Rise of the Serviced Office Sector

As part of Metropolis’ detailed monitoring of the London office market, it has emerged that the serviced or ‘co-working’ office sector is now the third largest business type taking office space in the capital. Some 2m sq ft was let to serviced office operators in 2017 and over 2.4m sq ft was let to the sector in 2018. There are now over a dozen serviced operators looking for additional sites in London, with more requirements being launched each month. The sector has expanded across Central London and the UK regions with business models from both operators and landlords adapting to changing customer demands.

Over recent years, we there has been a substantial growth in the flexible office market. Providers such as IWG (whose brands include Regus and Spaces) and new entrants from the US including WeWork, now dominate the market. Reports by analysts such as Cushman & Wakefield point to a greater willingness amongst major corporate occupiers to source quite significant amounts of office accommodation from the serviced sector and take advantage of their flexible terms.

Central London has one of the largest and most mature flexible workplace markets and over the last five years has cemented its global reputation for new office occupancy models . Cushman & Wakefield estimates that flexible workplace operators currently occupy around 10.7 million sq ft of space across Central London. This equates to around 4% of the Central London office stock.

In 2012, Clerkenwell, Southbank and Covent Garden were the areas that had the highest proportion of flexible workplace sector but Metropolis lettings data indicates that now Aldgate, City fringe, Shoreditch and Paddington have the highest concentration. The average serviced office centre is estimated at 22,300 sq ft up from 15,000 sq ft in 2016., with 30 centres in excess of 50,000 sq ft in Central London, many operated by WeWork.

Agents report that many larger companies are examining their business models in a bid to encourage creativity by providing a more unstructured and less centrally controlled environment than their traditional business. Recent market activity has included IWG focusing on expanding its Spaces brand while BE group has purchased Headspace to enable dramatic future growth. WeWork have said that it could offer an entire building to a single tenant and manage the custom build-out of the space.  BE Offices provide bespoke space via their BeSpoke division, which is aimed at corporate occupiers.

A BCA report revealed that increasing numbers of operators are seeking densities of 50 sq ft per desk across the UK. WeWork’s new centres are now being planned at 35-45 sq ft per desk Knotel, the newest entrant from the US is planning a similar density.

However some operators are finding difficulty in securing space, with some operators searching in the West End frustrated by a lack of stock. The larger operators will need to seek prelets or purchase buildings, but these are not options for smaller players. Most operators aim to achieve 85% occupancy within 12 months after fit out, which will generate a high level of sales activity, not least for removal companies.

To sum up, the new breed of flexible operator is challenging the traditional business model and the sector is going to remain an important segment of the real estate industry in the future. Take-up by the sector has increased year on year, with 2018 the most active year for the sector, with WeWork responsible for more than half of take up in 2017-18. WeWork and Spaces are also expanding into Manchester, Birmingham, Leeds, Glasgow and Edinburgh and plenty of evidence that other operators are following.

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What Office Occupiers Want

Metropolis researchers often hear of some unusual requests from office occupiers looking for the next base, which can trigger some sales opportunities for suppliers, so this week’s blog looks at some of the latest trends in office design.

A recent report by Lambert Smith Hampton examined some of the features of occupier demand. Slides, swings, ball ponds or a spot of mini golf were once the height of coolness. Revered and ridiculed in equal measure, the trend towards putting the fun factor into the office on the wish-list of technology and media start-ups. As with all fads, attitudes change and many have realised that the workforce and management need something different. That difference is functionality. The expectations that the workforce has on the workplace have largely been a result of technology, demographic and employment changes. It is these factors that have and will continue to evolve the thinking and implementation of design. The emphasis is now more on productivity and sustainability, increasingly being cost effective.

Technology has increasingly dictated change over the past decade. New technologies have tended to dispense with data rooms, to fixed desk PCs, to landline phones. The fast pace of technological change has
made it difficult to future proof office design. Technology is making the tools we use more portable, more personal and increasingly smaller, space can be therefore be devoted to more productive, collaborative and engaging activities rather than static desk spaces.

Designing a space that is functional and productive for the entire workforce is a difficult task, when it is required to retain the company culture and enhance the future one. Functional and productive design includes areas for team-work, quiet spaces, meeting rooms and private offices are all elements that need to be given some thought. If specific features are wanted, they must hold meaning and have purpose.. A
games room or even a fully functioning kitchen can help to create a shared space for everyone to come together.

The recent locational flexibility of occupiers has been underlined by recent occupier decisions. Media groups such as McCann relocating to the City of London, WPP to the Southbank or pharmaceutical Novartis’ move to White City, illustrate that old certainties about search areas are breaking down. Traditional certainties of lawyers in Midtown, hedge funds in Mayfair and government departments in Victoria are breaking down. For decades business sectors have been wedded to certain postcodes, submarkets and even streets. Whilst this has been slowly changing over recent years, the current pace is expected to step up a notch, as tenants are now more open-minded about their next workplace than ever before.

The main driver of change is the growth of technology that creates a truly connected workforce. The ability for people to work anywhere, at any time, has caused a re-imagination of the office and the role it plays. This technology revolution has changed people’s expectations of working practices, meaning the workplace is having to adapt. As a result, tenants are becoming ever more open to the type of space that they will operate from. Secondly, the workforce itself has changed. A wide range of ages in the office means a more complex and thoughtful approach to providing the right kind
of working environment.

In addition, the boundaries of London’s office market have grown over the past 25 years as new development has rippled westwards to Paddington, eastwards to Canary Wharf, north and south with King’s Cross and Southbank respectively. 2019 will see those boundaries push further out as regeneration, and improving transport links crystallise. Stratford and the Olympic Park is gaining leasing momentum. So too is White City to the west.

Some analysts think that offices will evolve to become more like coworking, with occupier space becomes about much more than just a building or a physical space to go and work in, it’s also an international supportive community.

London Office Market – January 2019

Central London office lettings in January 2019 reached just under 1m sq ft from 44 mid-large size office transactions (5,000 sq ft+) during the month. The January 2019 figure is in line with the current monthly London average of 1m sq ft.

January was characterised by 15 office deals over 20,000 sq ft, which were led by the WeWork’s 159,000 sq ft deal at Merchant Square, Paddington, W2, along with large deals to Alvarez & Marsal in London, EC2; Cinven’s large deal at 21 St James’s Square, SW1; plus Foraspace and ETC Venues at Southwark Bridge Road and 133 Houndsditch, EC3 respectively.

Business services topped the table of lettings by sector, compiled by Metropolis, underpinned by the WeWork deal and several other serviced office lettings. This was followed by financial services led by lettings to Cinven and Gartner. Insurance, professional and media were also well represented.

Office deals ‘under offer’ in central London fell slightly to 3.3m sq ft, and pending deal volumes are healthy in nearly all sub-markets, with a number of deals in solicitor’s hands.

By area, the City accounted for 42pc of the office floorspace let in January 2019 at 400,000 sq ft. The West End saw 355,000 sq ft of take-up. Midtown contributed 74,000 sq ft of lettings and Docklands 50,000 sq ft. Current London office demand is calculated to be around 3.7m sq ft in the City and 3.1m sq ft in the West End.

The volume of grade A (newly built or refurbished office space) let during the month, reached a healthy 420,000 sq ft sq ft (45% of the monthly total), as transactions for new space maintained the recent strong showing. Availability is dominated by secondhand space in all London markets.

Metropolis research is currently monitoring 625 ‘live’ London office requirements, with pending deals for space of up to 1.5m sq ft due to sign in the next few months.

Paul Ives Metropolis paul@metroinfo.co.uk

The Triggers for Relocation

Recent research by Metropolis Property Research on its 6,400 office occupier relocation leads in 2018, suggested that nearly 50% of moves were triggered in some part by lease events, either expiries or break options. Some 3,112 office leads made some reference to a lease expiry in 2018. Of the remainder, the majority were mostly either expansions, start-ups or mergers.

The research chimes with a recent report on office occupiers the Thames Valley by property consultant Lambert Smith Hampton (LSH).  It says that triggers for 2018 corporate relocation remain more or less on trend with the previous 5 years. LSH say that moves predicated on a lease event are slightly less prevalent at 40% than they were when the research was started in 2012 (43%), but still make up a large part of the market. For example see Riverbed Technology (Metropolis lead id 120785), JDA International (id 122285) and Midwich (id 121691) moves in Bracknell alone in 2018 . In 2015-16, the percentage of relocations triggered by a lease event was down to 36%, however LSH point to a high proportion of merger and acquisition activity (20%) that same year which forced some occupiers to relocate to accommodate such activity ahead of a lease expiry or break clause.

In 2012-13, expansion accounted for 34% of relocation triggers, however this has since grown to 38% in 2018 while merger and acquisition activity has reduced to 9%. LSH use the example of significant corporate expansion is provided by Oxford Nanopore Technologies (Metropolis lead id 121255) which freehold purchased the Danby Building on Oxford Science Park. The 55,000 sq ft deal came alongside their pre-let of a 35,000 sq ft manufacturing/R&D base at Harwell. This type of occupier is synonymous with the current Oxfordshire market; huge expansion as funding is being increased both from the University and globally.

Location, location, location remains the predominant criteria when relocating and some 37% to 50% of occupiers specify moves to particular districts over the last 6 years, but it is always the majority influencer. Alongside location is betterment, as occupiers desire to improve the quality of their working environment. The number of companies looking for better quality workspace has increased from 22% in 2012 to 34% in 2018. At the same time cost has reduced in importance over the period of the research from 22% down to 11%, albeit up from 6% in 2016.

Occupiers are more and more seeking better working environments in order to attract and retain the best staff and maximise productivity. LSH point to corporate occupiers coming to the market seeking more cost effective space only to change their minds and commit to better space having reviewed and evaluated the options. Mobile Broadband Networks (Metropolis id 121223) were seeking sub £30 per sq ft space in Reading only to move to Thames Tower at £35 per sq ft despite there being cheaper space available nearby. Occupiers often lean towards better space both in terms of quality and amenity once options are shortlisted

Looking into the future, Some 3,000 occupiers are looking for space in 2019 in advance of lease events with more at an early stage in advance of 2020 lease events. The number of occupiers asking for more fitted and furnished office space has risen considerably. This may be as a result of flexibility and Brexit concerns and is related with the demand for shorter leases.

Paul Ives Metropolis Head of Research. paul@metroinfo.co.uk

Metropolis Movers January 2019

Metropolis ran 653 business leads on ‘office movers’ in January 2019. If all reported moves were added together, the total would exceed 16 million sq ft of office searches and transactions, researched by Metropolis’ unique market-led intelligence research team, last month.

London was the largest region with 336 business leads during month, but there were also strong showings from the North West (56), South East (50) and Yorkshire (44). Financial services, IT and business services were the largest business sectors planning relocations or agreeing moves during the month.

The relocation leads geographically covered the whole UK and provided details of the size of the office occupier,  likely move dates, a description of the reasons or trigger for the move, its business sector and full contact details including an address for written inquiries, at least one telephone number and in most cases an email address. Some of the largest planned moves and top picks amongst the 653 January leads, included those on occupiers Nomura Bank, BNY Mellon, Virtus Data, Brewin Dolphin and Merck & Co .

The January 2019 leads included 201 ‘identified requirements’ across the UK, including 120 in London. Which means that the company confirmed to researchers that it has current or future plans to search for alternative office space. Of these 201 searches, 117 were newly posted office searches, not previously notified to clients.

The most recent research also included 202 ‘potential movers,’ which were mainly longer-term leads on occupiers, considering a future relocation, however the occupier has yet to make a final decision on whether to search for offices.

Most of the remaining stories covered companies that have just signed for new office space and have set a move date, including some large pre-lets and companies inviting tenders for fit-out contracts. The shortest planned move date is just over a month away, whilst the longest was late 2021.

Recent research by Metropolis concluded that a conservative estimate of ‘live’ business tender opportunities on the database in recent months, exceeded £1bn of business.

 

Rise of the pre-let

Recent research by Metropolis revealed that a total of 133 occupiers were involved in pre-let searches or deals during 2018. These included a wide variety of moves across the whole of the UK. In London, a record breaking 39 pre-let deals were signed during 2018 totalling 3.8m sq ft, ahead of the previously record-breaking 2.74 million sq ft of pre-lets agreed in 2013.

Reasons given by occupiers for the risingof pre-lets are varied, but include upcoming lease events, continued limited new developments coming on the market and faith in London. It is clear that tech and media firms are making significant long-term commitments to new buildings, alongside traditional City occupiers, including those in the insurance and financial sectors. 2018 was the year that global brands made big commitments, including the likes of real estate-savvy Facebook and Sony both committing to new European headquarters in the West End and King’s Cross.

Metropolis has identified up to 50 named occupiers, which have on-going London searches, which could sign pre-lets on under construction, new or newly refurbished office space in 2019.

Recent research by Cushman & Wakefield indicated that over the last ten years there has been a total of 24.4 million sq ft of office space let pre-let transactions completed. On average, there were 27
pre-lets each year over this period, with the peak being 2013 and 2014. Pre-letting is more common in the City, Docklands and City fringe, than in the West End.

Large pre-lets from TMT (tech, media and telecom) companies in recent years including Apple’s acquisition at Battersea Power Station (475,000 sq ft), Dentsu Aegis Network’s 312,000 sq ft deal at 1 Triton Square, Linkedin in Farringdon and Facebook’s recent commitment at King’s Cross (600,000 sq ft). Banking & financial occupiers were the next most active sector, accounting for 31% of total pre-let volumes over the last ten years, including Deutsche Bank’s future relocation into 21 Moorfields (469,000 sq ft), SMBC’s acquisition at 100 Liverpool Street (161,000 sq ft), Wells Fargo and TP ICAP’s pre-let of part of 135 Bishopsgate (122,000 sq ft).

Public sector and government occupiers have also driven pre-let volumes, including large-scale consolidations from HMRC, FCA and TfL, as well as the Chinese Embassy’s transaction at Royal Mint Court.

King’s Cross is one of the most popular desinations for new office stock secure pre-let in recent years, including deals in 2018 to Nike (63,000 sq ft), Facebook, Google, Spaces and WeWork. West End submarkets such as White City, Battersea and Nine Elms have have also attracted significant pre-lets including in 2018, Penguin Random House (83,000 sq ft).

It is clear that occupiers are looking beyond the traditional core office markets. Banking & financial occupiers took the largest share of tower pre-lets over the last 10 years with 32% of total volumes, matched by insurance companies (32%). Some 17% of lettings were prelet prior to construction and 29% let during the construction process, compared to 54% let post completion.

Outside of London, Barclays pre-let 470,000 sq ft at Buchanan Wharf in Glasgow. The new campus complex will house existing Glasgow staff along with new positions created in technology and operations functions. in Manchester, Booking.com has pre-let 222,000 sq ft at St John’s Building, as the new global headquarters for its ground transportation division, consolidating four offices around the city.

Research has revealed that larger occupiers are considering their options 3-4 years ahead of a move, especially if the target is a move in the core districts. Trends also include some smaller pre-lets with shorter leases, particularly whilst schemes are under construction. Competition for core space is making fringe locations more desirable, especially with the possibility of rental savings.

Metropolis is currently tracking over 100 occupiers looking for over 20,000 sq ft of offices in 2019-20, more than half of which could consider a pre-let.

Paul Ives Metropolis Head of Research – paul@metroinfo.co.uk

Edinburgh Boost

Recent figures on the Edinburgh office market in 2018 revealed that take-up totalled 855,000 sq ft (79,461 sq m) in 2018. This level of office lettings exceeds the ten year average for the fourth year running according to Cushman & Wakefield and just fails to beat the record 1.05m sq ft of office moves registered in 2017.

Some of the larger deals in Edinburgh last year include Baillie Gifford acquiring 60,000 sq ft at Chris Stewart Group’s 20 West Register Street, Royal London taking 47,000 sq ft from Aviva at 22 Haymarket Yards, Artemis taking 13,710 sq ft at Exchange Plaza and law firms Brodies securing 43,000 sq ft and Pinsent Mason taking 25,000 sq ft at BAM/Hermes’ new development at Capital Square. Diageo’s pre-let 11-12 Lochside Place and Charles River expanded at Clearwater House, Heriot-Watt Research Park and now occupy the full building

Metropolis ran 200 leads on Edinburgh occupier’s move intentions including 50 companies searching for alternative space and a further 60 which have yet to decide whether to view space.

The insurance and financial services sectors have been particularly active within Edinburgh, accounting for 45% of Edinburgh’s total take-up – while they typically form an active part of the market this is a 54% increase on the five-year average. Major occupiers are signing deals to pre-let the best new space under construction, leaving limited choice for occupiers coming to lease breaks who want to upgrade.

Vacancy rates have come down even further from 3.55 per cent in Q2 to 3.35 per cent in Q4.

Looking ahead, only future schemes at 2 Semple Street and 80 George Street are capable of providing supply of Grade A office space. However, over the longer term, Edinburgh now has its development hopes pinned on the future of the planned scheme at The Haymarket, following the sale to M&G.

Metropolis is currently tracking 40 Edinburgh based occupiers with future move plans and a further 60 office occupiers which are expected to come to a decision in 2019.