London’s Coworking Market Is Facing Rapid “Decline”

London-bridge
The Permitted Development Rights from office space to homes is limiting the supply of flexible office space in London.

Yes, you read that right.

Coworking may be booming in towns and cities around the world, complete with corporate occupiers, cash-rich investors and multi-billion dollar valuations. London also has its fair share of coworking spaces and by all accounts, the market appears to be growing healthily.

So what’s the problem?

Flexible workspace in London is failing small businesses and squeezing startups out of the city. Given that coworking was once hailed as the saviour of small businesses and home-based independents, thanks to its community-rich environments and affordable membership schemes, the coworking market in London is failing the very people it set out to champion.

Instead, it seems the market is fast becoming a victim of its own success.

High demand for flexible space in the capital is leading to limited supply, which is exacerbated by a loss of industrial land and conversions under Permitted Development Rights from office space to homes, leading to increasing pressure on affordable workspace and an uplift in workstation costs.

These concerns are made loud and clear by the London Assembly Economy Committee’s new report, ‘Helping SMEs to Thrive’, in which it states:

“The pressure on affordable workspace supply in London is increasing. Sixteen per cent of industrial land was lost over the period 2001-2015. If this trend continues, industrial land stock in London could fall by 33 per cent by 2041. The relaxation of planning rules has also contributed to the decline, especially of traditional office space and particularly in outer London, where almost one fifth of workspace could be lost to residential dwellings.”

With Central London too expensive and outer areas suffering from lack of supply, it leaves small businesses in a difficult situation.

“Higher rents and rates and significant increases in lease costs, can push workspace affordability beyond the grasp of most micro and small businesses.”

Similar concerns have also been raised by CBRE and the BCA (Business Centre Association).

In a recent report titled ‘Flexible Space Expansion: Where Will the Space Come From?’, CBRE raises a number of issues regarding the market’s rapid growth. It cites that increased competition and Permitted Development Rights have led to limited supply of available new space:

“To meet demand for future plans, business centres in the UK will need to occupy all new available development pipeline space, all second-hand space, and an additional 4.2 million sq ft. Bearing in mind the competition for space from other potential customers, this presents quite the task.”

Furthermore, as the competition for space continues to surge, the report claims that business centres are competing to outbid each other for limited space.

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London is already one of the most expensive places in the world for commercial property. Worse, London’s ‘Silicon Roundabout’ tech hub, which was created to help startups in the technology and digital sectors get established, is now the most expensive tech district in the world.

According to Knight Frank, renting an office in Shoreditch — the heart of London’s tech scene — is almost twice as expensive as Brooklyn in New York. It’s even encroaching on the traditionally sky-high costs of workspace in The City, London’s financial district.

Left unchecked, will London’s flexible space market eventually become the exclusive domain of corporates and heavily-funded high-growth companies?

That’s exactly what the London Assembly Economy Committee is trying to avoid, as such a scenario could lead to a toxic startup environment. According to the report, London already has the highest rate (10%) of all UK regions for business failures:

“The low survival rates are partly a product of the competitive environment London generates, with more businesses in the same space competing for success. But they are also symptomatic of the raft of other challenges they face, such as high rent and business rates costs, and the lack of availability of affordable business accommodation.”

The report calls for closer inspection and “better alignment” of planning and development, and further research to understand why many areas of outer London are vastly under-represented in the flexible workspace market compared to the highly competitive market in Central London.

The group sets out a number of recommendations for the Mayor of London to support the needs of SMEs, including further research to determine:

  • The viability for replicating the flexible workspace model across London as a means of using available space more smartly, and for reducing business overheads for micro and start-up businesses;
  • The extent of the demand for workspace in outer London boroughs.

The report’s author and deputy leader of the Assembly’s Labour Group, Fiona Twycross, said affordable workspace for small businesses is crucial for economic growth.

“SMEs are the lifeblood of London’s economy and our local communities. Yet, they are struggling to find work space that is flexible, affordable and well-located,” she warned.

“We need concrete proposals to maximise affordable workspace and to fully understand why SMEs are leaving London. The voices of micro and small businesses must be heard when it comes to shaping the city.”