Start-ups abandon east London as office rents soar

There has been a mass exodus of start-ups from Tech City, East London due to commercial rents reaching similar levels to central London. Prime-grade traditional office space in Shoreditch has risen from £35-£40 sq ft in 2013 to £65 and many start-ups are no longer able to afford the rent. Although the rise in the rent for co-working space in the area has not been as steep (increasing from £285 monthly-per-deck to £350 over the same period), it is still too high for many early-stage tech firms.

Relevance: Regus has one location in Shoreditch where it competes with a number of other serviced office and co-work space providers including WeWork, SOHO Works, Shoreditch Works and Forge & Co.

“I’m not anti-London but it’s just not feasible for us,” says Matthew Twist, founder of Experiently, an online accountancy marketplace based in Liss, Hampshire.

Founded in early 2015, the company was briefly based in Shoreditch before being invited on to an accelerator programme in Newcastle. The decision not to move back to Tech City in September was a no-brainer, given the costs of office space.

“The thought of paying £3,000 a [month for an office] – that’s a hire for us,” says Twist. “When I come to raise another round of investment they’ll look at the burn and they’ll look at how much revenue we’re making and that will heavily impact how much my company is valued at and how much money we can therefore raise.”

Twist isn’t the only entrepreneur to have reached the conclusion that east London is not for him. Exclusive new data from commercial property agent Stirling Ackroyd has found that the number of registered technology companies in the EC1V postcode – Tech City heartland – has dropped by 227 over the last six months, from 2,480 in the second quarter of 2015 to 2,421 in Q3 and 2,253 in Q4, a 10.1% fall over the period.

There are any number of reasons why companies might be leaving the area, but the increasingly high cost of commercial rents almost certainly has something to do with it: what Stirling Ackroyd calls “prime grade-A” office space in Shoreditch is currently being let for £65/sq ft, as opposed to £35-£40/sq ft in 2013.

What started out as an inexpensive and flexible option for startups unable to afford West End rents is becoming out of reach for the very community that championed it in the first place. At the same time, Tech City UK, the body set up by the government in 2010 to foster the tech scene in east London, has expanded its remit to encompass the rest of the country. Whether this is simply a matter of an industry growing up and facing all the usual market pressures that come with that growth, or a pressing problem that needs to be solved, depends on your perspective, but the data is clear.

“Commercial rents are responding to a drastic increase in popularity, which in turn has prompted a struggle to supply enough offices,” says Stirling Ackroyd’s managing director, Andrew Bridges. “Despite seeking to distance itself from corporate central London for so long, Shoreditch is beginning to find itself on a similar pricing path. So some smaller businesses and new startups are being forced to look elsewhere.”

Where they are looking varies hugely. Sam Bruce, co-founder of travel aggregator Much Better Adventures, initially set up a home office for the whole team in a chalet in the French Alps, only moving to London once the company had raised its first round of investment.

“We considered the cost of renting separate flats, office space and commuting and it became clear that London was going to be far too expensive,” he says. “Being here [from the beginning] would have significantly shortened our runway.”

Reshma Sohoni, co-founder of venture capital firm Seedcamp, acknowledges the problem but is optimistic that co-working spaces like WeWork and Runway East, which offer greater flexibility and affordability than the conventional commercial rental market, are helping to plug the gap. “In the early stages you still have loads of options to move up the chain in terms of flexible working,” she says. “It isn’t as much of a crunch.”

Tushar Agarwal, co-founder and CEO of Hubble, a market place for flexible office space, agrees. “Office rents for conventional long-term leases – typically five to 15 years – have definitely increased. However, our data shows that shared office rents – where most startups work – such as sublet office space and co-working, have only risen half as much.”

The rate of increase may be less pronounced for co-working spaces and the like – from £285 monthly-per-deck in December 2013 to £350 in November 2015, according to Agarwal – but that’s still enough to put off some early-stage tech firms.

Even for those startups for whom co-working spaces are the ideal solution early on, scaling up brings challenges. “It is tough to find space that is flexible for them to grow and do it fast,” says Sohoni. “Getting multiple floors of office space within east London – that’s a very big challenge.”

The fact that tech firms are moving out of Shoreditch isn’t necessarily a bad thing, says Gerard Grech, chief executive of Tech City UK. “Rising rents are certainly an issue for startups in east London, but the same can be said across the UK. No doubt that competition for commercial space is a symptom of the UK’s thriving digital sector, but this is inevitable in the competitive marketplace that we are cultivating. The challenge will be to ensure that those that need to base their business in specific locations are not forced out due to property prices.”

Fintech, for example, which stands to benefit from being close to the City, or firms in the biotech sector that tend to cluster around leading academic institutions. For the others, however, perhaps location is less of an issue than it used to be.

Either way, Grech is positive about the potential of co-working spaces to help meet the challenge of rising rents. Ultimately, however, he’s pleased to see digital business clusters taking root outside London and would like to see more tech firms “looking beyond Shoreditch.”

A UK-wide tech landscape is something we can all get behind, but not everyone is so keen to take the focus off the capital. “London has carved out a leading position as a centre of tech but there’s much more to do to ensure we build on this success,” says Labour mayoral candidate Sadiq Khan. “As mayor, I’d use my powers and directly intervene to protect the dwindling workspaces and startup locations for tech and creative companies across London.”

Khan will do this, he says, by promoting the provision of small business premises in housing and commercial developments, and providing affordable live-work units. Conservative candidate Zac Goldsmith, meanwhile, has said in recent interviews that he will require all new major commercial developments to set aside affordable office space, and will set up a “match-making” service to bring together smaller businesses looking to grow with large companies with space and expertise to spare.

Sohoni can’t see the city’s tech star waning any time soon. “Even if you wanted to leave here because of the infrastructure challenges, it’s very attractive to stay,” says Sohoni. “It’s becoming a centre of gravity for talent now and capital is definitely getting concentrated here, to a very large extent. London has more and more to offer.”

The question for the city and the tech community going forwards is, who will be able to take that offer up?

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