Trendy tech companies and young start-ups have traditionally sought office space in fashionable east London locations like Shoreditch. In fact, our research has shown that between 2013 and 2016, for every 1 sq ft of floor space given up by tech and media companies in these areas, 8 sq ft of additional floor space was leased to such companies.
However, once firms move beyond the start-up phase, and have a stable income, they might begin looking to scale-up and expand. And once they do, their demand for office space, and what that space can do, changes, too.
Those tech companies that are scaling up often grow beyond their Shoreditch roots. At the end of last year, Deliveroo announced new offices near Cannon Street and Amazon will shortly be calling Liverpool Street home with over 500,000 sq ft of office space. Over the last few years, prime rents in Shoreditch have more than doubled and are now higher than those in the City. In April, the business rates revaluation will further increase occupational costs significantly. However, rising costs only partly explain the movement of the techies.
Of course, we can’t talk about office location decisions without factoring in rent. One of the most important drivers of strategic decision making is financial. Given that real estate is typically the second largest operational expense following labour costs, this is obvious. East London locations had previously been attractive due to lower rents, but over the last few years, the increase in popularity of the areas surrounding Old Street and Shoreditch has pushed up commercial rents to match, and in some cases exceed the rents in the City.
Changes to business rates from 1 April will further increase the cost of businesses renting around Shoreditch eroding the financial incentive to locating here.
As we see many tech firms grow in size and confidence, they are finding the available physical space in East London a restriction. Though few tech firms would be looking for premises like Google’s 863,000 sq ft planned office in King’s Cross, replete with swimming pool and airship docking station, many firms are, nonetheless, outgrowing the available options in east London.
Places like Shoreditch and Clerkenwell, with their converted buildings and Victorian warehouses, simply do not have the floorplate or technical specification to house firms the size of Deliveroo, which recently announced plans to recruit 300 software engineers for its new office.
Scaled up businesses also need to attract a wider variety of staff than start-ups. They need lawyers, accountants, designers, business developers, marketers – this requires not just a bigger office but one that can attract and retain the best talent – and that talent is often used to, and enjoys working in, the City environment.
An additional driver of the migration is the fact that central London is simply better connected than many east London hotspots. Given that many staff will be commuting in from the outskirts of London, or from further afield, good transport link makes it easier to attract and retain this wider staff pool.
What is possibly less well known is that the City not only has better transport connections, but internet connectivity, too. Shoreditch, for instance, has notoriously poor internet connectivity, a particular problem for tech firms. At a time when technological development and the rise of Internet of Things play an increasingly important role in day-to-day businesses operations, it is particularly important that tech firms that are scaling up have internet speeds that will not put a chokehold on further growth.
Bolstered by increased confidence, and driven, in part, by impressive growth, tech companies looking to scale up are on the move. With the financial impetus of being based in east London becoming less of a factor, they are waking up to the advantages provided by the City. These tech firms will soon be invading the bankers’ turf.