Tech start-ups tend to have very specific property needs. Growth expectations are high – tech companies outstrip the UK private sector average and employee recruitment among tech firms is exceeding the UK average – yet these businesses are invariably young, entrepreneurial and, to an extent, speculative at launch. This tends to mean that founders often cannot predict whether their business will employ two people or 200 people over the course of a year.
The issue with this is that the commercial property sector has so far struggled to keep up with the demand of its new, energetic and expansive tenants. Traditionally, office space is let on a five-year lease for a specific demise with very stringent parameters. Tenants are expected to spend a large amount of capital fitting out and redecorating the space to a level that complements their business.
The market is, however, starting to adapt. Coworking spaces, particularly in and around London’s “City Fringe” and Shoreditch, are increasingly popular and cost-effective and they are not in short supply. These, however, will only cater for a start up, and once a business reaches more than four or five people, most businesses do not want to be sharing space and potentially confidential information with a nosy neighbour. Incubator spaces are widely available too, but often these are predicated on the business matching up the criteria required by the space owners, or even a stake of business equity being forfeited.
The option for a business is to either commit to a lengthy and onerous lease, or to take a dry, old-fashioned serviced office space, which rarely matches up to the image that a young tech business wants to portray.
So, the quandary for the TMT sector is that the property market is struggling to cater for their needs. Traditional landlords, and in particular institutional landlords, are not thinking outside the parameters of a very tired and antiquated leasing model. Leases are by their very nature inflexible, and tenants today require, first and foremost, flexibility.
It is within this context that we are seeing more and more flexible working spaces pop up; spaces 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 proving to be so popular with freelancers and individuals. There is clearly a demand for this model and we have seen this first hand at the Headspace Group. Recently, a tenant – a rapidly growing online business – joined with seven people, with space to grow for up to 15. Their projected growth suddenly shot up, and now they require space for 30 people, which they have just moved into. Indeed, in the three months since launching we are 80 per cent full and our tenants are exclusively TMT companies.
What is clear is that, as a result of the TMT sector’s rapid growth, attitudes towards commercial property are changing and this presents both challenges and opportunities for property developers and commercial landlords. Those who develop an offering that resonates with the market will no doubt benefit as a result.
Jonathan Rosenblatt is Managing Director of the Headspace Group.