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.

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.

 

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.

Birmingham Offices Looking Ahead

Birmingham office market during 2018 saw 754,000 sq ft of office space transacted in 113 letting deals. This was a little down on the 1m sq ft of take-up in 2017 which included a 240,000 sq ft Government letting at Arena Central, but up on the 693,000 sq ft of office moves agreed in 2016.

Major lettings during 2018 included: WSP taking 46,000 sq ft at The Mailbox, BE Group taking 38,000 sq ft at Somerset House, Zurich Insurance taking 23,000 sq ft at Colmore Square and General Dental Council agreeing to move to 22,000 sq ft at 1 Colmore Square.

Metropolis ran 80 leads on Birmingham office moves during 2018, with 25 searches for office space ongoing.

A recent report by Knight Frank highlights notable expansions such as Hogan Lovells have quadrupling the size of its Birmingham office, taking 23,000 sq ft at The Colmore Building. The law firm is taking advantage of the cost benefits such as lower wages and property costs in the city.

Over the last 18 months Birmingham has witnessed an upsurge in flexible office provision. More than 20% of Birmingham transactions (approx 313,000 sq. ft.) have been divided between various flexible models such as co-working, traditional managed centres, and operators who are providing a fixed term, fully serviced office, to identified occupiers. Instant Offices (3 buildings), Spaces (2 buildings) and MSO have been notably active, acquiring a number of locations.

Knight Frank say take-up of Grade A accommodation repeatedly accounts for over 50% of total activity within central Birmingham. High quality space deals are driven in part by the occupiers’ seeking to raise the profile of their business and enhance their staff recruitment potential. The wellbeing of staff and the workplace is shaping occupier decision-making. Access green walls, health and leisure facilities and high quality on-site catering is becoming as important.

Looking ahead, Knight Frank confirm a number of potential lettings are currently in advance talks at city centre office buildings including The Lewis Building, One Colmore Square, The Colmore Building and Baskerville House as well as some pre-let discussions. Metropolis lists a number of the occupiers interested in these schemes.

At developments under construction, including 103 Colmore Row, 3 Snowhill and 2 Chamberlain Square at Paradise, there is a significant level of advanced pre-let discussions with occupiers

Banking and the Office Market

CBRE has just published its report: “Why We Can Bank on London 2018” which looks at subsectors within London’s financial services ‘ecosystem’: investment and retail banks, fintech firms, traditional asset managers and private equity firms and hedge funds. The intentions of occupiers in these sectors make up a large part of the Metropolis weekly office leads output.

The financial sector accounted for 27% of active space requirements by sq ft in autumn 2018

CBRE say Since the EU referendum, banks have continued to commit to London with Deutsche Bank taking 550,000 sq ft and SMBC taking 161,000 sq ft, while Wells Fargo took 220,000 sq ft for its new European
headquarters. However, banks have also been ‘nearshoring’ (moving staff to regional hubs in the UK) with Bank of America, JP Morgan and Deutsche Bank all announcing plans in late 2012 to move 3,000 jobs away from London.

The UK has been ranked first globally for the strongest fintech sector since 2016. It’s largest companies include Funding Circle, a peer-to-peer financing platform for companies and mobile banking service Revolut is achieving ‘unicorn’ status in April 2018 on reaching a valuation of $1.7bn (both companies’ intentions recently featured on Metropolis).  Fast growing Nutmeg is the first firm to offer an online discretionary investment management service in the UK. Fintech firms are dispersed but have tended to cluster in areas such as Canary Wharf and the City, where initiatives such as Level39 provide provide space. The typical lifecycle of a fintech firm begins in low-cost flexible space, usually in fringe locations. Typically, the firm then moves to a larger and more corporate space as it matures. Metropolis has run nearly 40 leads on fintech companies recently.

Private equity and hedge funds. London is the second largest centre globally for hedge fund managers  Over the past 10 years, firms other than banks or traditional asset managers have accounted for 61% of the sector’s total take-up of 27m sq ft in Central London. There are currently over 200,000 sq ft of office requirements live in this sector in central London. Metropolis has brought subscribers over 30 stories about hedge fund companies office move intentions in recent months.

CBRE conclude by forecasting the rise of agile working becoming more widely adopted in the banking sector, increasingly shifting towards more open plan offices and policies such as working from home. Firms are also increasingly considering an area’s wealth of amenities and transport links. For private equity firms in particular this could become a growing trend as they move away from prestige locations such as Knightsbridge and Mayfair to better connected locations.

Metropolis has run over 500 leads on London-based financial sector occupiers relocation intentions in 2018.

Merry Christmas to all Metropolis blog readers.

Paul Ives, Metropolis Head of Research. December 2018

Metropolis Movers October 2018

Metropolis ran 616 business leads on ‘office movers’ in October 2018. If all reported moves were added together the total would exceed 14 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 300 business leads during month, but there were also strong showings from the North West (61), South East (52) and Yorkshire (52). 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, company likely move dates, a description of the reasons 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 616 October leads, included those on occupiers Shell UK, IBM, WPP,Jane Street Capital and McCann Worldgroup .

The October 2018 leads included 161 ‘identified requirements’, including 100 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 175 searches, 109 were newly posted office searches, not previously notified to clients.

The most recent research also included 176 ‘potential movers,’ which were mainly longer-term leads on occupiers, considering a future relocation, but the occupier has yet to make a final decision on whether to search.

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.

If you would like some information on flexible Metropolis subscription packages, then please email Andy or Paul at andy@metroinfo.co.uk or paul@metroinfo.co.uk, mentioning ‘Metropolis Blog’

Metropolis Movers in August 2018

Metropolis ran 601 business leads on ‘office movers’ in August 2018. If all reported moves were added together the total would exceed 15 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 309 business leads during month, but there were also strong showings from the South East (72),  North West (60) and Yorkshire (46). 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, company likely move dates, a description of the reasons 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 601 July leads, included those on occupiers AstraZeneca, NTT Data, BNY Mellon, Booking.com and BGC International.

The August 2018 leads included 203 ‘identified requirements’, 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 203 searches, 104 were newly posted office searches, not previously notified to clients.

The most recent research also included 133 ‘potential movers,’ which were mainly longer-term leads on occupiers, considering a relocation, but the occupier has yet to make a final decision on whether to search.

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.

If you would like some information on flexible Metropolis subscription packages, then please email Andy at andy@metroinfo.co.uk, mentioning ‘Metropolis Blog’