Blog - Commercial
THE SILICON VALLEY EFFECT: STARTUPS & INCUBATING IN OUR OWN BACKYARD
Can the innovation and property booms co-exist?
Since the fabled rise of San Francisco’s Silicon Valley in the 90s, cities all over the world have been vying for the title of next big startup hotbed. Berlin, Chicago, Bangalore and Vancouver have all staked various claims. Just before the start of 2019, Inc.com listed it’s top 50 innovative cities in the world. Tokyo took the top spot with London in second place and Silicon Valley in third.
Sydney is Australia’s undisputed startup capital and ranked in 10th place in Inc.com’s top 50 Innovative Cities. Nearly half of all local startup ventures are based in New South Wales, with Sydney accounting for the vast majority of those. In fact, in StartUp Muster’s 2018 report it showed 42.8% of Australia’s startups had their primary offices in Sydney.
But for all the ‘innovation nation’ rhetoric, how is Sydney actually faring?
Over the past few years, the vacancy rate of CBD commercial space has continued to fall and currently sits at just 4.6 per cent, with predictions that the figure will only rise to about 5% vacancy by 2020.
This low vacancy rate is linked to a lack of available space (in conjunction with shrinking yields) which drives up rent. There’s been repositioning of properties and fewer options on the market in recent years, more commercial buildings have become residential conversions and large infrastructure projects such as the Quay Quarter and Metro have removed stock from the market. In the second half of 2017 alone, 60,000 square metres of commercial space was lost.
Secondary stock (B-grade space) has also been affected and 300,000 square metres of stock was lost between 2015 and 2017 for conversion into hotels or residential accommodation.
As a result, attention is turning back to sustainable commercial developments.
State of play for Sydney startups
There’s definitely an acknowledgement that more needs to be done to help innovative businesses. Growth should be achieved because of the city, not in spite of it. We know that one or two success stories does not a startup ‘culture’ make.
Startups thrive in an ecosystem which includes:
- Proximity to top universities
- Proximity to airports
- Proximity to other startups
- Good public transport/bike paths
- Affordable rent
- Availability of venture capital
Sydney can just about scrape a pass on most of those points (though transport is still a work in progress). It’s the issue of rent where things start to get problematic.
While the property scene is gradually morphing to suit the needs of the latest entrepreneurial wave, many believe the movement remains shackled by Sydney’s real estate boom.
Despite this, a number of plans are in the works – such as The Bays Precinct and Australian Technology Park – for new commercial developments and office conversions. This is a collaborative effort for local and state governments, as well as property developers. Meanwhile, the federal government looks to remove taxation barriers for new businesses.
Not all new businesses are startups, of course. Some are simply new businesses. What distinguishes startups is their innovation and use of technology.
In this sector – in spite of high property prices – Sydney is showing steady growth. Reflecting the proclivity of startups to grow in close proximity to one another, City Fringe suburbs such as Pyrmont, Ultimo and Surry Hills are carving out a reputation as genuine startup precincts.
The rise of coworking
Startups often turn to coworking to avoid the fixed obligation of long-term leases. This refers to shared office space, owned and managed by a third party, such as Hub, Fishburners and Tank Stream Labs.
In coworking arrangements, startups don’t have to commit to finite office space which their workforce could soon outgrow. Memberships are tailored to a company’s specific size and needs. In recent years, the practice has moved from niche to somewhere approaching mainstream, especially for lean-budget startups.
Across Australia in 2018 there were 51.8% of startups working in co-working spaces while 25.7% had their own office space. Incubator/startup accelerator spaces, home offices and anywhere that a smart device could be used were also popular working spaces.
As well as the flexibility, there’s a genuine community element that new businesses relish. Space is shared with other fledgeling companies, often to complementary effect. This makes networking with like-minded individuals more organic and convenient than it might otherwise be.
That said, some companies – particularly those with ready access to venture capital – may prefer their own space from the outset.
If you’re a strata owner, read about why it’s important to stay aware of and respond quickly to coworking as a competitive threat.
New developments and initiatives
The aforementioned proposals for The Bays Precinct and Australian Technology Park are encouraging signs, at least symbolically for the time being. How successful the plans are in practice remains to be seen.
White Bay Power Station
The Bays Precinct encompasses suburbs surrounding the Anzac Bridge, namely Rozelle, Pyrmont and Glebe. Mike Baird’s key focus is to convert the disused power station at White Bay into a bustling tech hub.
“(It could be) a place where global giants of tech and innovation work with startup entrepreneurs, business incubators and accelerators,” he said.
At the time of writing, Google was in talks with UrbanGrowth NSW to move its Australian headquarters to the site. This would be part of a larger initiative to spearhead innovation and high-tech employment in the area.
It’s certainly rare in Sydney to have so much space available for redevelopment so close to the city. As the birthplace of Google Maps, Sydney’s foreshore looks set for a substantial real-life update.
Australian Technology Park
There are also big plans in motion to revamp and relaunch Australian Technology Park in Eveleigh to attract innovative startups.
Just this month, Mirvac launched the first two buildings of the revamped Technology Park. Some consternation was caused when the Commonwealth Bank (and 10,000 of its employees) was announced as the project’s primary tenant. However, planning minister Rob Stokes has promised a “vibrant, creative tech precinct.”
Once completed, and whatever the outcome, the revamped precinct should stimulate the local economy and continue Redfern’s suburban renaissance. The arrival of CommBank at least makes the development more commercially viable.
Finance, Funding & Accelerators
On a federal level, the government has repeatedly acknowledged the importance of encouraging innovation and creating an environment conducive to business development.
In 2016, the government announced its effort to bring renowned startup accelerator, MassChallenge to Australia. Their immediate efforts focus on “idea-pitching competitions, startup boot camps, and local and international mentoring.”
Elsewhere, in 2017 Jobs for New South Wales committed to investing an impressive $35 million over five years in the Sydney Startup Hub. The centre is a 17,000 square meter 11-level space in the city centre. Now home to over 480 startups, the Hub is described as “a focal point for NSW’s startup ecosystem and a fertile ground for true collaboration.”
Barriers are coming down
Old bureaucratic barriers are also being removed. Previously, any equity offered to prospective startup employees was taxed upfront. Offering employee equity is now much easier, overriding changes implemented in 2009 and previous tax rules that restricted Australia’s ability to entice overseas talent while retaining our own.
To qualify for new startup equity allowances, companies must:
- Be Australian resident taxpayers
- Be less than 10 years old
- Not be publicly listed
- Have aggregated turnover under $50 million
- Not offer more than 10% equity to any employee
Elsewhere, significant tax offsets are being made available to venture capitalists and investors, with a view to reducing risk-aversion. The existing insolvency rules are also being relaxed to “reduce the stigma associated with business failure.”
You can read more about government grants and tax incentives for startups here.
What does this mean for the commercial property market?
Naturally, the developments and conversions underway are cause for much anticipation. Office space in inner Sydney suburbs continues to grow in demand. Currently, the big players are the likes of Surry Hills, Pyrmont, Ultimo, Redfern and Glebe. But expect neighbouring districts of Annandale, Alexandria, Chippendale and Newtown to enter the fray.
It’s no coincidence that these suburbs are all close to institutions such as the University of Sydney and UTS. They’re also increasingly well serviced by public transport.
It’s likely we’ll see more diverse office spaces and conversions popping up. Sydney is on its way to becoming more intuitively designed, utilising space to maximise potential, rather than stockpiling white elephants.
Sydney still has a long way to go before it can be internationally recognised as a breeding ground for startups. But the wheels are in motion for development in the years to come.
The talent and ambition are here. Funding and safety nets are beginning to be more available than ever before. In the Startup Muster 2018 report, 33.8% of startups had at least one investor on-board, while 41% of startups have been approached by at least one investor, showing that backing is available.
It’s a case of joining the dots to make Sydney as conducive as possible to creativity and business development – and for the right price. The opportunity is there for the property industry to lead the way.
TGC has access to a variety of office spaces for rent and for sale in Sydney and an experienced team of commercial real estate agents who are happy to answer any of your property-related questions. Contact us or call on 1300 458 800.