Co-work spaces at risk from rising property prices

The cost of renting office space in many central business districts around the world is out of reach for many small- and medium-sized enterprises which, coupled with a shift in work patterns, has given rise to a boom in flexible alternatives such as co-working venues. However, many are housed in properties with short-term (two- to five-year) leases meaning landlords can raise rents in line with new market highs when leases come up for renewal, as evidenced recently in London’s Shoreditch.

The traditional notion of the “office” is changing dramatically. And although there are shifts around their actual design, the most dramatic change is cost.

The cost of renting office space in many central business districts around the world is now so high that it has for a long time been out of reach for many small and medium-sized enterprises (SMEs). Knight Frank’s recently released Global Cities 2016 report shows that rents can range from approximately $33.50 (£22.00) per square foot per year in Seoul, to an eye watering $255 (£165) square foot per year in Hong Kong – by far the most expensive city to rent an office in the world.

These figures have all sorts of negative implications for those early to mid-stage businesses that benefit from being physically located in the centre of cities, resulting in them either moving or starting up elsewhere. This is concerning given how important SMEs are to the overall economic health of contemporary cities.

The onset of the digital revolution began to disrupt the office market in the early 2000s, encouraging the growth of new types of working patterns, new career trajectories, and practices. A year-on-year increase in the number of freelancers, consultants, or those working from project to project, has amplified the demand for work space that is more flexible than the traditional office environment and infrastructure provides.

This has coincided with the rise of more “creative” career trajectories that also rely on this type of flexibility: artists and designer-makers, but also software developers, graphic designers, and more.

Into the hub

The new type of flexible work spaces they require have been on the rise for some years, and goes by a number of different names: co-working spaces, incubators, flexible work space, open workspace or hubs.

These new work spaces act as hubs for these workers from non-related sectors and firms who come together to share the same environment. To work they must be affordable (especially for early to mid-stage workers, consultants and startups), and close to centres of sector-specific activity (usually city centres or creative quarters). They also need to have flexible rental arrangements, and to provide amenities that keep flexible workers returning: this can be provided through the immediate urban environment (think Shoreditch in London or Wicker Park in Chicago), or through the building itself (as in a café or bar or other type of amenity).

They work by charging a monthly rate for desk rental or for open work space (including the provision of wifi and sometimes a land line). This creates an economies of scale, thereby offsetting the price of the larger space by subletting. They also work on a flexible membership basis, with flexible contracts allowing people to leave with short notice.

Many of these spaces, in cities across the globe, offer a variety of services and features to their members. Some curate their members in order to ensure a working environment where collaboration is central. Others gear their space towards startups and early stage businesses, by holding guest talks, seminars, business surgeries, and the provision of machinery for rent. Others still charge exorbitant rates for desk space to create opulent environments ensuring exclusivity.

Whatever the model, these spaces represent a new working landscape in the contemporary urban environment. Many view them as the new engines of economic growth and innovation.

But they are under threat. London is suffering not only from a well-documented, but a not so well-documented workspace crisis, too. This is because the buildings used to house these work spaces are usually rented: the leases usually negotiated are short term (2-5 years) and market driven, or in some cases just below the market average.

The rise in property prices means that, once the time comes to renegotiate a new lease, landlords can raise the prices to new market highs and make a killing. This is especially true of the buildings that are close to the city centre (Shoreditch is a prime example here).

The result is that all the old difficulties of unaffordable office rents are returning to stifle emerging economic activity for SMEs once again. In London, this is threatening the growth of these new types of work space, even as they are enabling a growth in the number of SMEs and startups.

Dr. Tarek Virani is a post Doctoral Research Assistant at Queen Mary, University of London & Creativeworks London.

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