12 Cities: Upstart Cities

12 Cities
 
The Price Of World City Status

16 March 2016, by Yolande Barnes

A review of changing live/work accommodation costs

 

Within world cities, creative and digital businesses have flourished in the wake of the global financial crisis. Here, we examine the consequent impact on real estate rents and growth.

 

 
San Francisco

Being a global city comes at a price – they are the most expensive for occupiers and the most lucrative for investors. But these cities are now being challenged by smaller, ‘upstart cities’.

Our live/work accommodation cost rankings closely reflect the extent to which each city dominates global markets on a variety of measures (see fig.1). There is an 89% correlation between the position of a city on the Savills World Class City Score and its position on the live/work accommodation costs ranking.

FIGURE 1

World city live/work accommodation cost

 
Figure 1

The productivity of cities and their value to global businesses clearly has a pronounced effect on demand, and hence rental costs. The highest-ranking global cities – London and New York – are also the most expensive for businesses and workers to occupy. The average cost of accommodation per worker, per year in our top 12 cities is $69,100.

The downside for world cities comes when they can’t supply new accommodation of ‘city quality’ fast enough; they can then become a victim of their own success as rents rise accordingly and the affordability of the city becomes an issue. Many of the world cities we study have been caught out in this way, particularly in the ‘old world’, because until the 1990s most of them were dealing with depopulation and neighbourhood decline, especially in the now popular urban core.

While many of the ‘new world’ cities (eg Shanghai and Dubai) have taken rapid urbanisation in their stride, some Western cities have found the supply response more difficult. Notable exceptions are cities such as Chicago, where the supply response is more elastic and accommodation costs are low in relation to the city’s global status ranking.

The challenge for the top alpha cities is to supply new business quarters and residential neighbourhoods, while capturing the characteristics that made the city an attraction in the first place. Growth without social, economic or environmental loss is one of the biggest challenges facing our world cities today.

While some of the larger and most prominent world-class cities struggle to replicate their most successful city fabric in new places, others are emerging (see fig.2). These would-be challengers for the top city rankings are sometimes very small, such as Berlin (population 4.3 million) or Dublin (1.7 million), or can be emerging giants such as Lagos (13 million and growing fast), Mumbai (20 million), or Rio de Janeiro (12 million).

Some of the small but surprisingly successful cities are scoring high on global city status but low on live/work accommodation costs. Other giants are not yet scoring as highly on global city rankings, but are nevertheless commanding surprisingly high rent levels.

The live/work accommodation costs of Lagos, for example, are more than those of Singapore because the new supply of grade A ‘international quality’ office stock in the city has not enjoyed sufficient investment levels and build rates to keep pace with demand. The vast majority of workspaces in emerging cities such as Rio, Mumbai and Lagos remain small-scale, informal local buildings.

FIGURE 2

Upstart cities live/work accommodation costs

 
Figure 2

What is the Savills World Class City Score?

Cities become globalised and compete on the global stage for a variety of reasons. A huge number of measures are made of their connectedness, economic performance, power and competitiveness by different organisations. We have combined those that seem to best capture the features that make cities powerful and important real estate markets – for both occupiers and investors – to give the Savills World Class City Score.

This index puts London and New York firmly at the top of the tree, but it also highlights the growing strength of some small cities, including our ‘upstart cities’.

 

 
World Class City Score
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Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883