Traditional landlords challenged by tech companies' office needs

London's booming tech and creative economy is changing the way that people in the capital work - and that poses a challenge for its biggest office landlords.

Tech, media and the creative industries have become the fastest-growing sectors in the past half-decade, but there is increasing evidence that these young, innovative companies do not want to occupy the glossy high-rise towers that have come to dominate the City and Docklands.

They also find it hard to commit to the 15 to 20-year leases which are standard in the property industry.

Instead they have turned to landlords that offer flexible office space in former warehouses, factories and industrial buildings in cheaper locations such as the South Bank, Farringdon and to the east of the City.

Hubble is one example. It runs a marketplace matching businesses seeking small amounts of space on short-term flexible contracts with companies who have spare space to sublet.

Its founder Tushar Agarwal says he was inspired to launch the company after seeing how hard his friends found it to secure space for their start-ups.

"Start-ups are very bad potential occupiers for traditional landlords," he says. "Business life cycles are getting shorter, so it becomes harder for companies to commit to long leases."

Companies such as Hubble and WeWork - a New York-based co-working space provider which has opened a branch in Clerkenwell - are tapping into small companies' desire to cluster without committing to long leases.

One of the biggest winners has been FTSE 250-listed Workspace, formerly an owner of small industrial estates, which has transformed its portfolio over the past decade.

More than 95 per cent of its tenants are now tech businesses. Two years ago it launched Club Workspace, which offers individual memberships giving access to shared office spaces scattered across London, like a chain of private members' clubs.

Angus Boag, development director of Workspace, says: "A lot of these businesses trade with each other and there is a lot of information exchanged between them."

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"Some financial services firms are realising they are losing staff to TMT companies and asking how they can compete with that," says Paul Bennett, an associate director at property advisers Savills. "TMT has really changed the way other sectors work, now they've got to do something more fun."

A report published this month by the City of London Corporation and the City Property Association found that "agile" working - flexible hours, working away from the office and sharing desks and informal social spaces from in-house coffee bars to breakout areas with casual seating - is becoming the norm.

Mr Bennett cites examples of companies installing indoor climbing walls, sports courts or allowing cycling indoors, as well as gourmet coffee shops, libraries and quiet zones.

Workspace holds talks, presentations and social events, and gets to know its tenants better than most commercial property landlords do.

"When you are a big landlord with a big tenant, you might only need to talk to them every five years when you come along and do a rent review," Mr Boag says. "So perhaps you don't understand how their needs are changing. We talk to our tenants every day and have to be as flexible as they are."

Not all landlords have caught up with this, though. "There is a real drive from occupiers to keep things as flexible as possible, but most landlords still want long lease terms," says Mr Bennett.

<>Bridging the gap are serviced office providers, which for the first time late last year beca*me the biggest leasers of new space in the City, taking up 17 per cent of all new lettings in the final quarter of 2014, according to BNP Paribas.

"Serviced offices are the main way the property industry is coping with the change in the way companies work," Mr Agarwal says.

The trend has become a boon for landlords. Some of London's biggest new buildings have let space to flexible office providers. Cheesegrater owner British Land recently let its 30th floor to Servcorp, an Australian serviced office company.

Europe's tallest building, the Shard, contains two floors of serviced office space rented by the Office Group.

Research published this month by office brokers Instant found that serviced office providers are one of the quickest-growing groups of tenants, with new lettings up more than 10 per cent year-on-year.

"We are seeing the sector become a viable alternative to the conventional model for commercial property," says Tim Rodber, Instant chief executive.

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