• Real Assets
  • Real Estate

Talent, clusters and scale: Identifying European office markets in the era of knowledge capitalism

The role of a city is vastly different to fifty years ago. We explain why talent, clusters and scale are key factors in determining which cities – and therefore European office markets – will thrive in the years ahead.

The changing role of cities

The role of a city is vastly different to fifty years ago. Many of Europe’s great cities grew up in an era of industrialisation when competition was heavily driven by input costs. Locations benefited from qualities such as a natural harbour, access to a navigable river, proximity to sources of fuel (usually coal) and access to labour, suppliers and consumers. With such qualities, cities enjoyed a durable comparative advantage.  

But as global markets opened up, the pace of transportation accelerated, and the cost of communication fell, such qualities no longer provided cities with a competitive edge. Global sourcing rendered the old notion of comparative advantage less relevant.

Yet location matters no less than it did in the past. As leading urban economist Ed Glaeser puts it, “a central paradox of our time is that cities, industrial agglomerations remained remarkably vital, despite easier movement of goods and knowledge across space.” Today, a city’s success is driven by its ability to facilitate knowledge exchange and information sharing to nurture idea creation. Competitive advantage no longer rests on access to inputs but on making more productive use of inputs and this requires continual innovation.

Talent, clusters and scale

So the characteristics that make a city successful have changed entirely. In an era of knowledge capitalism, cities need talent, clusters and scale. All of which are inter-related and somewhat co-dependent. Cities with clusters of excellence attract talent, which in turn leads to growth and scale. As the urbanist Richard Florida says, “access to talented and creative people is to modern business what access to coal and iron ore was to steel-making.” Large agglomerations of highly-skilled people are therefore critical to a city’s prospects.

Being part of a cluster provides companies with easier access to information and technology, while providing efficiencies in sourcing inputs such as labour. This enables a city’s firms to be more productive.

Stockholm, Berlin, Amsterdam and Copenhagen are cities with world-renowned clusters in digital and biotech fields. Each enjoy a positive dynamic and the liveability of the city attracts highly skilled talent, pools of highly skilled labour attract businesses and foster firm creation and this, in turn, encourages more qualified people to choose to live in the city. Berlin, for example, is home to 38,000 digital and creative companies and it is estimated that a start-up is founded every 20 minutes there.

Equally, Munich, Frankfurt and Dublin are cities that compete globally as headquarter locations and are supported by strong labour market credentials. They have vibrant clusters in financial, automotive, ICT and media, cultural and creative industries, and engineering sectors.

Figure 1: Working population 2018 ('000)

Working population
Source: Oxford Economics, April 2019

Lyon, Stuttgart and Hamburg are examples of well-rounded cities that host knowledge intensive business activity and boast strong demographic credentials. They are regional powerhouses set to drive growth in some of Europe’s most successful regions. While Stuttgart is home to several major companies including Daimler AG, Porsche, Mercedes-Benz, Bosche and Mahle, Hamburg is the economic centre of northern Germany and transportation hub for both Scandinavia and Eastern Europe.

Figure 2: Total students by city

Total students
Source: QS, April 2019

Agglomeration benefits when firms and people locate near one another as co-location makes the exchange of goods and ideas easier and cheaper. The larger the agglomeration, the greater the benefits. Indeed, these benefits tend to increase at an exponential rate as cities increase in size. So larger cities are more productive simply because they are larger.

Europe’s two megacities, Paris and London, stand out as magnets for global talent and their scale gives them a major competitive advantage. They have the right credentials to drive growth in an era of knowledge capitalism and both have office markets characterised by significant constraints to new development, signalling scope for sustained rental growth over the long run.

Cities of the future

Such characteristics are the most important drivers of cities’ success. Of course, in an era of globalisation, cities that have an ability to attract global talent and capital will also benefit from an international profile and global connectivity. An appropriate level of autonomy combined with visionary leadership can also improve a city’s prospects.

Selecting cities for office investments requires focus. All told, there are 800 cities in the EU, including over 100 with a population of over a quarter of a million.

While some cities do seem well placed to drive growth in an era of knowledge capitalism, they offer limited opportunities for office investors, either because they are small markets – such as Oslo or Helsinki – or because there are very few barriers to entry, as is the case in Warsaw. Each of the cities we have identified for office investment have either significant barriers to entry or have specific submarkets in which supply risks are low.

More notable, perhaps, is the exclusion of some major European cities including, for example, Madrid and Milan. While both cities are very established office markets, neither city looks particularly well placed to succeed as knowledge economies. The overall educational attainment levels of both cities compare unfavourably with northern Europe. Emigration of young talent is a key concern in both Spain and Italy, undermining their talent credentials. Furthermore, Madrid’s working age population is set to gradually decline in the years ahead, while Milan’s prospects are hindered by relatively high long-term macroeconomic risks in Italy.

Cities set to thrive, particularly in an era of knowledge capitalism, are those that manage to attract talent, establish or maintain clusters of value-add economic activity and leverage the agglomeration effects that occur when firms and people locate in close proximity.

Figure 3: Strategic target office markets

Strategic target office markets
Source: Aviva Investors, May 2019

Subscribe to AIQ

Receive our insights on the big themes influencing financial markets and the global economy, from interest rates and inflation to technology and environmental change. 

Subscribe today

Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.