London, the tech sector and real estate: Four key themes in London’s occupational market today
While recently researching for a project entitled ‘Future Gazing’, I was struck by the wisdom of a quote from Bill Gates. The Microsoft co-founder maintains that “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” This is prescient when assessing the recent evolution of the London office market.
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What a difference ten years make
Just think back over the last ten years; a period that commenced with the global financial crisis (GFC) and even greater trepidation in the market. At the time, I was constantly fielding the question ‘when will the market return to normal?’. The hopeful inference therein was that huge market disruption emerging from the GFC would be short-lived.
The answer, as it transpires, was that it would not be. What constituted ‘normal’ was steadily, and sometimes subtly, redefined over the remainder of the decade. The size and shape of the London market; the volume and nature of the physical space developed within it; the tenant mix occupying that space; and the terms on which that space is occupied have all been fundamentally altered. Rather than reverting to type, the market adapted.
The market had to adapt because its most essential component – the occupier – was itself needing to respond to a range of pressures. As the post-GFC operating environment became characterised by lower economic growth, the transformational impact of technology, a digital revolution which changed the route to market forever, and an associated shift in businesses’ talent requirements, the role of real estate became redefined.
It is telling of the period that it was the emergent tech giants - Microsoft, Google, Apple, Amazon and Facebook - who led this process of redefinition. In the spirit of the Gates quote, it was an incremental but significant change.
The giants gravitated towards cities and particularly towards London; they utilised technology to change work styles and working practices; transformed the layout and fit-out of the workplace to support those work styles and raise workplace satisfaction; and, critically, in so doing influenced and inspired the real estate strategies of occupiers drawn from across all other industry sectors.
The four key themes in the occupational market today
This influence cannot be underestimated. As well as being the dominant source of occupational demand in London today, the new orthodoxies introduced by tech occupiers have been actively mirrored by lawyers, accountancy practices, media firms and banks – in fact by all businesses being reshaped by technological disruption. In this sense, London’s occupational market has four key themes running through it today.
1. Real estate underpins strategy
Real estate is now firmly viewed as a strategic device. Rather than a simple factor of production, the right office supports operational and cultural transformation within a business. It contributes to talent management strategies, supporting headcount growth and staff retention. It facilitates and drives new working cultures.
It increasingly embodies and promotes brand values. Yet this strategic role for real estate is not without problem. The inherent uncertainty, together with the sheer scale and speed of change within the operating environment, means that business planning horizons are becoming ever shorter.
For many businesses, looking out two to three years from today is near impossible. This is problematic in a real estate market where, although reducing, average Central London lease lengths stand at over seven years. Little wonder therefore that occupiers today demand greater flexibility and optionality within leases.
It used to be the case that the premium placed on lease flexibility was too great a cost for the occupier to bear. Today the true cost of not having such flexibility could well be terminal to a business. What is more the balanced nature of today’s Central London market means that flexibility is available at lower cost to the occupier, as pragmatism shapes landlord behaviour.
2. An innovative imperative
Business success, if not business survival, is now entirely dependent upon adopting and applying new technologies to drive efficiency, productivity, open up new markets or create new product offerings.
As a result, an innovation imperative is at work which is directly impacting on the function, use, design and even location of space. A key trend has been the emergence of innovation hubs across a range of industry sectors.
These can be entirely ring-fenced within an organisation but are increasingly open, collaborative environments that seek to generate tie-ups between corporate occupiers and innovative start-ups or suppliers. No longer is the office about housing row upon row of staff administering email. Instead, it is about creating and innovating in collaboration.
"Tech giants influence and inspire the real estate strategies of occupiers drawn from across all other industry sectors"
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3. Occupier mobility continues
In seeking both strategic transformation and greater innovation, occupiers are showing increased levels of mobility across the London market. This is a trend we have highlighted over the last two years, but one that shows no sign of abating.
There are a number of factors at work. Key is the need for occupiers to tap into talent pools that are capable of supporting business transformation. Unsurprisingly we have seen growing interest in locations that benefit from transport infrastructure improvements, and which therefore increase the catchment from which labour can be drawn – three of the five best-performing submarkets since 2007 are those surrounding Crossrail stations.
Similarly, we now see occupiers proactively seeking locations that are supported by an innovative, academic infrastructure. While reduced new supply in the London market has influenced this mobility, the push for staff access is undoubtedly the principal driver.
Source: Knight Frank Research
4. Coworking expands and evolves
An undeniable trend is increased interest in new occupational models. The market has witnessed the astonishing growth of coworking and this is an area of the market that is evolving rapidly. Once the domain of small start-up companies, coworking is now a solution to the needs of larger occupiers or, in popular parlance, enterprises.
Yet often what is missed in assessments of the coworking phenomenon is what we believe is its most important attribute. Coworking has shifted the supply of real estate from being product to service based. Space as a service is now also part of the lexicon of the London market.
More importantly, it taps entirely into the needs of the modern occupier to be housed within well serviced space that creates a positive experience and a sense of community, with a level of service and attention that is consistent irrespective of the amount of space occupied. Coworking operators recognise the occupier as the customer and serve them accordingly with high quality service.
What does this mean for the market going forwards?
Clearly, the London office market will continue to evolve. There will be much talk of more revolutionary times in the next 24 months. Brexit will continue to dominate the headlines and will eventually lead to tangible changes in the operating environment. Lease accounting will also change and focus occupier attention on the financial impacts of their portfolios.
Critically, the next wave of technology will hit business. Robotics, AI, and the Internet of Things will all challenge business processes and structures. Once again, their true impact is unlikely to be revolutionary in the short-term but will be huge over the longer-term. As that impact becomes evident, the basis of occupier decision making will change forever.
The key implication of this for occupiers and investors alike can be found in the very next line of that Gates’ quote; “Don’t be lulled into inaction”.
Source: Knight Frank Research
The Central London office market is currently undergoing a period of significant change – but with big change comes great opportunity. Our latest report provides occupiers and investors with thoughts and guidance for the year ahead as the Central London office market continues to shift.