Rising costs are impacting all aspects of life in 2023 and the real estate sector is no exception. It’s a troubling scenario for both commercial and residential occupants.
High inflation has clear implications for businesses, especially smaller firms and startups, which have a significant contribution to global economic growth. As their operating costs rise, they are likely to find it harder to afford the commercial spaces they seek in the locations they want, which may limit their ability to grow.
These businesses’ most important asset is their workforce, which faces an acute shortage of affordable accommodation local to their workplace. This could pose challenges for recruiting and retaining talent. Rent for a one-bed apartment in the city centre accounts for 55% of the average net salary across 14 global cities, ranging from 37% in Chicago to 79% in Hong Kong.
Competition for high-quality office space is also rising, pushing up rents. Demand continues to increase as businesses seek energy-efficient, flexible, imaginatively designed units in well-connected locations that will attract top talent. Between 2019 and 2022 prime office rents increased by an average of 4.9% average across 23 global office markets.
This upward trend has hit small and medium-sized enterprises hardest and many have been forced farther out into more remote districts and less attractive buildings.
Proportion of net income spent on rent: average income to 1 bed rent
Source: Savills using Numbeo
Off-the-shelf solutions
The issue here is partly one of how to protect and nurture small businesses.
For companies starting out, any savings made on premises and channelled back into the business could prove the difference between success and failure.
One possible solution is the rise of commercial co-working spaces, which offer all-in packages without restrictive long leases. Given the costs of setting up and maintaining an office, these deals can work out simpler and cheaper over time.
To compare the cost of a co-working arrangement relative to the net effective cost of a conventional prime office, Savills Research looked at how the cost for a 10-person business varied in 16 key global markets. The study found that a co-working space is 40 % cheaper on average, although there is considerable variation between locations.
Where co-working arrangements prove too expensive, public-sector funds are being used alongside private investment in the creation of startup hubs, for example, the Factory Berlin project and Barcelona Activa’s incubation spaces. These arrangements offer cheap rents and shared resources among similarly small-scale enterprises in convenient locations.
They also foster collaboration across communities, both locally and within their industry sectors.
5 year residential rental growth
Source: Savills Research, Zoopla – powered by Hometrack, Housing Anywhere, Numbeo, Hong Kong Rating & Valuation Department, SCB, SWM Research, Zilow
Similarly, university incubators support enterprises and startups driven by the university community, helping to retain academic talent.
Corporate accelerators provide mentorship, resources and funding to early-stage businesses. For the corporates supporting these initiatives, it’s a valuable chance to engage with innovative startups and the talent they attract.
The need for social housing
On the residential real estate front, too, affordability pressures are acute, affecting many city dwellers – especially younger people, students, and essential workers and their families.
Ageing populations and a rise in single households have also intensified the competition for a limited supply of affordable city housing. Both capital and rental values have been pushed up, with demand for rental accommodation exacerbated by recent hikes in mortgage rates.
Renters are having to look further afield, live at home for longer, move to cheaper cities or “hutch up” by taking a room in a shared flat.
That pressure has refocused attention on the need to deliver genuinely affordable social housing, usually through some form of public-sector support. In Spain and other EU countries, for example, Covid-19 recovery plans are being used to subsidise affordable housing.
Repurposing old commercial stock
Other ways to boost the availability of affordable stock in city centres include the repurposing of old commercial stock into new housing, such as Les Grand Voisins, located in Paris’s former Saint Vincent de Paul Hospital. Another initiative is to regenerate deprived neighbourhoods through a mix of affordable and market housing alongside commercial properties.
In the UK and Europe, closed-ended ESG-focused social housing funds from the likes of Man Group and Civitas, among others, are bringing private capital to support publicly funded social housing schemes. Investors accept a lower financial return than they would from full-blown commercially focused funds.
Clearly, there’s a pressing need to reimagine city-centre living and working in many big cities, and to make it more affordable in a 21st-century context. The most successful schemes are likely to be those that focus on delivering wider social and environmental benefits too.
