By Giles Fuchs, CEO of leading serviced office provider, Office Space in Town.
Evolving from a disruptive to a significant and dynamic force within commercial property, the flexible office market continues to expand, significantly outpacing other areas within the property sector.
Its growth has been global, led by the London serviced office market, which grew by almost 20 per cent last year and where rental rates have hit record highs.
Despite economic and political uncertainty,this growth is showing no signs of slowing. Traditional Landlords such as British Land and The Crown Estate have begun to capitalise on the boom, launching their own flexible office offerings. Long-term, income-seeking institutional investors such as pension funds and insurance companies are also waking up to the powerful income opportunities that serviced offices offer and are beginning to commit to the sector.For example, earlier this year FTSE -250 REIT RDI took an 80 per cent 80% interest in a portfolio of four of our established high quality serviced offices.
The flexible office boom can no longer be dismissed as a trend. Powerful economic and business behavioral shifts are driving the shift in demand away from conventional to serviced office space. Businesses today are far less concerned about square footage and far more concerned about the services the space provides. For landlords and investors, this is translating into revenue streams beyond rent. Below I outline the key factors that underpin this market shift and why it will only accelerate.
Changes in how we work
Technology is liberating how and where businesses operate and employees are becoming more footloose. Being ‘cloud-based’ means that businesses are no longer confined to ‘these four walls’, a phone and a desk;and are therefore not well served by traditional, static square footage. The inherent flexibility and minimal fixed costs that flexible offices provide have meant that small and medium sized businesses have been early adopters. SMEs accounted for 99.9% of all private sector businesses and 60% of all private sector employment in the UK at the start of 2017, making demand for flexible space intense, and with 4.5 million new businesses predicted to start up in the coming decade, it is unlikely to slow down in the foreseeable future.
It would, however, be a misconception to believe is that serviced offices only attract start-ups. In reality, they cater for medium-sized and mature business much further along their growth journey. Deals for 20 plus and 50 plus desk requirements have risen by 12 per cent and 19 per cent respectively since the beginning of 2017 and larger companies are now taking up roughly 30 per cent of the supply.
Race to be flexible
Political and economic uncertainty is driving businesses away from traditional leases, towards flexible office space. UK businesses are increasingly hedging their bets, shunning the fixed terms and fixed costs associated with traditional, long-term office leases in favour of greater flexibility. A company’s ability to scale office space up or down quickly and easily according to its needs without incurring moving costs – not possible with the static square footage of conventional office leases – can ensure that productivity and profitability are maintained.
Servicing all sectors
Originally, emerging tech companies or quirky millennial start-ups were seen as the model customer for the flexible office market. In the last two years, however, demand has broadened significantly, and flexible offices are now are home to prestigious firms, with some even establishing their HQ in serviced offices. They have been able to do this as the standard of facilities, services and IT easily matches if not surpasses what is available in ordinary commercial offices. Businesses from a broad array of sectors also now occupy serviced offices, including construction, consulting, finance, transportation, charity, technology, energy and public services.
Work life balance
Once a trend, now increasingly the norm, businesses, and more compellingly, their employees, have come to expect flexibility in how, where, and even when they work. Break-out areas, communal social space, cafes offering connoisseur coffee, beauty salons, sleep pods and roof terraces are becoming commonplace, as work and hospitality converge in the name of service. As a result, flexible office providers are constantly innovating their product offering and evolving services that can cater to these changing demands.Millennial workers, characterized by their pursuit for experience over ownership and a strong work life balance, have been a major contributor to this shift. With 34% of those aged under 35 working offsite at least once a month, compared to just 27% of those over 35, flexible spaces have the potential to help businesses attract and retain, a young and dynamic workforce, a trend that is likely to continue as GenZ begin to enter the workforce.
Richer revenue streams
Traditionally office landlords’ income has been derived only from rent.Integrating services into office space not only enhances the tenant experience and therefore the rental value of the space, it also introduces new potential revenue streams. This means that, while serviced and flexible offices equally deliver stable rental income, they offer two additional income streams. First is income from contracted services, such as IT and reception facilities. The second is from variable services such as bookable meeting rooms, secretarial functions, in-house restaurants, bedrooms, gyms and beauty rooms. Only by amalgamating all income streams together can the absolute value of a service office building be established.
An industry received, standard valuation for the serviced office sector, is needed which recognises this enhanced value. A recent independent report by Capital Economics and Nottingham Trent University, commissioned by Office Space in Town (OSiT) proposed a valuation methodology that is currently being considered by RICS. This would provide further support for the emergence of serviced offices as an asset class in their own right, attracting a broad range of occupiers and investors to a model that is sweeping markets globally.