Copyright: David Lawson - published Property Week March 2006
For much of last year little seemed to be happening at MLS Group, which seemed strange for a company named by the Financial Times as the 18th fastest growing private business in the UK. The property industry scratched its head, wondering whether this was another bright star that burned too brightly before fizzling out. No-one has forgotten how Regus exploded onto the scene before tottering on the brink of disaster, accused of growing too far, too fast.Other market leaders like HQ and MWB went through their own horrors, and while all have recovered, doomsters found more ammunition when another brash newcomer, Southern Cross, crashed last year.
Yet MLS has been through similar storms and came out stronger. The dotcom crash was seen as an opportunity to snap up space at bargain rates. It not only weathered the dot.com crash but expanded while achieving what seemed impossible - maintaining a high occupancy rate. Even this was not good enough for the industry’s sceptics, however. So MLS decided to take a short pause last year from frenetic growth and push that rate up from 70% to 85%. ‘We are not a property company. We are a service operation,’ says marketing manager Ian Kibby. But he, along with founder and chief executive Paul Williams realised it was important to try and eliminate once and for all any doubts in the minds of landlords.
Like other top players, MLS no longer relies on taking new space. For the last couple of years it has concentrated on drawing landlords into joint ventures or management agreements, so it needs to show hard evidence that this can produce better returns than conventional leasing. Now that is out of the way, it is back to normal. MLS has soared from a couple of modest centres west of London to 77 in eight years. Another just opened in Nottingham, and more are on the cards. The aim is to extend further across the country to the North and Scotland.
MLS is sticking by what appeared to be an outrageous projection of 200 centres in five years, making this the only group to come even close to Regus for sheer bulk. Last year’s pause will have little impact. In fact, Kibby believes the target will be hit earlier than expected. Even that might be brought forward if the cynics have been finally defeated. Kibby despairs of the fact that top agents still look down their noses at managed space. ‘We are put almost in the same bracket as lock-ups over garages,’ he says.
Despite striking deals with some of the biggest landlords in the business, including Land Securities Trillium, Sun Alliance and Morley, none has emerged from a top conventional agent. Online brokers fill the gap, providing around 65% of new business. But this is not just confined to directing tenant enquiries. The relationship has hardened into more of a trade partnership. Last year Douglas Green of Serviced Office Sales brokered the merger with Acacia Group, bringing 17 more centres under the MLS umbrella.
Kibby says eight out of 10 small firms would be better off in flexible space, yet it is still a struggle convincing top London names. They don’t see an 800 sq ft customer as a revenue generator, nor some modest off-pitch refurbished building as likely to generate much kudos. Landlords can be just as conservative. Despite soaring growth, less than 1% of commercial property is managed space because many property managers still don’t understand the concept, nor the savings it can bring them, says Kibby. MLS is putting its faith in the Business Centres Association to educate the conventional property sector, otherwise such short-sightedness will close off the biggest growth area of the next decade
What is the secret which enables MLS to expand while so many others mark time? There is no mysterious billionaire behind the scenes, nor an over-generous bank manager. New deals are financed entirely from cashflow, which is another reason for boosting occupancy rates. And those high rates emerge from what so many operators promise but don’t always supply: customer service. ‘We don’t sell on cost,’ says MLS founder Paul Williams. Emphasis on quality gets across a perception of good value, which reduces client turnover, helps sell extra services and eases price increases.
Focus on small firms is another growth factor. For all the headlines over the billions made by big names like BP, it is the SME that endures slumps and has grown most strongly in the latest economic cycle. Every centre is designed around this focus. They range from one in Putney at 8,000 sq ft to a giant of 60,000 sq ft on Shaftesbury Avenue in London’s West End. The key factor is divisibility, as the average client wants space for only five to seven workstations. Each depends on local demand, says Kibby. Shaftesbury Avenue can offer large spaces for the area’s film industry and small ones to suite neighbouring Chinatown. Locations are central, as staff in small firms tend to travel by public transport. The ambition is to provide access to 95% of small firms in the UK. It no longer seems that far-fetched.
Bringing Brands to Real Estate
A key to the spectacular growth of serviced space is the idea that one product suits all. It is the closest thing to branding in the chaotic world of commercial property. Rather than wading through endless brochures and wasting valuable time on site visits, the potential tenant is presented with a standard menu including everything from lease length to furniture and services such as reception and cleaning. Like a bottle of Coke or packet of soap powder, the brand tells you what you will get.
This meets a persistent complaint from occupiers that choosing business space is like navigating a minefield of hidden dangers and obstacles when it should be as simple as selecting a hotel. Pick a Hilton or Marriott anywhere in the world and you know what to expect right down to the size of the bed and location of ice machines. Business space can vary from one floor to the next. Lease restrictions, service charges, planning controls and business rates all need careful examination by an army of specialists, adding to the overall cost.
Business centres offer to cut through this fog, and it is tempting for landlords to assume they can apply this brand to any kind of surplus space just by shortening leases and throwing in a few extra services. It is not that simple. Tenants are not fixated merely on the fact that they can get in and out quickly, nor on bundled services like cleaning and reception. Just like the traditional market, they have other priorities, and these vary. Location is the most obvious. A financial adviser might be happy with a foothold on a business park if clients rarely needed to visit, but not if they are billionaires jetting in from around the world. Atmosphere is another key element. While hedge funds drool over wood panelling and leather settees, a hot electronics start-up demands endless glass walls and lashings of stainless steel.
So the single product model is fatally flawed and more forward-thinking operators taking over surplus space are splitting the overall brand into different layers This does not mean throwing out the clarity of hotel-style choice, however. Single brands like Hilton and Marriott also have sub-brands which offer different levels of service. Executive Offices might be the last outfit expected to promote branding. Founder Peter Kershaw made great play when launching under the firm’s previous name, HQ, that there would be no nameplates on each centre, let alone Regus-style flags on the roof. High-class tenants do not want visitors to think they are boarders in someone else’s home.
But when marketing space, it helps to put buildings into distinct categories. Kershaw took over Argyll last year specifically because of the innate up-market brand of centres in London’s West End. These reek of exclusivity and discreetness - ideal for hedge funds and east European oil companies seeking to impress footloose billionaires. ‘When you have 15 centres in the West End, you can’t take prospective clients around them all, so you adopt a brand under which they know what they are going to get,’ says sales director John Drover. But rather than cut out the rest of the market, EO bought Corpnex to also offer more of a ‘cheap and cheerful’ image, while the middle range is now being filled by a new brand called Palladia. This concentrates on restoring listed buildings, giving the gravitas and style some tenants want but with modern internal designs.
Another business centre veteran, Philip Parris, differentiates Harvard Locatis centres is a slightly different way. While one overall brand covers centres around the world, they are divided into three types according to the services provided. ‘Not everyone wants the same thing at the same time,’ says Parris. This shatters a fundamental tenet of commercial property that location determines price. EO charges £1,500 per workstation for a centre in the West End’s Brook Street but £750 just around the corner.
There is often no obvious evidence that one centre is graded higher than another. Central Court in London’s Holborn appears very up-market, with high quality interiors carved out of the distinguished shell of the former Patent Office. Yet it is in the middle-ranking Palladia brand. Drover says this kind of market slicing has helped EO boost occupancy rates to almost 90%. The average landlord or operator would kill for this kind of success but might argue their hands are tied when they are limited to one or two centres. Yet Drover points out that it is possible to create different brands even within buildings. Charges vary even within a building according to services and fit-out. Space is graded from A to D according to services and fit-out standards. Tenants can choose from specifications right down to the type of chairs and tables.
Locartis Weaves Global Web
Glance through the tenant list of even the smallest business centre and some surprising names may leap out. Top international companies are hidden away in often anonymous space far from big city lights. This partly reflects an increase in globalisation, with overseas names moving into managed space as a first foothold. But even established firms are using property more fluidly, taking on short-term premises to match the projected time span of a contract.
This is both a boon and a challenge for operators. Foreign tenants lost their allure in the dot.com crash when high-tech names pulled out, leaving painful gaps. The crisis endured by Regus and HQ was also associated, however falsely, with expanding overseas. Some landlords remain suspicious, relying on local demand but they are overlooking a vibrant potential market, as multi-nationals have helped fill many of the dot.com gaps. Ironically, the more open-minded now face a new threat.
Businesses are becoming more rigorous about choosing property, according to Philip Parris, CEO of Harvard Managed Offices. In the past they may have allowed local managers to make their own decisions about where to locate but are increasingly transferring responsibility to corporate real estate departments or property management consultants. This is leading to more centralised decision making. Managers half a world away are attracted to networks that can guarantee standards and offer centralised billing. Landlords could again find themselves edged out by names like Regus.
Parris saw this while the rest of the market was still concentrating on battling recession. He and another serviced office pioneer, Richard Nissen, had experience of international markets after setting up an association called Global Office Network in the early Nineties so smaller operators could link with other centres across the world. This faded when Regus and HQ emerged to offer this service in-house. But Parris never lost faith in the idea that independents could compete with the giants by working under a single brand. Harvard’s expansion was put on hold as the recession played out but he scoured the world for the right international partners to create a new association called Locartis in 2001.
First to join was Multiburo, the leading French operator, followed by selected firms in other leading countries. Locartis now includes 100 centres across Europe and the same number in the US. Harvard has now resumed growth, providing the UK focus, with seven Harvard Locartis centres in the country. Parris sees capacity for as many as 50, although he will not be drawn on the timescale.Like other leading operators, the key to expansion will be management contracts and joint ventures. Landlords will be offered a way to exploit surplus space but Parris also wants to help kick-start large developments by allocating space in them to business centres. Tenants in serviced space often graduate to larger premises and more conventional leases, he says. This could ease the plight of harassed agents by producing an immediate income and offering potential tenants already in a building.
Locartis is not throwing open its doors to anyone, as that would defeat the objective of setting uniform high standards which satisfy distant corporate real estate departments. Centres must meet benchmarks including quality of services and the amount of space allocated to facilities such as reception. They need to be a substantial size, as this offers greater flexibility. Locartis is looking at developments up to 200,000 sq ft where a ‘feeder’ business centre could stimulate further letting.
Individual centres will be at least 15,000 to 20,000 sq ft. An existing rent roll of what Parris calls multi-site tenants is also important., as this shows that businesses from outside the local market have already given a vote of approval to the location.The business model could help centres hold on to these key players by providing a single point of contact when leases come up for renewal and distant corporate real estate managers are looking to cull multiple suppliers. They don’t need to be multinationals, says Parris. Even within the UK there is a trend towards centralised decision making on property.
SoS For International Connections
Online listing services enable business centres to connect with potential tenants half a world away, but what happens when someone wants to expand in the other direction? Not everyone will qualify or even want to join an international partnership, so they could disappoint valued existing tenants or watch casual searchers come onto their web sites and leave immediately. Search Office Space [SoS] aims to bridge this gap by providing links to its 5,000-strong international database. Big names like Abbey, MLS, BEG, Lenta and Longford have adopted the service but even the smallest operator can join this unofficial ‘club’, according to SoS MD Richard Smith. It costs nothing, as fees come from landlords letting the space. In fact, centres can supplement their income as they get a slice of the commission. Guiding tenants abroad can also set up relationships which bring in more business back home. ‘The beauty of the internet is that we can do this all from a London HQ and part-time satellite offices around the world,’ says Smith.
Big Occupiers Shun Inclusive Services
The death knell tolling over traditional leases grew louder when Transport for London chose to centralise 10 offices in short-term space near Victoria Station. But serviced office operators should temper their excitement, as the move shows they, too, could be under threat. It should be no surprise that TfL wants short leases. No-one can predict how much space will be needed as issues such as Crossrail, congestion charging and the Olympics ebb and flow. More significant is the choice of managed space without inclusive services such as reception and meeting rooms that are normally the selling point for business centres
Big tenants provide their own services, says Rob Hamilton, MD of Instant Offices Managed, which brought TfL into Southside, a landmark office block managed by GE Capital for offshore trust WELPUT. The key factor is a three-year lease on 35,000 sq ft with an option to extend to 60,000 sq ft and up to five years at a fixed rent. Hamilton has several similar deals in the pipeline and this could be just the tip of a massive iceberg. More than two-thirds of the UK’s top 100 companies want flexible leases, according to the annual review of corporate occupiers by consultant FraserCRE. Almost 40% set an ideal length of three to five years.
Landlords are beginning to come around but the richest source of supply is likely to come from occupiers themselves. Almost 40% of top firms face a crisis under new accounting regulations which reveal surplus property costs estimated by FraserCRE at £103bn. Sub-letting is hard where rents have fallen below the level demanded by the landlord. Converting to serviced offices can be one solution, as they command premium rents. Details of the Southside deal have not been revealed but in exchange for a short contract WELPUT will be getting more than the £45/sq ft open market rent for the area.
Conversion is not cheap, however, particularly for large spaces, so serviced centres tend to be limited to around 20,000 sq ft. Hamilton says opting for managed space at Southside saved £20/sq ft. The sheer scale also brought benefits such as big discounts on furniture. A swing to managed space could spell danger for serviced office operators, says Philip Dodson, MD of specialist agent Office Planet. It is attractive not just to big occupiers but for private landlords with a few small, often older buildings, he says.
The lower tier of serviced office providers will struggle to compete as they have to provide a lot more staffing and services but do not get much more income. Small managed office space in central London is being let for between £350 and £450 per desk per month, which is not much less than fully serviced space of the same quality at £450 to £500. The number of providers has doubled in the last year with big names like Grosvenor Estate and Landflex joined by a host of smaller operators such as Ledian, Smith Noble and Reflex. Managed space could grow to between 5-10% of office stock in London within five years. This is in addition to the 5% Dodson says is already occupied by fully serviced offices.
What is Managed Space?
Serviced offices generally include a range of extras such as staffed reception, meeting rooms and secretarial facilities. Managed space includes rent, rates, service charges and sometimes furniture and internet connections but nothing else. Both are short-term lettings.Philip Dodson, MD of agent Office Planet says three levels of tenure are evolving:
[Source: FraserCRE Corporate Occupiers’ Report 2005]
Occupancy Rates Rising
The severe wobble suffered by serviced offices and managed business space after the dot.com collapse has all but disappeared. Occupancy rates are soaring and investors are begging to join the party. Most major players have expanded in the last 12 months, and smaller ones are set to follow their lead, says Richard Boon, chairman of the Business Centre Association. Among leading names MLS is now up to 77 centres after taking over Acacia, MWB has reached 46 with its takeover of City Executive Offices and Evans Easyspace plans to hit 35 this year. Business Environment is almost 100% full and aims to double in size over five years, Electra Partners is funding Bizspace for a drive into managed workspace, while Abbey, KBC and Orega have opened new centres.
Workstations in London jumped almost 10% in the last year, says Instant Offices Group. Managing director Rob Hamilton says a slew of large centres opened towards the end of 2005, yet increasing demand meant occupancy rates jumped to almost 84% compared with only 76% a couple of years ago. Media and IT are most buoyant, providing a third of serviced office inquiries, says specialist agent Office Planet. But demand spreads across the board, including construction and government.
[Source: Office Planet]
Enquiries
% of leads
Media / IT 33%
Professional & Consulting 15%
Construction/Engineering/Energy 14%
Finance 12%
Government/Education/Research 9%
Service/other 9%
Recruitment 8%
Number of desks
% of leads
1-2 26%
3-5 31%
6-10 22%
11-20 11%
21+ 10%
Serviced space may make up less than 1% of UK commercial property but the industry has matured to become a mainstream option for these occupiers, says Boon. Landlords are increasingly looking at management agreements to solve property problems, while investors are keeping a close eye on the introduction of REITs. If a few rules can be tweaked, this could be among the first sectors to benefit.
Havant International has set up Fasset as a new vehicle to reproduce the transformation of Langstone Tech Park near Portsmouth, bought for £18m in 1997 and just sold for more than £54m to LaSalle Asset Management. Fasset has a 15-year service agreement to continue development of Langstone but MD Chris Allington is looking for similar partnerships with owners of parks bigger than 200,000 sq ft. The risk sharing, managed space business model involves facilities, property and development management and leases ranging from five years to as short as a week.
Self-Storage Soars
Self-storage should be considered part of the managed space sector, as it shares so many similarities. Operators buy or lease property then rent out short-term serviced space. The concept was born in the US, migrated here to spawn big names such as SafeStore and Big Yellow, but sits on a large base of small operators. Investors sniffing the promise of REITs may again take a lead from the US, which has seen massive growth to a market value of almost $150bn. Consolidation is rife as big names gobble up minnows, culminating in the $3.2bn merger of two trusts, Public Storage and Shurgard this month. But a dearth of UK analysis has left self-storage in the same limbo as serviced offices when they burst on the market. Steel Storage, which designs and develops sites across the world, has helped fill some gaps with a survey based on 976 firms advertising in Yellow Pages.
Top Self-Storage Operators
Sites [annual increase]
SafeStore 70 [0]
Access 46 [6]
Big Yellow 36 [4]
Lok ’n Store 21 [2]
Shurgard UK 18 [2]
Sentry 10 [0]
SpaceMaker 8 [0]
Armadillo 7 [1]
KeepSafe 8 [2]
Big Box 7 [2]
TOTAL 231 [19]
[Source: Steel Storage annual survey]
UK Overview - 976 self-storage companies