Small office lettings are responsible for the vast majority of Central London office transactions, forming the “bread and butter” of an office agent’s working day. However, in the 1,000-5,000 sq ft bracket, their share of total transactions is dropping.
That’s according to EG data, which suggests smaller deal sizes have fallen significantly as a proportion of overall Central London activity over recent years.
During 2012, 1,000-5,000 sq ft deals constituted some 80% of West End office transactions. In 2017, they now account for 10% fewer deals – a trend mirrored in the wider Central London market (see below).
The encroachment of serviced offices onto the mainstream has made long-term office deals far less attractive for SME occupiers, which crave agility.
“We’ve noticed that there’s definitely a trend towards some businesses going down the co-working route when a few years ago, they would have taken 2,000-3,000 sq ft,” says Michael Pain, head of the tenant advisory team at Carter Jonas.
“Landlords of conventional office space ought to be concerned about it: these changes to the conventional leasing market are happening at the expense of 1,000-5,000 sq ft deals.”
The SME’s need for flexibility is dampening overall deal volumes at this end of market: as the proportion of larger deals increases, the overall “churn” of deals in Central London – upon which fee earners rely – is inevitably eroded.
There are several reasons for the drop-off. Smaller businesses are not necessarily fully aware of how much space they’ll need in 3-5 years’ time. And they would have to fork out large sums upfront to pay for their office fit-outs. By contrast, serviced offices reduce the amount of cash flow burden for a smaller business on day one.
Landlords are taking note with far more hands-on asset management. British Land recently launched its own flexible office brand, Storey. Helical is offering flexible terms to smaller tenants with the chance to “upscale” into larger premises on longer-term leases.
Matthew Bonning-Snook, property director at Helical, says: “Small start-up businesses certainly enjoy the serviced office/co-work experience and being alongside potential collaborators.”
There is a risk of such occupiers becoming accustomed to this less conventional space, “trading up” into larger chunks of serviced offices. That said, landlords should not despair across the board.
Tenants in certain sectors will never be attracted to flexible space in the same way as newer start-ups: law firms or accountants rely on confidentiality and discretion. Hedge funds want self-contained buildings.
Simon Knights, partner and head of West End agency at Strutt & Parker, says that occupiers in the West End in particular always need their own space. “The people who take offices in the heartland want to be seen as individual,” he says.
Bonning-Snook adds: “We are finding that once these businesses are established they often want their own identity, privacy and the ability to brand their own space. At the large multi-let office buildings we own, our experience is that by offering high quality dynamic space, a hands on customer service approach and the necessary flexibility on terms, we can provide these fast changing businesses the agility but also the security they desire.
“This works both ways as we can usually upsize and downsize occupiers which increases our tenant retention rate, reduces void and rent-free periods and gives us the ability to drive the income.”
With more progressive landlords increasingly making the effort to stem the tide, more traditional property owners could get left behind. This issue is particularly pronounced in Mayfair, according to Jamie Shuttle, partner at Edward Charles & Partners, who says this location in particular, is “awash” with space in the sub-5,000 sq ft bracket. Shuttle says: “Landlords are having to be more open minded about lease breaks and deposits. As competition increases, we’re having to fight against serviced offices more and more: they have a receptive audience that will happily pay a bit more.”
Detractors claim the current serviced office boom is a fad; others suggest there is a more fundamental structural shift in how we work taking place. If it is the latter, then agents will need to get used to a permanent change in how often these smaller office deals get signed.
To send feedback, e-mail nick.johnstone@egi.co.uk or tweet @n_johnstone or @estatesgazette
