A full understanding of total accommodation costs is important for businesses when making location decisions. The true cost of accommodation goes beyond the headline cost per square foot for office rental. This analysis considers the variations in size and specification of business space and residential accommodation, as well as the ongoing costs for occupiers.
In our analysis, we have included office rents alongside residential occupancy across 10 world cities that have a big global pull on business, visitors and households. This gives a better comparison between cities of the impact of real estate on a business. Many international organisations look at accommodation costs when making a decision about which city to locate in. Our league table of headline costs (see Table 1) breaks out office rents for finance and business companies compared to firms in the creative sector.
But what the headline figures don’t show is the impact all real estate costs in a city will have on a business. If property taxes or other occupation costs are high, or if residential rents are high and reflected in wage demands, that will also have an impact on the bottom line.
We therefore think it is important to look at all real estate costs associated with our SEU (see box out). We have imagined the same seven people located in each of our 10 world-class cities, but in two different types of organisation – a hedge fund (finance and business services) and a social media company (creative sector).
The graphs in the gallery show the results for each location. This hierarchy of costs is different to the headline rent hierarchy. For example, it shows that New York is more expensive when residential and other costs are taken into account – and that Shanghai is cheaper.
The cost of office rents is very much less important in some cities than others. In some locations, the same ‘executive unit’ will expect and require much larger square footage than others. Total annual costs of accommodating the SEU in Hong Kong are over £650,000 per year, while Mumbai costs £157,000.
In Paris, for example, the costs of residential accommodation and other costs outweigh office rent by a substantial 87%. In Shanghai, in the case of the finance and business services firm, nearly half of total costs will be taken up by office rent.
In the creative sector, overall costs are cheaper, ranging from £135,000 in Mumbai to over £450,000 a year in Hong Kong. At the same time, the office costs are a much less significant proportion of the total costs in creative industries than financial. This suggests that, in these people-oriented industries, choosing a location with the residential accommodation to keep employees happy and paying them sufficiently to afford it, may be a more important key to personnel retention than cool and funky workspaces.
While Hong Kong heads all our tables when it comes to cost of accommodation, New York is a particularly expensive city in which to locate a creative startup. London, on the other hand, is relatively cheap and belies its position as the second most expensive city in terms of headline rents.
For creative businesses, office rents are almost insignificant compared to other accommodation costs, typically less than 20% of the total. Add the cost of attracting the human capital vital to such industries and it becomes apparent that office rents should not feature high on the priority list of locational decision-making.
It is the quality of the human capital the cities attract that make them world-class. The cost of accommodation reflect this rather than determines it.