by Mitchell Winter
Letting buildings for multi-occupancy has never been glamorous, but even in the bull markets of the 1980s it was the bread and butter for many agents and institutional landlords. In the current market it may have to be the jam as well. Approximately 80% of the office properties which came on the market in central London during 1990 for letting as single buildings are now being offered on a floor-by-floor or suite-by-suite basis.
Breaking buildings up in this way may be the developer’s or the landlord’s second choice. To be successful, it has to be treated as something more than “second best”. Properly managed and marketed, multi-occupancy can be a profitable alternative to a single, large letting. Even in the current market occupiers will pay premium rents for smaller units.
However, in a market flooded with space, occupiers often find it difficult to separate even the best multi-occupancy schemes from the “chaff”.
Location and quality
Successful multi-tenanted buildings will undoubtedly be well located and offer top-quality space. This may seem patently obvious, but it is a common misconception that the requirements of smaller occupiers will be somehow less stringent than those of larger users. This is simply not the case.
A large number of companies taking space in multi-tenanted buildings are subsidiaries or divisions of much larger international organisations. They expect the very best in terms of both location and quality of their office space. There is no reason to assume that smaller companies are any less discerning.
Small occupiers may have been forced to take second best in the past, but not necessarily because they wanted to. In the current market even the smallest company has real buying power and is in a position to pick and choose. Airconditioning, central heating, raised floors, prestigious reception areas and quality finishes and fitting throughout are all increasingly essential, as is a high level of service.
While top central-London locations such as Mayfair, St James’s, the City and Victoria will continue to be in demand, there can be little doubt that more secondary locations such as Fitzrovia, Marylebone and Oxford Street are suffering, and this will continue for a year or so.
Viable buildings
It is vital that developers and landlords recognise that subdivision is not appropriate for every empty building. One of the more serious problems facing this market is that many of the small units available have serious deficiencies.
The physical configuration of a building and the number and position of its windows have significant implications, particularly if divisions of less than a floor are proposed. Splitting any building into suites leads to a reduction in the amount of net lettable accommodation, as space has to be given over to the “common parts” required in a multi-tenanted building. The way in which these can be incorporated influences the commercial viability of subdivision.
In some buildings it is possible to locate reception areas, corridors and meeting rooms in central areas which would be difficult to let once the space has been divided up because they lack natural light, while at the same time maximising the amount of income generated from the better space. In others, prime office accommodation has to be sacrificed to common parts. It is for this reason, for example, that the large open-plan dealing-room space much favoured in the 1980s is so difficult to subdivide successfully. Period buildings also often present similar problems.
Suitable servicing
Servicing needs must receive careful consideration when subdividing a building for multi-occupancy. Most modern properties have the best, “state of the art” M&E technology but are designed with a single occupier in mind. As a result, much of the physical servicing is totally unsuitable for modular, multi-tenanted use.
In particular, providing occupiers of subdivided space with individual control of their own air-conditioning and central heating is often difficult. In two major acquisitions of floors in brand-new buildings undertaken by my firm last year, considerable sums had to be spent by the occupiers in adapting the existing system to provide balanced air-conditioning in modular offices.
The lack of suitable sound-proofing in suites also causes problems, both in relation to dividing walls and the void above the suspended ceiling. With the increasing use of metal ceiling tiles which make subdivision of the void uneconomic, the latter is becoming a particular problem.
As well as conforming to fire regulations, landlords should also consider:
- whether there are sufficient power points in each suite;
- that all occupiers need to have access to male and female toilet facilities;
- how any on-site parking facilities will be divided between occupiers and whether nearby contract spaces can be arranged.
Flexible terms
In the current economic climate, landlords and developers need to be ever more flexible and imaginative, and this is particularly true if the space is for multi-occupation. With so much accommodation on the market, landlords can no longer afford to dictate terms on a “take it or leave it” basis. Far more successful will be those adapted to the individual needs of the occupier.
Instead of offering the usual rent-free periods, for example, landlords should pay tenants’ fitting-out costs. These represent a significant outlay for smaller occupiers and the expenditure can often be incorporated in the rent in a way which is very attractive to both sides.
Similarly, landlords of multi-occupied buildings need to look seriously at offering short leases and/or break clauses and be more flexible about rent review patterns. These are increasingly becoming standard requirements throughout the property market, but are particularly relevant to smaller, rapidly changing occupiers whose long-term requirements are often difficult to predict. Many companies, notably those from the USA, will consider incurring penalties in order to have such terms incorporated in their leases.
Service, not property
Potential occupiers of multi-tenanted buildings are looking for more than just a certain number of square feet from which to operate their business. They want to buy a package which incorporates both their office space and a number of other less tangible aspects such as service, proactive management and maintenance. In particular, it is important to offer:
- central reception facilities with trained staff and an internal telephone system which enables communication about visitors;
- extensive security including, as appropriate, commissioners, closed circuit TV and/or coded entry systems;
- meeting and conference room facilities — especially important to small space users.
In serviced office accommodation or business centres, of course, an even broader range of facilities are required which further adds to the overall service infrastructure.
Multi-tenanted properties also require a much higher level of management than buildings let to one, two or even three occupiers, with a much greater understanding of the tenants’ needs. Good management may not let the space in the first place, but it will keep occupiers in the building happy, thereby securing long-term income.
Marketing multi-occupancy
The marketing of subdivided buildings should be more creative than simply revising details. It demands the same professional, high-quality approach applied to large instructions, but this is all too often lacking. In the current market as much effort should be put into letting 5,000 sq ft as 50,000 sq ft.
In particular, the distribution of brochures and other marketing material about multi-occupied space needs to be highly focused. Information should be sent not to the senior partners of agency firms, but to the junior agents who are actually doing the deals in the small space letting market. Similarly, receptions and other marketing events should target people for whom multi-occupation is of real interest.
There is no substitute for on-site marketing facilities, with well-trained staff.
Conclusion
In the bull market of the past few years, the image of multi-occupancy became somewhat tarnished. Many existing multi-tenanted buildings were allowed to deteriorate while landlords concentrated on their redevelopment potential, and new additions tended to be unsuitable, unattractive or poorly located buildings which would have been difficult to let in any market.
In the 1990s, the property industry cannot afford to ignore multi-occupancy. It may prove to be the golden goose.
