PROPERTY TECH: Tech startups are turning their backs in droves on unaffordable, inflexible five-year leases in favour of more short-term options. Jonathan Rosenblatt, operating in the new business space, offers his perspective.
One of the resounding themes coming from TechCityInsider’s recent podcast on developments in prop-tech was of a UK property sector that was old, traditional and ripe for disruption by the tech sector. The gradual move towards online transactions, particularly in areas such as residential property, clearly creates an opportunity to shake up the market.
As someone working in commercial property, there are some interesting parallels to be drawn between this and how the tech boom is impacting another segment of the UK’s property market: office space. What’s interesting is that it’s not necessarily e-commerce that is impacting upon the sector. Rather, it is the specific needs, outlook and demographic of a booming tech sector that is largely young, entrepreneurial and, to an extent, speculative.
Tech startups tend to have very specific needs in terms of property. Growth expectations are high – tech sector growth and recruitment is outstripping that of the UK private sector average – and founders often cannot predict whether their business will employ five or 200 people over the course of a year. This is largely at odds with how the commercial property sector traditionally approaches the leasing of office space.
Office space is traditionally let on a five-year lease for a specific demise with very stringent parameters. This means that the square footage that they have at their disposal needs to be appropriate for the five years that the tenant is in situ, irrespective of business’ expansion or contraction.
And it’s the tenants who have to spend a lot of money fitting out and redecorating the space to a level that complements their business – something often ignored by SMEs low on disposable capital.
So what’s changing?
For starters, this newer breed of tech tenant wants space that matches their brand. Fresh, modern spaces that allow for flexible working and not restrained to a desk. Designer couches, ping-pong tables and fully loaded chocolate cupboards are now commonplace in offices. Employee satisfaction – beyond salaries – at work is a key driver for tech businesses. That makes the workplace environment all the more important.
Google’s California HQ is the obvious and most famous example of this environment: volleyball courts, cafes, snack kitchens, bowling alleys and even swimming pools all feature. The same approach is being taken in the development of its new King’s Cross home.
But these sorts of fit outs are expensive and most landlords are not keen on the high-end speculative outlay (for obvious reasons), preferring to leave the investment in their property to the tenant. New businesses are, of course, rarely able to offer the sort of initial capital expenditure that’s needed – so there’s an increasing emphasis on workspace providers to meet these goals.
We’re already seeing this in the raft of co-working spaces popping up across the city in trendy warehouse conversions, and this approach is beginning to make its way into the serviced office arena – favoured by tenants who don’t necessarily want to share space and potentially confidential information with other co-workers.
From my own experience, this is something that was very much front of mind when developing Headspace – we actually used an interior designer better known for working with high-end bars and restaurants than working spaces, to ensure that these factors were central to our design.
Flexibility is also increasingly important. While most landlords, and in particular institutional landlords, are continuing to operate within the parameters of a very tired and antiquated leasing model, tenants are increasingly voting with their feet. Indeed, recent research from Citibase found that more than 90% of SME owners and directors surveyed said they would only agree to sign tenancy terms between six months and three years.
It is within this context that we are seeing more and more flexible working spaces pop up; spaces with short-terms leases, which on one hand offer the privacy and exclusivity of the traditional office leasing model, but with the flexibility and style of the co-working spaces that are so popular with freelancers and individuals.
There is clearly a demand for this model and we have seen this first hand at Headspace Group. We were 100% occupied within four months of launching and are now busy expanding the operation.
What is clear is that, as a result of the tech sector’s rapid growth, attitudes towards commercial property are changing. This presents both challenges and opportunities for property developers and commercial landlords. Those who can develop an offering that resonates with the market will no doubt benefit as a result.
Jonathan Rosenblatt is managing director of Headspace Group, a flexible tech and creative working space in London’s Farringdon.