Will the commercial property sector recover?

With an estimated 2m+ sq ft of empty commercial space in the city of Bristol, where will new growth come from?

There is a lack of demand currently for grade A space, which matches with a concurrent lack of supply - although increased demand expected next year could create a problem. Any enquiries are taking longer to translate due to ongoing uncertainty in the market – with particular reference to problems in the Eurozone and the banking sector.

At the moment there is some demand for highly specified grade B space, which could offer an opportunity for developers to refurbish existing secondary space.

Room for growth

One area of growth has been the serviced office market: with around 50, Bristol is ranked 15th in the world for number of business centres; Bristol is among the top markets in theUK, which grew by 60% between 2005 and 2008. Growth has obviously slowed now and the effects of the last few years mean that current average workstation rates are below those for 2005.

As a reaction to increased space and depressed demand, many landlords have given their space over to the serviced office model and further intensified the competition in the sector. Bristol has increased its’ number of Centres by around 10% over the last two years, due at least in part to this phenomenon.

Across the 50 Centres for serviced offices in Bristol, occupancy has remained steady, even while average workstation prices have gone down.

What does the serviced office model offer?

Flexibility – serviced offices have a regular turnover, small businesses are expected to start, grow and then move on to more traditional space. Although this is changing (see below), having to replace small tenants at regular intervals is easier than losing a large lease tenant that might take a considerable amount of time to replace.

Some business centres are owner occupied which gives them the opportunity to provide a wide range of tenant propositions: licensed, managed or leased.

Landlords have been able to turn some or all of their space over to the serviced model to cope with lack of demand in leasing.

More certainty - lower cost of entry, with cloud services for IT and telecoms available on monthly terms, cheaper broadband costs, also available monthly (often including set-up costs), along with reduced infrastructure costs, means a business centre is not as expensive to set up as it used to be.

The market shows persistent demand and has a network of brokers offering information and search services to channel that demand. The Centre’s themselves are also constantly adapting to customer needs and providing ever more services for a growing range of prospects.

The maturity and size of the UK market (1 in 3 Centre’s globally are in theUK) means the market itself is fairly stable, providing a good return for investors and more widespread awareness among businesses of the services available.

Also, Centre’s are better able to keep clients longer. Serviced offices can compete with conventional leasing on price all the way up to 20 workstations and beyond, while still maintaining their flexibility and adaptability that enable businesses to react quickly to market and economic demands.

All this combines to ensure the longevity of the serviced office model.

Continued growth – albeit at a slower rate, but the serviced office services are perfect for the modern workforce. According to an Instant Office report last year, ‘Serviced offices are one of the fastest growing sectors in the commercial property market.’

There has been a growth in flexible and mobile working, from large corporate enterprises to solo entrepreneurs, which reflects business needs for cost control, modern thinking about employee satisfaction and performance and social changes like two-parent and single-parent working families.

The provision of hot-desks, touch-down space, meeting space, networking opportunities and general support services in business centres exactly matches the needs of this evolving workforce.

Conclusion

In 2011, serviced office space accounted for over 2% of total office stock in theUK. This is boosted, however, by the amount of flexible space being used in corporate offices, like BT and Orange.

Large companies, like BT, have found significant cost savings through these developments: BT estimate they saved £500m between 2000 and 2008 as 70% of their staff turned to flexible working.

At the other end of the scale, solo entrepreneurs and small businesses use this technology and flexibility to minimise start-up costs, gain competitive advantage and enjoy a better work-life balance.

According to reports by DTZ and the Reading University, the observed motivators for serviced office take up are flexibility, immediate availability, certainty of cost, location, additional services, ability to vacate and short term commitment, quality address, ability to expand and contract and the serviced office network.

These demands, particularly in economically difficult times, are not going to reverse. Indeed, I can see less need for conventional space in the future and increasing demand for space that is even more flexible and adaptable than now.

This provides a strong case for the serviced office model to take up a good proportion of the excess stock currently wallowing in the commercial market.

Sources

Instant Office: Global Serviced Office Review 2011

DTZ Research: Flexible Managed Office Market July 2006

DTZ Research: Property Times Bristol Q12 2012

Change and Flexibility: The role of serviced office space in office markets and corporate property portfolios, Reading University, Gibson and Lizieri, 1999

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