Serviced office news 27th April 2016

Serviced office supply needs to keep with demand so that the economic benefits such offices offer can be maximised, writes Giles Fuchs, CEO and co-founder Office Space in Town.

One of the standout stories in the global property market over the past year has been the striking growth of serviced offices. The UK – and in particular, London – has led the way: research released last month by Bilfinger GVA showed the total take up of serviced offices in the capital had soared by almost 40 per cent year on year in 2015, higher than the total take up recorded between 2009 and 2013. The problem is that supply is struggling to keep pace with demand.

One of the chief advantages of serviced offices is that they help relieve small and medium-sized businesses of onerous capital costs. But the relative dearth of supply represents a significant challenge to the fast-growing companies typically drawn towards the convenience of flexible office space – which could have a damaging effect on the wider economy. What can be done to redress this imbalance? A good starting point is to help landlords and policymakers better understand the advantages of serviced office space.

One major benefit is that serviced offices can generate their own eco-systems by, for example, enabling nascent businesses to take advantage of complementary services located in the same building. As a recent report by Deloitte put it, this “collective or cooperative environment provides a valuable network of contacts not easily obtained when in a traditional leased space”. More work needs to be done to measure the economic impact of this community ethos and additional spend. Building owners may well be receptive to such evidence.

Research by the City of London Corporation found that some landlords do feel a sense of responsibility for accommodating the rise of small businesses – especially in helping to build a sustainable business ecosystem. Local authorities also have an important role to play. Planning committees should be encouraged to more carefully consider the needs of their local economies. Discussions are too frequently dominated by consumer, amenities and transport concerns, neglecting the make-up of local business – which often comprises significant SME sectors that could thrive with the right infrastructure in place. Even in London, where their number has grown substantially, serviced offices still represent only around 3% of commercial office space in the City, the Capital’s financial district.

At a time when financial institutions are reducing the size of their workforce – and a number of leading banks are advertising spare office space – developers and City of London Corporation planners should stop the trend of focusing on ever grander floorplate buildings and consider more flexible developments. One common misconception is that serviced offices only attract start-ups, which results in uncertain revenue streams for landlords. In reality, however, they cater just as widely for medium-sized and mature business much further along their growth journey.

Serviced offices have an average client tenure of two and a half years, not much lower than the average commercial lease of less than four years – and, because they have several clients concurrently, are less susceptible to disruption when any one lease comes to an end Dispelling misunderstandings of the stability of income they generate is an important step towards accelerating their acceptance and development, and can help reverse the trend of office space being converted into purely residential developments. There are indications that residential valuations, after years of rapid growth, are now entering a period of slowdown. In this environment, serviced offices potentially offer a higher-yielding conversion alternative than commercial office space.

A crucial step to help convince investors and landlords is to gain recognition for a market-wide valuation of serviced offices. Currently there is no established method and no entry in the RICS (Royal Institution of Chartered Surveyors) red book. Ad hoc valuations are typically underestimates because the additional income that serviced offices derive from their contracted and variable facilities is poorly understood. Investors therefore too often feel pressured to shy away from flexible working space in favour of the clearer and more familiar appraisals of conventional offices.

RICS discussed such a potential approach at a conference last month, and we are soon to publish a report on the subject, which we hope will lead to an agreed valuation methodology being accepted. Once implemented this is likely to secure additional institutional investment and encourage more serviced offices to be built. This makes much sense from a wider economic perspective, given that demand continues to accelerate. It is clear that start-ups, growth businesses and established companies all already recognise the potential of flexible working space to help them flourish. Supply must catch up.