Moving beyond London’s discount to market rate approach
In this Sightlines article, Patrick Ransom, Associate Director in Avison Young’s Regeneration team, explores current definitions of ‘affordable workspace’. This is the first in our new five-part series on affordable workspace.
Like many global cities, London’s supply of employment space has become increasingly squeezed over the last decade. The capital’s constrained commercial markets have been weakened by the conversion of stock to residential uses, partly due to permitted development rights, and what remains has primarily focused on businesses able to pay market rates.
These trends have pushed commercial rents up across the city – according to CoStar, average office rental values have increased by >42% over the last decade and industrial rental values have increased by >122%. This has made many locations unaffordable for some organisations - particularly micro businesses, social enterprises, and charities, all of which are the lifeblood of London’s diverse, successful, and cohesive local economies.
This issue is widely recognised across London, and the ‘affordability’ of commercial space has become a strategic focus for urban planners and strategists in recent years. At the city level, the Greater London Authority (GLA) recognises the need to retain organisations that create economic, social and community value, and has published extensively on the issue (see here). It also encourages London Boroughs to provide a sufficient supply of ‘affordable’ workspace catering to these organisations.
But what is ‘affordable’ workspace?
In the London Plan (2021, p.246) the GLA defines it as:
“Workspace that is provided at rents maintained below the market rate for a specific social, cultural, or economic development purpose. It can be provided directly by a public, charitable or other supporting body; through grant and management arrangements (for example through land trusts); and/or secured permanently by planning or other agreements”.
Such “specific… purpose[s]” include workspace that is:
Dedicated to specific sectors that have social value such as charities or social enterprises.
Dedicated to specific sectors that have cultural value such as artists’ studios and designer-maker spaces.
Dedicated to disadvantaged groups starting up in any sector.
Providing educational outcomes through connections to schools, colleges or higher education.
Supporting start-up businesses or regeneration.
It is clear therefore that ‘affordable’ workspace is intended to deliver specific outcomes that are considered positive for the city rather than simply subsidise marginal businesses.
The GLA also set out an expectation for “[London] boroughs, in their Development Plans,… [to] consider detailed affordable workspace policies” (p.245). They do not, however, provide guidance on what “rents maintained below the market rate” are or how affordable workspace planning policies should be structured.
Given this lack of guidance, London Boroughs have taken their own approaches to developing affordable workspace policies. While most secure space through Section 106 agreements as part of new large-scale commercial developments, and generally define ‘affordability’ as a simple discount to the market rate, what they deem as an appropriate discount varies greatly due to locally specific development and political contexts.
The London Borough of Tower Hamlets stipulate that developments that comprise 1,000 sqm+ of employment space must provide 10% of space at a rate that is at least 10% below the market rate.
The London Borough of Hackney set out that schemes with 1,000 sqm+ of employment space should provide 10% of space at no more than 40% of market rate in the Shoreditch Office Area and no more than 60% in other areas.
The London Borough of Islington demand that developments with 1,000+ sqm of employment space provide 5% of space at a peppercorn rate for entrepreneurs, social enterprises, and charities.
This variation has significant implications for the type, nature and outcomes of space that comes forward in different places, as well as the ability of neighbouring boroughs to negotiate strongly with developers.
While these early affordable workspace policies have helped to bring forward a number of innovative spaces (e.g. Tripod, Brixton;Better Space, Farringdon;Town Square, Old Street;XCHG, Bishopsgate), there is an opportunity for future policies to take a more nuanced definition of ‘affordability’. This is because ‘affordability’ means different things to different business, and there are other factors that are as, if not more, important to businesses than discounted rents.
For example, for some businesses an initial rent-free period is more valuable than a sustained discounted rent due to initial high set up and fit-out costs (e.g., businesses focusing on manufacturing, food production, retail etc). Similarly, access to expensive and specialist equipment (e.g., 3D printers, laser cutters, audio/visual equipment, commercial ovens) can be a greater barrier to entering the market or scaling for some businesses than paying a market rent.
For others ‘easy-in-easy out’ lease terms can be more helpful than reduced rates because they can scale up and scale down as they test and experiment with new ideas without the risk of punitive and costly lease breaks. Some smaller businesses also prefer ‘all inclusive’ rates to discounted rates, particularly where they incorporate business rates, energy bills, WiFi, showers, lockers, meeting rooms or reception staff. While the price per sq ft advertised can be higher for workspaces offering these terms, the total cost to occupiers can be lower as they benefit from economies of scale and do not face the administrative burden associated with these factors.
Other businesses simply require smaller units that command lower rents and have lower fit out costs over discounted rents.
Moving forward, future affordable workspace policies could consider other factors affecting the affordability of space – for us ‘affordable’ workspace should be a more encompassing term incorporating all spaces that reduce the cost burden on occupiers (i.e., through discounted rents, flexible terms, rent free periods, provision of equipment, fit out support etc). Perhaps a better term would be ‘accessible’ workspace, as ‘affordability’ has connotations related to discounted rents.
They should also be more responsive to boroughs’ economic strategies, for examples by focusing on supporting key sectors, overcoming location specific issues, and/or delivering wider social value and economic inclusion. The provision of affordable workspace should not be a generic or blanket strategy within Local Plans, but rather a focused tool that plays the role of being a ‘land use’ pillar of boroughs’ economic development strategies. As local authorities are the main custodians of economic development in their locale, there is therefore a case for all London boroughs to carefully consider the delivery of ‘accessible’ or ‘affordable’ space.
Factors impacting affordability
Rent Free Periods
Flexible Lease Terms
All Inclusive Rents
Fit Out Support
In line with this we have been working with the London Borough of Haringey (LBH) to develop a more holistic definition and approach to securing affordable workspace than their existing policy – a ‘2.0 Affordable Workspace Policy’. The approach, captured within a decision tree, takes a more nuanced view of affordability, and addresses other limitations associated with the first wave of workspace policies adopted by London boroughs – the ‘1.0 Affordable Workspace Policies’.
The approach was designed in line with several overarching principles that may be useful to consider in other contexts:
Develop clear economic and social value objectives at the outset, including identifying priority sectors (including, in some cases, the third sector) and workspace typologies to support in different sub-areas.
Incorporate a discount to market rate option for sub-areas focusing on sectors that that operate very close to the margins.
Include alternative ‘affordability factors’ for sub-areas focusing on sectors that have requirements and needs that are not only related to discounted market rates (e.g., equipment, tools, ‘all in’ rates, flexible terms etc).
Provide an ‘exceptions’ approach (i.e., Payment in Lieu) where economic objectives may be better met by consolidating investment elsewhere – this could be where the location, scale, nature or timing of space delivery limit the ability to achieve economic objectives (this is covered in more detail in our third blog post).
Offer flexibility to enable developers to define their own approach to achieving economic objectives, where tailored to priority sectors and supported by a credible business plan, recognising that they can bring interesting ideas to the table.
Ensure that policies are not too restrictive so that operators can offer something innovative that appeals to a particular market while also bringing something unique to an area.
Set clear parameters about the nature of workspace that can be provided in different sub-areas to direct developers less familiar with providing workspace. Ensure these parameters build in design flexibility to allow units to adapt to changing business demands over time (this is covered in more detail in our fifth blog post).
Establish minimum size thresholds for different workspace typologies so space is viable for a workspace provider to manage over the long term.
Define the fit-out levels that are required for the space to be occupiable and ‘fit for purpose’ for operators and businesses alike.
While this approach does incorporate a discount to market rate option, this is only for sectors that require a heavy discount to market. Crucial to the success of this approach is the inclusion of other flexibilities and ‘affordability factors’ to meet the needs of other sectors that play a crucial role in meeting the economic objectives of a place. We believe that if future policies are developed around these principles, they will generate more positive economic and social outcomes for both businesses and places alike.
“Properly facilitated, affordable workspaces can create an exciting buzz, sparking collaboration and inspiring creativity. As a landlord developer we want to foster the growth of start-ups and SME’s as we understand the social and cultural value that they can generate. Ideally, we also want to see them grow into lasting customers.
It’s evident that the first wave of affordable workspace policies in London have not always been sufficiently targeted to meet local needs nor flexible enough to deliver best value for the local economy. In some Boroughs too much space is being delivered in new Grade A office schemes, which are not necessarily best suited to the needs of either affordable workspace providers or tenants. Even at a substantial discount to open market terms these spaces are not genuinely affordable for many small and newly formed businesses.
As the first-generation policies begin to mature local authorities will need to consider how effective they’ve been and where necessary evolve them so that they are more flexible and allow creative approaches that better address genuine need. This might mean being open to consolidation of affordable workspace in dedicated hubs, provision of less but better equipped space on more genuine affordable terms and greater consideration of the benefits of payments in lieu that will deliver meaningful space in the right locations”.
- Robert Hume, Senior Development Director, Landsec
Patrick Ransom is an Associate Director in our London Planning, Development and Regeneration team. He is an Affordable Workspace commentator and has undertaken research on the topic for the London Boroughs of Brent, Hammersmith & Fulham, Haringey, Lambeth, Islington, Tower Hamlets, Camden and Hackney.