Research article

The Digital Catch-up

Creative office rental is catching up with the financial sector.

Within world cities, creative and digital businesses have been flourishing while financial corporations have been struggling to rebuild in the wake of the global financial crisis. The consequent impacts on real estates rents and growth are examined in this article.

As the finance and service revolution of the 20th century gives way to the digital age of the 21st century, we examine the repercussions for real estate.

There is a big difference in most world cities between rents paid by a creative or digital scale-up and a hedge fund, although the gap is closing. In June 2015 the total annual office rent paid for each member of staff in a hedge fund averaged $22,399 across the 12 world cities covered in this report. This compares to $10,453 per person for a small digital scale-up or creative company, which represents just 47% of the financial sector office rent. This ‘digital discount’ has eroded since 2008. At the end of 2008, the digital and creative industry paid, on average, 42% of what a hedge fund would pay in rent.

Figure 1

FIGURE 1Office rents per person June 2015: Digital/Creative vs Financial 

The difference between these rents clearly reflects a different scale of revenue between a financial company and a creative company, but we expect the gap to continue to close. This is because the size of the digital and creative sector is growing faster than the finance industry in many of the world cities we monitor, meaning rental growth is higher too. Meanwhile, it takes time for the nature and location of office stock to change from the type of large, floor-plate corporate premises required for banking to smaller, flexible and altogether more dynamic spaces required by creative and digital occupiers. This means that scarcity value also increases rents.

In some cities the importance of the digital and creative industry would already seem to have overtaken finance. In Sydney, for example, creative industry companies are paying more per person for office rents than finance companies are. Local supply and demand factors will clearly have an impact here. Relatively low demand for financial offices in Sydney means the city has some of the cheapest rents for this sector among our world cities, paying well below the world average per person.

Globally, the average growth of office rents we monitor among our 12 cities was just 1.7% between December 2008 and June 2015. But this average disguises a big difference between the financial sector and creative and digital sector. While office rents in the financial sector fell by an average of 1.8%, the creative sector offices saw growth of 8.6% over the same period.

Figure 2

FIGURE 2Percentage cost of Creative as compared with Financial

Some of the differences in rental growth were stark. Hedge funds operating out of Dubai can expect to pay 60% less in rent (in local currency) than they did in 2008, and in Singapore 41% less. Meanwhile, creative types in Hong Kong, San Francisco and London are paying, respectively, 46%, 43% and 30% more than they were in 2008. In San Francisco tech rents grew by 450bps more than financial rents, which grew by just 8%.

This reflects the growing supremacy of the digital and creative economy in San Francisco against a weaker financial environment. Digital and creative outperformance in Hong Kong was also significant – these companies have seen a 46% rise in commercial rents since 2008, compared with 19% in the financial sector. Over the past year though, little or no rental growth has been registered in either sector.

Figure 3

FIGURE 3Office rental growth 2008-15: Creative and Digital

Landlords who switched from core, prime financial sector assets to fringe, secondary properties in areas catering for the growing creative digital sector may be rubbing their hands in glee, but there are some notable exceptions.

Sydney is unusual in having a financial sector where rents are lower than the creative sector. Rental growth in both sectors has not been spectacular, but financial rents have slightly outperformed creative since 2008 and continued to do so over the past year.

"There has been an emergence of a new, small-scale ‘digital and creative finance sector’ in London’s West End"

Yolande Barnes, Savills Research

London has another interesting story to tell, exhibiting high rental growth in both sectors, but with hedge fund rents growing more than the creative and digital. This is because, not only are creative industries expanding into and pioneering new areas, but also because hedge funds have colonised very prime and exclusive new locations, such as Mayfair. Rents in this district have been pushed up substantially by the competition and the limited supply of small-scale, period buildings that dominate the area.

There has been an emergence of a new, small-scale ‘digital and creative finance sector’ in London’s West End which requires different space, dissimilar to the big financial corporations and banks located in the traditional banking areas of the City of London. A similar trend has also emerged in New York, where hedge funds are colonising new Midtown areas, while Wall Street still houses the big corporate institutions. In both cases it is the rents of the small, creative, digital-age hedge funds that are rising the fastest.

The digital age will continue to disrupt the industries of the occupiers in our survey and it is likely that we will continue to see changes in rental levels, according to who wins and who loses in this new marketplace.

Landlords not only need to adapt buildings to suit these new occupiers in all sectors, they also need to be aware that tenants are likely to continue to seek new locations and new ways of working to ameliorate rising rental costs in core central business district areas. Investors who spot these trends early will see the best returns.

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