Behind a brick façade at 6 St. Andrew Street in central London, the eight-storey office has a desk and chair, a break area and shelves with carefully arranged potted plants and coffee-table books. It is fully equipped.
The scene is very different from the typical new office waiting for a tenant. These are usually supplied completely empty, often without even carpet, so that the tenant can choose and usually pay for their own ‘equipment’.
But landlord Great Portland Estates bought the building for £30m in 2022, specifically to add to its growing portfolio of ‘fully managed’ offices. They take care of everything, from the reception and Wi-Fi to the yoga studio in the basement and activities planned in the shared kitchen on the second floor as a perk for office workers.
“The problems they have to deal with in space are not their problems; they are our problems,” said Nick Sanderson, GPE’s chief financial and operating officer.
According to property analyst Greenstreet, around 10% of the central London office market is now some kind of ‘flexible’ space, up from 6% in 2019 and significantly more than in other major cities. expensive. GPE is expanding its “flexible” offering to 1 million square feet, representing 40% of its office portfolio.
Although there is no set definition for the term, large landlords primarily prefer to offer fully equipped, managed office units with 50 to 100 desks on short-term leases, typically two years.
The rise of flexible, full-service options, also known as “office hotels,” is evidence of a shift in the dynamic between companies looking to bring employees back to the office and landlords trying new ways to attract tenants.
Sanderson said GPE even banned the word “tenant” among its staff, preferring instead the word “customer.”
“We’re used to having everything available to us with a tap on our iPhones. This is the real estate industry’s response,” said Katie Oliphant, a partner at Knight Frank. “For the occupiers, it’s clear what the appeal is. . . . It’s all done for them.”
London’s biggest landlords such as Derwent, British Land, Land Securities, Canary Wharf Group and even the aristocratic Grosvenor Estate are all offering more flexible office space, a trend that was set in place before the pandemic. It started and then rapidly accelerated.
Coworking, which generally involves less space and shorter rental periods, is primarily handled by specialist companies such as IWG, Workspace, Industrious, WeWork, and Blackstone-backed The Office Group; We also offer fully managed units.
For managers of large office complexes such as Canary Wharf, British Land’s Broadgate and Landsec’s Victoria development, flexible space allows tenants who want to expand and We can accommodate tenants who need space for special projects.
For example, Canary Wharf Group signed a major fully managed contract with City in 2022, at the same time as the bank refurbished an office tower elsewhere on its Docklands site.
Other companies like GPE are looking to move entire offices into fully managed facilities for top dollar rents, whether it’s an entire mid-sized company or a London base for companies based elsewhere. It’s tempting companies.
Cal Lee, who advises on flexible workspace at real estate firm Savills, says WeWork has been successful in attracting not only start-ups but also larger companies looking for temporary space or small satellite locations. He said it had prompted a “major transformation of the market.” Newman’s company eventually grew too large and had to file for bankruptcy.
For landlords and real estate investors, changes in business models have significant implications. Traditionally, developers like GPE have taken out 10- or 15-year leases on their buildings to offset the risks of new construction projects.
Offering only two-year leases, the huge additional costs and headaches of running a building are only justified by the highest rents.
GPE said it was targeting a 50% premium on rent for fully managed space compared to traditional offices, after deducting operating costs, and is currently achieving an even higher premium. Ta. St Andrews Street is on the market for £200 per square foot.
Landlords also have to follow market demand. Mr Savills said 77% of office lettings in west London to tenants with fewer than 70 desks were on flexible terms.
“Landlords (of smaller buildings) are facing the reality that the market has to get here,” said Green Street analyst Adam Shapton.
One of the challenges in the flexible office market is the lack of robust performance data. In traditional vacancy rates, flexible space is typically counted as full because it is not available in the mainstream rental market.
Savills and Greenstreet estimate that occupancy rates average around 80 per cent across their flexible portfolios, which would increase London’s overall vacancy rate by 1-2 percentage points – Data provider According to , co-stars are already at a 20-year high of almost 10 percent.
But flexible operators also don’t want to be completely full, as part of their business model is allowing customers to add desks on short notice.
Shapton said this trend is still fairly new and appears to be causing both fixed-income and equity investors to price in additional risk into flexible office portfolios, making them vulnerable as tenants become more cost-conscious. said. It added that the premium for fully managed space is likely to be eroded by further competition.
“Won’t office occupiers wake up from their post-pandemic fever dreams?” he said. “It feels like a permanent structural change, but it’s also possible that some of it could be reversed over time… There’s a lack of data to fully understand how these things work.” It is certainly not understood.”
