Managed Space Rides the Recession

Copyright: David Lawson

Published in Property Week June 2009

Recession was meant to prove the superiority of managed business space to traditional leasing as tenants became frightened of committing to long-term leases. Why then is the sector convulsed by the downturn?   Top-three operator MLS has collapsed into administration, UBC lost its highly respected chief executive Philip Grace in a management reshuffle and a frenzy of price cutting threatens to drag others into a black hole.

   Managed space operators are no different to any other business if they are weighed down with debt, and there is plenty of that to go around. Not everyone is suffering, however. Regus has painful memories of the dotcom crash but is now riding high. Net cash balances increased almost £230m in the three months to April. MWB Business Exchange can breathe easy this time around after accumulating huge amounts of cash. Profits hit £14m last year.  Avanta seemed set for hard times after the its partner Kenmore faced difficulties but chief executive David Alberto insists he has the reserves and cashflow to double in size over the next three years.

  The stage has been set for jungle warfare as the strong devour the weak. MLS is currently the main food source with 15 centres taken over by MWBEX and others shared between rivals such as Forsyth. Serviced Office Group made an early entry to the feast by taking over six centres from Premier Office Holdings last year and is now cherry picking MLS. 

  Division between haves and have-nots will shape the future of the sector over the next few years. That does not mean the strong will have an easy ride. Regus admits ‘pressure on occupancy and price’ is impacting net income. In other words, plenty of new tenants are coming out of the woodwork but they are demanding lower rents. Even existing ones are taking advantage of tougher times.  ‘There is a lot more churn as people try to switch to cheaper space,’ Simon Jones, commercial director of agent Officebroker, told one of a series of meetings called by the Business Centres Association to discuss market turmoil.

  Success will depend on who can offer the best deals and that may not just involve rents. ‘There will be less net new business. Operators must concentrate on retaining tenants by offering better service,’ he said.

  New tenants face a huge range of standards and quality as the sector goes through a crisis of identity, says Paul Finch, co-founder of Orega. ‘Most centres are very average and difficult to distinguish from one another.’

   The key to success – and possibly survival – will be quality. Management agreements are becoming commonplace as landlords seek to fill space but operators must resist expansion for its own sake, he says. Orega is doing well because it has concentrated on customer service and ensuring landlords invest in their property. ‘We refuse to enter into management agreements with anyone who is not prepared to turn their building into the best in town,’ says Finch. 

  This concentration on tenant care appears to be paying off for Avanta. Chief executive David Alberto says 46% of new occupiers are now signing up for at least a year. More than 25% of tenants in central London and towns such as Reading are staying for even longer. That has helped reduce churn, increase occupancy levels and stabilise prices in the last three months, he says. But rents are still down on last year and some operators are making ‘shockingly’ low offers. ‘I can’t see how they can make a reasonable margin,’ he says, hinting at further trouble to come.

  Some are more open about the dangers of a price war. ‘If we don’t stop cutting margins we will spiral into a black hole from which some will not escape,’ said Brian Andrews, executive director of Basepoint. He told the BCA meeting about 25% cuts in fees among rivals, which encouraged his tenants to make similar demands.    

  It will be hard for some to resist filling space at any cost when facing rent bills on leased space. MLS was reduced to offers as low as £1/desk in its death throes.  The market outside London appears hardest hit. Andrews says demand ‘fell off a cliff’ in March as struggling firms decided to cease operations at end of the tax year. The biggest damage was among startups, where lettings fell 12%, although this was eased by a 4% growth in firms with more than 10 employees. ‘Two years ago we were building walls to divide space. Now we are knocking them down to accommodate downsizing major firms,’ said Andrews.

  The picture is different in London, which still hosts the bulk of serviced offices, where Avanta and MWBEX have seen a surge in demand for space to handle half a dozen or more desks. This is partly from professionals setting up new ventures after the wave of redundancies since the financial crash but also because large firms are downsizing to cut property costs.  Competition is still fierce, however, with rents down as much as 15%, says Office Group MD Olly Olsen. And it will take ‘a hell of a long time’ to get back to last year’s levels, he adds.