a global scale it is San Francisco that is at the forefront of the evolution, says Roberts. It was among the first to see the wealth move out as Silicon Valley blossomed in the 1970s and 1980s. But now the SOMA district downtown is outperforming. The talent that businesses now compete for wants to live near the action and are fed up with being shipped out to Silicon Valley.
The SOMA district now commands rents at a premium even to the city’s financial district.
“Knowledge and creativity are the driving force behind a city’s economy now,” says Roberts.
“People are increasingly choosing to live in town as they want the vibe of the big city. But they can’t afford to live in the core so across the world, people are migrating to the equivalent of London’s Zone 2. They have their social life in the centre and are living in the fringe. New office locations are straddling that.”
The likes of media giant Time Warner and cosmetics company L’Oréal are now competing with the new tech firms for talent. Both companies have signed major prelets at Hudson Yards, a $20bn (£12.2bn) development by Related Companies in a former industrial area of Manhattan, brought to life by the city’s High Line. Both have moved away from exclusive Midtown to this developing part of Manhattan.
Barriers broken down
“The CBD is now becoming the whole centre,” adds Roberts. “The barriers between the core and the fringe are being broken down.”
Even large-scale financial occupiers are leaving the core for trendier, more worker-friendly areas as all corporates fight to attract the best graduates.
In the US, JP Morgan Chase will move some 2,000 staff from its 60-storey 1 Chase Manhattan Plaza tower HQ to the MetroTech Center in Brooklyn by the end of the year. And, in Australia, the regeneration of 54 acres of disused wharves at Barangaroo in Sydney is expanding the CBD west and is attracting major corporates including Westpac, KPMG and PwC.
But what does the evolution of the fringe mean for the core? Will it decline as the creative cluster explodes?
Roberts thinks not, but he says it will change. As creative businesses become ever more corporate and major corporates become ever more creative, the large unit space in the core will survive and continue much as it always has but the smaller offices will become ultra-expensive, ego-driven offices where occupiers will pay double the rents, just for the address.
And what about overcrowding in the fringe? Will the fringe get its own fringe?
“The ripple effect will be up, not out,” says Roberts. “If you are in the very centre, an awful lot of people can commute. As soon as you move out to the equivalent of Zone 3, people are resistant.”
