Choosing where to set up shop is a difficult decision for any business. For tech firms and start-ups, the answer to this question has, for many years, been London’s East End. With ample provision of shared offices, co-working, incubator or accelerator spaces, many of which are available on flexible leases, it is easy to understand why many smaller firms are eager to call places like Shoreditch and Old Street, home.
As firms scale up, growing in size and confidence, their demands for office space, and what that space needs to do, change. As such, growing firms are now looking beyond their traditional homes and further afield to pastures news. But if not Shoreditch, with its converted warehouses and Victorian streets, then where?
As it turns out, many growing tech firms are swapping their East End roots for prime City locations as they start to scale up. At the end of last year, for instance, Deliveroo opened new offices in Cannon Street and Amazon, meanwhile, will shortly be calling Liverpool Street Home with circa 500,000 sq ft of offices.
The fact is, as tech firms scale up, transforming into more mature businesses, their labour requirements change. Business worth millions, or even billions, need more than a handful of coders and developers. Rather, they need a diverse range of new staff, including in-house lawyers, communications experts, accountants and HR consultants. Growing businesses need to align themselves with new staff that have traditionally called the City ‘home’, as well as ensuring that their offices have a large enough footplate to house them. Places like Shoreditch and Old Street, have few buildings that can offer the kind of space required. The City, meanwhile, with its high level of base build specification, supply pipeline and ever increasing restaurant and retail offering is well positioned to attract an entirely new audience.
In addition, and somewhat surprisingly, internet speeds in Shoreditch are notoriously bad and power is an increasing issue. The City’s recent focus on improving internet speed therefore offers welcome relief for tech firms for whom reliable connections are crucial.
Technology is proving a disruptor to even the most traditional of industries and the techies are working ever more closely with existing City firms, so on one level, tech companies are simply moving towards their customers. We only need to look at the use of blockchain by insurers, the number of banks with plans to offer robo-advice, and the use of Artificial Intelligence in the legal industry to appreciate this.
Prime rent costs, which help make real estate typically the second largest operational expense after labour costs, are also one of the factors contributing to this trend. JLL’s data for the last quarter of 2016 show that rents in Shoreditch, at £70 per sq ft, are now higher than those in the City Central submarket. From April 2017 the business rates revaluation will further increase occupational costs significantly - rates could rise from £12 per sq ft to as much as £28 per sq ft - comparable to the best space in the central City area. Put simply, increasing rent is eroding the cost advantage of being based in East London.
It’s also not just the City’s proximity to clients and rents that are an attraction. At a more human level, for the majority of employees who will travel in to work via public transport, the City offers quicker transport to a wider range of areas and access to a number of tube lines, overground and bus routes. The arrival of Crossrail into Liverpool Street in 2018 will also open up the area with faster connections from across London.
With all these factors taken into consideration, it’s no surprise that those tech firms who are scaling up are attracted to the City as a new location for their business.
This article was cowritten by Matthijs Weeink, Director and Head of Business Location Consulting at JLL.