The London commercial property market has been booming for over half a decade, with average rental growth outpacing occupier output in the majority of sub-markets over the past five years.

This growth is underpinned by suppressed supply. In 2016 the GLA estimated that Permitted Development Rights (PDR) have led to up to 15.8 million sq ft of London’s offices being converted into residential units since 2013. While most of these properties were lower grade office stock and unlikely to be the most inspiring of buildings, they provided vital affordable space for small businesses which has not been replaced.

Soaring house prices and increased pressures on local authorities to deliver housing means that often commercial schemes are unable to compete with residential-led proposals on the majority of development sites. Where commercial proposals are coming forward, they are most commonly large lot sizes as developers look to pre-let space to established companies therefore meaning there is very little stock coming to the market appropriate for SMEs.

Collectively, these factors have led to an unprecedented imbalance between the supply and demand of snakker-scale workspaces, meaning London is increasingly unaffordable for start-ups and small businesses who are the lifeblood of the city’s economy.

So how is London tackling the issue?

The unprecedented growth of serviced office and co-working space providers in recent years can be owed in part to the supply/demand imbalance of such workspaces. Although not always offering the most affordable space, these operators provide other key benefits to SMEs, principally flexibility. London has also seen considerably more subsidised space provided via more incubator and accelerator programmes than any other European city in the last three years. And the utilisation of temporary space for small businesses is on the rise, most notably on vacant sites earmarked for development but where, for planning or strategic reasons, construction has yet to commence.

Some policy responses have also begun to emerge. The Mayor recently announced plans to form a Workspace Providers Board to advise how affordable space can be protected and promoted. He also intends to amend the London Plan to strengthen safeguards for existing small business space, including encouraging the curtailing of PDR where necessary.

Some local authorities have adopted more radical approaches. Hackney and Islington, for example, have recently introduced policies requiring a portion of all new office space to be let at a discounted market rent. However, while well intended, these policies may inadvertently mean that even less supply comes forward, as the requirements depress office scheme values, further reducing viability when competing with residential proposals.

Ultimately, the solution to London’s workspace affordability issues requires a nuanced approach, considering the implications of policies at a local and even site level. The unexpected consequences of PDR show that policies applied geographically blindly are ineffective in a market as diverse as London.

Policy makers and market players will need to work together to ensure the price of London’s office space does not smother the city’s entrepreneurial community and, ultimately, its long-term economic viability.

Further information

Read more: Spotlight London Developments