By Rob Harris, Ramidus Consulting Limited
You are probably aware of serviced offices, but how much do you know about the businesses they attract? Ramidus Consulting was commissioned by the City of London Corporation to explore the role of the serviced office market in the City of London (‘the City’). This is one of the questions our research set out to address: finding, among other things, that they support one of the City’s most vibrant and important sectors – its small businesses.
Looking to the future, we believe that serviced offices will continue to evolve, offering a wider range of products for increasingly agile businesses and workers. For example, there might be more co-working space (for micro-businesses) and more managed space (for larger businesses). Increasingly varied levels of service and specification might also emerge to suit the needs of different businesses. Both of these developments could see a broadening base of occupier types in the City – such as more technology and media businesses. As more and more serviced office licences replace traditional leases, it seems that serviced offices will help to enrich the City’s business ecology.
The size and composition of the market
Serviced offices emerged in the UK in the late-1980s and now form an integral part of the City’s real estate market: today there are around 85 centres located in the City. These have a combined area of two million square feet, housing an estimated 2,250 businesses and 18,000 workers.
Around 70% of serviced office space is occupied by small and medium sized business (SMEs), some of which are in start-up or growth mode, but most of which are ‘steady state’ businesses. The other 30% is occupied by larger corporates, comprising a mix of representative offices and overflow space.
Operators differentiate themselves according to quality of service, style and price. High quality information, communications and technology (ICT) provision is an essential part of the serviced office offer, its critical aspects being consistency, resilience and support. For small unit occupiers there is the tangible benefit of being part of a bigger ICT infrastructure.
Flexibility is key
Whether the occupier is a start-up business making its first commitment to property, or a large corporate business taking project or overflow space, serviced offices give flexibility – a crucial ingredient in responding to changing market conditions. They provide fully fitted and furnished space, on ‘easy in-easy out’ terms, with all costs bundled into a unitary charge, fixed for the duration of the license.
The most common offer is a 12-month licence, with a fixed desk rate, payable monthly in advance, with one month’s deposit. While it is difficult to compare like with like, we estimate that the headline cost of a serviced office is competitive with conventional leases.
Although flexibility is a key selling point, a key finding of our research has been the stability and maturity of many occupiers. We found an average length of stay of 18 to 24 months, with some occupiers remaining considerably longer – three to five years is not uncommon.
Sources of growth
Future growth is likely to result from the continued expansion of knowledge-based SMEs in London; corporates supporting their core property need with flexible ‘on-demand’ space, and from small businesses opting out of conventional leases.
Potential impact of rising City rents
While demand might remain strong, operators might open fewer centres in a prolonged upswing in the City property market because of their exposure to rising office rents, which have to be passed on to customers.
Broader range of offers
A broader range of offers is likely to emerge, with a strongly tiered market reflecting different qualities and styles. We expect to see a broader ‘flexible space’ market emerging, with more managed space, accelerators and co-working space.
Increased landlord involvement
We believe that more landlords will embrace the serviced office sector. The joint venture model of serviced offices seems to offer a number of advantages. It moderates the risk of the operator to falling rental markets, or any decline in demand and it gives a mechanism to share the rewards of a rising market with the property owner, making it a more attractive proposition and allowing the property owner to become involved in a market that seems to be expanding.