Serviced office London 29th October 2014

The serviced office market in the UK has matured to the extent that it can now be compared to the likes of Eat and Pret a Manger. London’s landlords have totally embraced the serviced office concept and see these operators as acceptable tenants, albeit covenants vary in strength.

There was a time when the received wisdom was that if a landlord had a hard to fill office building only as a measure of last resort would you consider offering it to a serviced office operator. But that is no longer the case. In Central London the majority of serviced offices are 90% full.

The driver for this is the need for flexibility from occupiers large and small. While conventional leases have typically come down in length from an average of 25 years to 10, or even 5 years, the serviced office market has grown exponentially, in parallel, to meet the needs of companies who want the flexibility to grow or contract at short notice.

Many of the small to medium businesses would prefer to start in a serviced office before graduating to take space on conventional lease terms. The advantage for them is that there are no up-front fit-out or other major capital costs. All services, furniture and IT are provided by the operator. Interestingly, there is now a lack of supply of small conventionally let office space and so the serviced office operators are filling the void by providing this accommodation not only for smaller companies but also for others wanting a representative office to start off with, or have a specific short-term project need.

One of the benefits for landlords where an operator is occupying part of the building is that the services provided – such as meeting room space - may be on offer to other tenants in the building which makes the building more attractive as a whole for those taking conventional leases. Furthermore, a serviced office can often act as an incubator for growing companies which, once they reach a certain size, will look to take space on a conventional lease basis elsewhere in the building. The dynamism of the serviced office market is evidenced by the number of operators now in the market.

The major players include Regus (MWB, Abbey Business Centres and Forsyth); i2 Offices, Avanta, London Executive Offices, Citibase, Landmark, The Office Group, ServCorp, Ventia, Business Environment and Lenta. Of course these are the major players but, also, there are myriad operators who have perhaps a handful of centres. The spread, and market acceptance, of serviced offices has now gone well beyond the central London core and is pushing into those areas that have become the target of the TMT boom like Shoreditch, Whitechapel and Hackney. There are very healthy returns to be made by landlords who let to serviced office operators and there is the added benefit of a possible ready-made source of tenants for their conventional space.

Prices are quoted in rents per workstation per month which in the Salesforce Tower (formerly Heron Tower) can be as much as £1,200, or in the City core £650 - £850 and a more modest £450 in Old Street or Aldgate; clearly these are subject to negotiation but at that level it is enabling landlords to charge operators rental levels akin to prices paid by conventional tenants and lease lengths can be for 10 years or upwards and, because the market is now mainstream, conventional property landlords look like they will have competition from the operators themselves who are now obtaining the backing to buy buildings and benefit from the upside in property valuations.