The importance of SMEs to the City of London and the wider UK economy at large has never been more pronounced. While demand is currently depressed due to the Covid-19 crisis, deals activity in the City of London for space under 50,000 sq ft has climbed further in 2020. Sub-50,000 sq ft activity has risen year-on-year since 2017, when 56% of space taken was in floorspace of this size and under. As of October 2020, that has risen to two-thirds, the highest level since 2016.
While some of the increase may be due to larger occupiers showing reluctance to commit to taking major space, the activity at the smaller end of the market is not just a fleeting trend in the City. Distress in the wider economy typically produces a redistribution of labour and the City of London is set to benefit from this in the latest round of corporate tightening. Job losses and rationalisation across all business sectors will inevitably lead to a dilution of the skill base in multinational occupiers based within the Square Mile.
Opportunities for new start-ups, spin-offs and freelancing have never been more generous, despite the economic climate. Gone are the stringent 15-year leases and inflexible occupational trends. With the growth of flexible working and proliferation of competing providers, small operators can now access core markets like the City of London without being tied into long-term leases and capital expenditure that would ordinarily make such an option unviable. The City of London now has over 4m sq ft of flexible office space, across co-working, managed and private offices.
GFC flashbacks
The trend toward SMEs, while not an instant adjustment, is starting to mirror demand in the aftermath of the global financial crisis, where there was significant growth in ‘one-man-bands’ and start-ups in the City driven by former employees who had suffered redundancy or simply decided on a new career move.
Following the economic contraction in 2009, the following year saw SMEs accounting for 53% of take-up in the City core. However, by 2011, the swing towards SMEs showed 89% of space accounted for by occupiers taking under 50,000 sq ft. This began the steady rise in SMEs registered in the City of London, increasing by a quarter between 2011-2015.
A further shock in 2016 with the result of the EU referendum triggered another burst of start-up activity, and the number of City-based SMEs ballooned by 48% in the space of 12 months. The latest figures in 2020 to date show a similar trend beginning to develop, as City SMEs have reached a four-year high with small (10-40 employees) and medium (50-249 employees) firms reaching a record level, with over 90% of occupiers in the City of London now classed as SMEs.
A measure of optimism
The City of London has an occupational diversity that will provide resilience and help drive recovery from the Covid-19 pandemic.
But the importance of smaller-scale occupiers to the future health of the City of London has never been more evident, particularly in the 50-249 employee range, which has mushroomed from 670 in 2016 to its current level of 940.
Given the likely reconfiguring of office portfolios for larger corporates across London as a whole over the next 18-24 months, the healthy appetite of SMEs will provide a measure of optimism to landlords across the Square Mile in these challenging times.
Guy Grantham is director of research and forecasting at Colliers International
