UK Property News 27th September 2011

Serviced offices have survived major cuts in revenue following the global economic downturn to become one of the fastest growing sectors in the commercial property market, according to one of the widest-ranging reports yet produced on the sector.

The Global Serviced Office Review 2011, which has been put together by leading UK serviced office broker and managed office group Instant from its own data, finds that the sector has benefited in particular from the even greater falls in rents for traditional offices since the downturn which has enabled operators to take space at affordable prices. Instant reports: “Overall it is true to say that the serviced office sector has proved remarkably resilient throughout the recession of recent years, despite fluctuations in some areas. “The forecast remains one of strong growth in both mature and emerging markets, with providers creating more ways to allow businesses to take advantage of technological changes to working practices.” The data includes breakdowns of the sector’s largest markets and companies as well as details of prices for workstations globally. The data finds that, as of July 2011, there were 5,484 centres operating in 101 countries around the world. The figure is up 18.5% on the same period in 2008, with the sector now encompassing over 80m sq ft (7.6m sq m) of offices with the capacity to accommodate more than 750,000 workstations. Since 2005, the largest global market – the UK - has more than doubled the total number of available centres with the exception of London (which has grown by 43%) and Edinburgh (which has grown by 50%). Sheffield and Milton Keynes have more than tripled the number of open centres over the same period. Between 2005 and 2008, the UK’s top markets increased their total number of centres by 60% – the fastest period of growth for any market. The continued growth in the market post 2008 has come despite average workstation rates and centre occupancy levels peaking in Q3 2008. Between 2008 and 2009, the global average workstation rate fell by 10.8% and overall occupancy rates decreased by 12.6% from a high of 87% to a low of 76% during the same period. As demand for serviced office space decreased, many providers slashed rates in order to improve occupancy levels, leading to the highest rate of centre closures in 2009. During this period, 182 centres in the top 50 markets ceased operations – a 75% increase over 2008 levels. Intant estimates that four out of five centres that closed, did so due to poor economic conditions. However, the overall number of serviced offi ce centres worldwide continued to increase during the period. The increase may be attributed to the decrease in commercial property prices worldwide. Rental rates in the office market peaked in 2007, followed by a sharp decline. As prices began to fall, serviced office providers with surplus capital began acquiring new space on long-term leases. It said that favourable conditions allowed providers to maximise returns over the lease period, by dividing up the space and selling it on short-term contracts. In 2008, 424 new centres opened for business throughout the top 50 markets – a 93% increase over 2007 centre openings. There are now over 1,400 cities globally where businesses can utilise serviced offices, The UK has 36% of the world’s total centres, with London alone offering 8%. The US is the second largest centre with North and South America together taking up 32% of the global market. The EMEA (excluding the UK) and the Middle East has experienced particularly strong growth in recent years, and the region now represents 20% of the total market. The Asia Paci?c region, comprised of most of the Asian continent and Australasia, is the smallest with 12% of the global market. However, this region is expected to grow faster than any other in the coming years. The current mean workstation rate for the top 50 markets is USD $653 per month. Sheffield in the UK has the lowest average at $296, and Paris has the highest average at $1,573. Over the past five years, the top 50 markets have a mean of 3.3 workstations per contract. Houston and Miami have the lowest average at 1.7 workstations per contract while London and Leeds have the highest at 6.7. This shows that larger companies are more likely to use serviced offices in markets like London and Leeds than in markets with a lower figure. The more developed the market, the higher the average contract size. Instant has also provided in-depth coverage of the serviced offices main players. Currently, there are almost 2,400 providers operating nearly 5,500 serviced office centres worldwide. Each provider operates an average of 2.4 centres, resulting in a market that is extremely fragmented. While most providers only operate a small number of centres, there are a few bigger players. Regus is the dominant provider operating more than 1,100 centres in 88 countries. However Mark Dixon's company still only represents 20% of the total market. In addition to Regus, Australian group Servcorp is the only other global provider with more than 100 centres in 21 countries. Through organic growth, Servcorp has increased the number of centres it operates by 308% since 2005, yet it still has less than 2% of the global market. There are more than 60 providers that have 10 or more centres in their portfolio, adding up to 43% of the total market. The remaining 57% of the market is made up of providers with between one to nine centres in their portfolio. Third and fourth are the UK’s BizSpace and MWB Business Exchange respectively. The largest market London saw the highest average of 7.27 workstations per transaction in 2011. This is a 15% increase in size from the 2009 low of 6.3 workstations, and is only 5% below the 2008 high of 7.64 workstations per transaction. The number of centres in London has increased year-on-year despite negative economic growth. Since 2005, the number of centres has increased by 43% for all of London; however, growth in central London is slightly lower at 36% for the same period. Some submarkets saw a slight retraction in growth between 2009 and 2010, but overall the market has grown by 7.5% since 2008. Workstation rates have been more volatile. On average London rates increased by 11% from 2005 to 2008, but dropped by 12.9% in 2009 due to poor economic conditions. Since this low, rates have increased by 12.6% and look set to return to their 2008 high before the end of 2011. The West End is the most expensive submarket, and average workstation rates are currently 25% more here than in any other central London submarket.