Once upon a time a workaholic former hot-dog salesman came up with a great idea to give everyone the chance to work in a swish office. First, dump those onerous long leases which commit to years of expense. Then throw in all the bells and whistles normally available only to big-spenders such as posh furniture, meeting rooms and high-tech telephones. As so often with great ideas, others jumped on the bandwagon and a revolution was born. Then the sky fell. Economies crumbled, tenants disappeared, big operators wobbled, and the big idea suddenly became the bad idea.
It is easy to believe this neatly sums up the history of serviced offices. Mark Dixon might appear to have invented the sector when he launched Regus 10 years ago, such was the excitement generated. And the current financial woes which have spread through the multi-billion-pound sector might suggest it was all built on sand. But the truth is a lot more complex.
Firstly, serviced offices were around long before Regus came on the scene. Nor are they confined to a few big names. Shared space goes back centuries to the time barristers set up chambers and brokers established the Stock Exchange and Lloyd’s. More recently, drop-in centres sprang up in city centres for visiting businessmen, evolving into specialist operators. The Business Centre Association, set up in 1989, now has more than 650 members and the specialist agent Instant Offices estimates the sector has reached almost 10m sq ft.
Secondly, they show no sign of going away. In fact, supply continues to increase, with close to a thousand operators across the UK. Even conventional landlords are crowding in. For instance, Land Securities, the UK’s biggest property company, has launched a flexible letting service which includes many of the elements of serviced space. The idea of offering only a bare four walls weighed down with long-term commitment to rents has been fatally weakened.
Nor have tenants been put off by headlines over financial troubles among some of the big names. ‘The industry is now being pushed onwards by demand,’ says Jonathan Price, of the financial group Close Brothers.
In this crowded market, it can be easy to lose track of the fundamental reasons why service space is attractive and what is on offer.
What is serviced space?
There is no single definition because operators now offer such a wide variety. Industry and retailing have also joined in, so it is now more apt to talk of serviced workspace than mere offices.. The common thread is that tenants get more than a roof over their head. They pay a single occupation charge which can include a range of services such as lighting, heating, furniture, telephone, reception and meeting rooms. The other important difference to conventional property is that they are not trapped in long-term leases.
Fitting out premises can be a huge burden. Moving or setting up a new business is disruptive enough without spending time and exhausting start-up loans planning and buying furniture and carpets. Bills are also swollen by one-off costs such as agents’ and lawyers’ fees.
Smaller companies and start-ups have traditionally been relegated to cramped space over shops or in seedy backstreets because they can’t afford the rents charged on prime space or do not have the track record to meet landlords’ covenant requirements. Business centres and specialist operators have the resources to provide the same quality of space and addresses taken by much larger and more established firms.
In fact, standards and facilities have now reached a level where those big names now jostle with smaller users for serviced space. They shift departments and teams around as business ebbs and flows. Even the government is in the queue, making up one of the biggest tenants for this kind of space in central London. This trend sparked the growth of Regus when founder Mark Dixon saw an untapped market for major users.
One of the biggest gripes about conventional leases is that tenants pay a service charge but still have to handle their own insurance and maintenance. Business centres were the first to introduce all-in charges and this has become the norm for serviced space. Standards are also higher. Air-conditioning and efficient heating are no longer just a dream for smaller tenants. Smaller firms also made do with sparse business services. Now they can buy in facilities such as receptionists, cleaners, secretarial and technical back-up as part of an overall charge.
High-speed telephone and data links are no longer the preserve of big companies and specialists but small firms often find it a struggle to keep up to date and cope with the intricacies. Most business centres now provide a central broadband connection which is shared by tenants. Where this is still not available, they often fit ISDN lines which are almost as fast. Other kinds of technology such as videoconferencing, central fax services and high-quality copying add to the attractions that are often beyond the means of smaller firms. A new kind of business centre provides ‘touchdown’ services, where mobile workers can drop in, plug in their laptop and connect with the internet. This comes full circle from the first serviced centres, when firms such as solicitors or auditors based in the provinces would pay for a brass plate and a desk in a shared office in central London to give the prestige of a top address and keep in touch with home when visiting the capital.
Convenience may have pushed serviced space into serious contention with conventional premises but costs will boost it into the mainstream. In the past it has been difficult to judge value for money. Rents look so much cheaper for every square foot but tenants are gradually learning to judge on overall costs including services, heating, lighting and other charges. The market was given a major boost by surveys by Cushman & Wakefield Healey & Baker and the Chartered Institute of Purchasing and Supply which produced a truer bottom line. CiPS for instance showed savings as high as 78% over conventional space in major cities for periods of one month to three years for firms with between one and 60 employees.
Serviced workspace has been a boon to occupiers, providing premises matched to their needs rather than those of landlords and investors. But it can bring a whole new set of problems. The main point of this kind of accommodation is to relieve firms from diverting management time away from their core business, yet the increasing amount and diversity of supply is making choices harder – and more time-consuming.
Specialist agent Instant Offices says growth has levelled but still runs to around 450 suppliers - and that does not take account of landlords trying to offload empty space through a blitz of small ads in local papers. The Business Centres Association [BCA] estimates there are around 900 centres across the UK.
‘One problem is that the industry cannot decide what to call its product,’ says Rob Hamilton, MD of Instant Offices. Anything with four walls and a – perhaps leaky – roof can be described as a business centre, serviced office, executive suite, or the ubiquitous ‘flexible’ space.
The BCA aims to both set industry standards and provide free tenant advice on the 80% of business centres in the UK it represents. It points out there are recommended minimums but a menu of optional services, which is why they are so attractive to a wide spectrum of tenants requiring different levels of facilities.
At a basic level, this is a desk, chair and telephone. Furniture is almost always part of the package, on the basis that start-ups prefer not to commit resources for this kind of investment while bigger firms prefer not to tie up investment in things they may only use for a month or two. Lighting, heating , business rates, cleaning and maintenance wrapped up in a monthly charge are also considered the norm. After that, the list is as long as a tenant wants, ranging through reception and mail franking to plush meeting rooms and videoconferencing.
Almost every local authority and business development agency offers lists of operators. The BCA and specialists such as Instant Offices and Serviced Office Search [SOS] also provide online search engines.
As a rule of thumb, space is divided into three classes. SOS uses star ratings which match price ranges of:
but points out that these are very rough because of the range of prices and facilities around the UK. The best method is to take a virtual tour on a web site to narrow down the choice and then make a visit.
Instant Offices also sets three categories:
-- Economic or ‘budget’ - which have a limited range of services but still to a high standard. Acacia, with 17 centres across central London is typical, currently advertising special offers of three-person offices for £800/month.
-- Standard space - is generally in business centres which can support more
staff, a larger range of facilities, more luxurious rooms. They also have IT
standards for firms which see technology as critical and do a great deal of
business online. The BCA says most centres are now providing digital telephone
connections. This category makes up close to half the market and includes the
bulk of operators.
-- Premium – the top of the range, with luxury space, services and support up to international standards. IT will be at a level to satisfy the highest level users. This sector includes familiar big names such as Regus, MWB and HQ. But a number of smaller groups are also firmly placed in this sector because they concentrate on up-market addresses , blue-chip tenants and/or specialist niche markets.
Unlike conventional property, prime and secondary tenants do not necessarily live separately. A blue chip IT company can be found in the same building as a small consultant and large firms commonly spread different departments across the whole range of serviced space. A minnow could be looking for exactly the same as a giant: image, a prestige address, high-class services. The whole point of serviced space is that the smaller firm might not normally be able to afford the kind of quality demanded by bigger, richer ones. But departments within those top names may also not need qualities such as a prestige address or high-quality reception and be shifted into standard space.
‘Tenants need to consider what is important and match that against the space on offer,’ says Hamilton. A front office, for instance, needs a good image for visiting clients, so the search might focus on premium operators or standard ones that offer a top address.
That does not necessarily mean city centres. Many operators have colonised business parks and smaller towns for firms which are happy to move out or use serviced space as half-way houses between home working and conventional central offices. The key factor can be parking and/or proximity to public transport.
Cost is also important. Operators have slashed prices by as much as 60% over the last two years and most are ready to bargain. But not all.
The bulk of serviced office space is still in central London. Mayfair alone has around 60 centres. And while occupancy levels are running at only 77% in the capital, the figures are distorted by a couple of very large vacant units, says Hamilton.
‘Workstation rates seem to have increased marginally on average, with some large operators now penalising their sales staff if rents are not driven significantly higher before the end of the year,’ he says.
Demand has remained strong among small firms. Recession is always good for start-ups, because professionals laid off with hefty redundancy money will often jump back into harness. The biggest customers are also still in the market, as they take serviced space rather than commit to leases when the economy remains uncertain. It is the middle sector which has weakened and even here the upper end has begun to recover, says Hamilton.
But if rents rise, will tenants go back to their old ways? Some, maybe, but not as many as in the past. Every time a recession hits, they feel the pain from holding surplus space. Conventional rents are also being exposed as a poor indicator of business costs by studies such as the Total Office Cost Survey just published by Actium Consult and Cass Business School.
There are plenty of free tools for potential tenants to work out their own situation. Leading operators and specialist agents now offer an automated calculator on their web pages which will tot up extras such as heating and rates to give a realistic comparison between serviced and conventional space.
As the market for serviced space matures, operators are breaking away from the conventional range of services. This is partly to differentiate from a mass of competitors. Vacancy rates may have stabilised after a long decline but there are still not enough posteriors on seats to make finance directors sleep easily at night.
Tenants are also becoming more demanding. It took a while to get used to this kind of accommodation but occupiers are now more comfortable with the concept and no longer willing to accept standard offers. ‘They want what suits them rather than what suits the operator,’ says Richard Smith, MD of specialist broker Serviced Offices Search.
He has had more opportunity than most to watch the balance of power swing between landlord and tenant as SOS, which was set up in 1992, has been around longer than most suppliers. Operators see the changes as a normal reaction to feedback from customers.
Jamie Vine, head of direct sales and product development at MWB Business Exchange, says one of the main fears among tenants is that accommodation demands will suddenly change. Serviced space is meant to overcome that problem through flexibility – allowing tenants to grow or shrink as business ebbs and flows. But that means building ‘elasticity’ into developments so expansion space can be quickly found and any surplus just as swiftly taken back. Some smaller schemes just don’t have this capacity, as too much surplus space can mean profits disappear into a black hole.
Other operators feel they can succeed by limiting themselves to particular niche markets. Argyll and HQ, for instance, are reminiscent of those Victorian grocers who prided themselves as discreet suppliers to the gentry. They are unashamedly up-market, eschewing any price wars to sell on quality. Longford is another operator where you won’t find corporate flags flying over the centres, let alone the operator’s sign on the door.
Others are fishing in shallower waters, casting nets for minnows that have been previously ignored. Many potential tenants don’t want – or can afford - a full-time facility. MWB is one of the big names aiming to tackle this problem by offering a cut-down service called BusinessBase which enables up to three users to share the service for a maximum of 100 hours/month. Starting at less than £300/month, the fee is less than half the normal MWBEX level.
This comes full circle from the days when serviced space was just a desk and a telephone for someone visiting a city for perhaps a few days a month. The difference is that the accommodation is no longer stuck in some surplus space in the bowels of a building or in a dingy back street. Users share the same high-quality services and boast a prestige address.
The concept has never really gone away. It just became overshadowed by the surge of tenants taking larger amounts of serviced space as operators proliferated and big names like Regus and MWBEX came into the market. New technology also opened the field. Professionals commonly carry around notebook computers and mobile phones nowadays and are desperate for somewhere to send and receive email.
Cybercafes are not the sort of place to be doing confidential business, or relax and read a paper while downloading a sales report. Or charge a mobile phone. ‘This is one of the fastest growing areas of serviced space,’ says Smith. ‘It is attractive to people working from home who need somewhere to make calls or plug in a computer when in town. And as this becomes more important the services will become more common.’
The Institute of Directors can vouch for demand, with thousands of visitors using its touchdown centre off Trafalgar Square in London. Plans are in train to expand the idea into a UK chain of centres in partnership with operator Stonemartin. This trend has not escaped the notice of firms whose core business is dealing with mobile workers. All the big hotel conglomerates have set up or are considering touchdown areas where users can also use in-house hospitality services.
Whitbread is going a step further, creating up to 100 serviced centres next to its chain of Travel Inns and restaurants. Hotdesking and unlimited cups of tea are already available for £5/hr in places like Heathrow, Hemel Hempstead and Mansfield. These have revealed that it is not just travellers that welcome a temporary desk. Locals are also swarming in, which shows that despite the problems many operators are facing filling space as new suppliers join the market, there is potential demand if services are geared, as Smith says, to what customers want.
Some require merely a telephone number and postal address that appears they are in a prime address rather than stuck out on some suburban business park. Richard Nissen realised this back in 1980, long before the serviced office bandwagon began rolling. The centre he set up in London’s Piccadilly – aptly called Virtual Office - now has more than 1,200 clients across four buildings, connections with other UK business centres and worldwide links through the Global Office Network. But the original simple and efficient administrative backup for rootless professionals has helped underpin the operation through all the market’s highs and lows.
Operators are working hard to cut and slice the kind of services they offer between this basic touchdown level and the broad swathe of tenants taking space on monthly contracts. As hotel operators like Whitbread move in, so they are pushing in the other direction, creating office hotels.
Many tenants want to use space only as and when they need it rather than pay for a more permanent commitment. They can be based in cheaper or less accessible premises but tap into the better image and location when necessary. ‘We have a head office in Golders Green but use a virtual office in central London for things like meetings,’ says Smith.
Foreign companies are also recognising that they don’t necessarily need an expensive address when setting up in the UK. Many start off with an accommodation address, graduate to touchdown space as visits increase, move up to ‘hotel’ offices and then into more permanent offices.
The key to the future for serviced offices is whether UK tenants can be persuaded to break out of the conventional mindset and adopt a similar progression. Smith sees a lot more interest as homeworkers becomes common, but it seems unlikely they will ever make up the bulk of the office market. Start-ups and growing SME’s will need to be persuaded to change, and that will happen only if the sector provides every level of serviced space needed to move up this ladder.
Changes in business practises have driven the growth of services premises. More small firms, more start-ups and more short-term projects among larger organisations have all contributed to the erosion of traditional leases. Yet the focus on glossy ‘office hotels’ ignores a major part of this revolution.
Offices and industry are growing ever closer – in some cases merging into a hybrid which does not easily fit this view. Planners realised this 15 years ago, when they changed the Use Classes Order and invented the B1 category to bridge the divide. The transition has been startling, breeding a new generation of business parks where office and light industry is indistinguishable among futuristic glass blocks. Many have introduced new forms of tenure in smaller units aimed at nursing start-ups, while operators such as Regus have moved into schemes such as Green Park, near Reading, recognizing that not all serviced space needs to be in town centres.
But traditional industrial property is also proving a rich source of cheap, flexible accommodation. Serviced Office Search has been specialising in the sector since before most agents had even heard about it, yet managing director Richard Smith is ready to question whether the firm might need a change of name.
‘Perhaps it is misleading to keep talking about the serviced office industry. What we deal in is flexible space.’
Not everyone is ready to accept industrial property into the new family. It often lacks what is considered the key element - a quality image. Nor do industrial schemes usually boast a single, rolled-up charge which includes services and fittings such as furniture.
‘But not all our customers want fitted furniture,’ says Harry Platt, head of Workspace Group, one of the UK’s top regeneration landlords. ‘We have a lot of firms from the creative industries who want to provide their own interiors.’
Today’s service sector includes artists, actors, designers, craftsmen and IT developers. They don’t want conventional administrative space but nor do they want vast industrial sheds. A new market is being created somewhere between these two extremes.
Landlords like Platt are quick to admit that they have not adopted the full panoply usually associated with serviced offices. Traditional leases have been replaced by relatively short licences rather than monthly, or even hourly, tenure. Tenants pay business rates and service charges. Energy and broadband services are often pooled but are still generally an extra charge.
But this is merely a different part of the spectrum of tenure rather than a dogged attempt to cling to old ways. Rather than aim for standards and services on a par with prime offices, a handful of operators like Workspace are concentrating on providing ‘appropriate’ premises for smaller firms and a more elastic commitment for bigger ones unwilling to make long-term commitments.
‘There are 300,000 firms in London and more than 90% of those employ fewer than 20 people. Their main needs are flexibility and affordability, and this is where we focus out effort,’ says Platt. Rents average £8/sq ft and the firm’s 3,500 tenants can leave on three months’ notice. But relatively few do so, keeping vacancy rates consistently below 7%.
Not everyone is an artist or glassblower. Workspace has a rich mix of tenants including pure office users such as PR consultants, online support agents and advertising agencies. They comfortably sit cheek-by-jowl in elegantly converted old industrial premises such as the Leather Market in London’s Rotherhithe.
Many of the giant industrial sites being turned over to new uses provide the best of both worlds, as they can offer something closer to conventional serviced offices. Imex refurbished the administrative offices in a 300,000 sq ft former Royal Ordnance factory in Crewe desk space at £250-300/month.
This adds an extra dimension for tenants which demand both industrial and administrative space, says Derek Heathwood, a director of parent company Ashtenne. The landlord is also developing another variation for firms where administration and manufacture merges, such IT development. Called R&D space, these are single-storey premises similar to industry but built to a higher standard.
The bulk of space falls further outside serviced office conditions, as tenancies are on 12-month leases with two-month notice periods. But some have rates and services wrapped up in the rent. Energy is also pooled in many cases. ‘Sites often have a single supply of electricity, water and gas, so it makes sense,’ says Heathwood.
The wide mix of uses was a key reason why Ashtenne paid Mentmore more than £180m for the portfolio of serviced business space, originally built up under the Birkby name. Nor is it concerned about the flexibility of tenure. More than half its 3,000 tenants have been in place for over five years and those that move are seen as potential customers for placing elsewhere in Ashtenne’s huge national portfolio.
‘We see it as a great attraction to be able to offer not just a serviced office for someone on a site in East Kilbride but also the chance to deal with the same partner over a unit in the south of England,’ says Heathwood.
This kind of service should be a no-brainer, according to Roger Carey. While president of the British Property Federation he fought hard to persuade the industry to break out of the restrictions imposed by traditional leases. As managing director of Industrious he is putting theory into practice.
‘The key role of a landlord is to provide space in an uncomplicated way,’ he says. ‘Why, for instance, should a tenant have to pay for repairs and maintenance. If you rented a house you would expect the landlord to be responsible.
But he also sees no reason to exclude firms outside the normal serviced office crowd. Industrious, as its name suggests, is as likely to be dealing with blue overalls as white collars. It offers licences as short as six weeks but feels industrial tenants don’t want – or need – the ultra-short timescale of some office firms.
‘They usually have a perspective of at least a year,’ he says. ‘But they still want the confidence that if they lose a contract they will not be burdened.’ Around 1m sft – some 10% of the firm’s space - is on Flexilet, a six-year lease but with a break after every year. This includes repairs, service charges and insurance.
It is not just the metal-bashers that find this system attractive. ‘We have offices, design studios, laboratories and computer services in what are considered industrial units,’ says Carey.
Nor is it just a case of altruism by a benevolent landlord. ‘What we are doing is transferring risk, and tenants are willing to pay extra for that,’ says Carey. Flexilet rents average £6/sq ft compared with £5/sq ft estimated rental value for the firms 15m sq ft total portfolio.