CONVENTIONAL OFFICES ARE NOW AT A CRITICAL STAGE IN THEIR EVOLUTION
For years, our market and landlord’s market was all about covenant and length of lease.
The more profitable a company and longer lease they took, the more a building was valued/worth – this created an income stream to sell to Funds or investors. This has now changed.
The Central London market has seen two major developments over the past 15 years, which has had a major effect on you the occupier as and when your lease expires or, if you need additional office accommodation.
Conversion of Offices to Residential
Westminster Council adopted a pro-residential planning position on Commercial Office Buildings. Basically, if an office building was valued at £1,000 per sq.ft, residential prices were achieving £1,800+ per sq.ft. Then Candy & Candy raised the profile of the market and you were seeing office buildings worth £1,500-2,000 per sq.ft being converted into residential, then being sold for £4,000 per sq.ft +++. The maths to work out the profit is quite easy.
The pro-residential planning position resulted in excess of 3m sq.ft of commercial office space being removed from the market. This reduction in supply meant any demand in good or bad markets still had a reduced market.
At the same time, the City and East London became cool – firstly driven by David Rosen of Pilcher Hershman persuading Mother to move from Soho @ £50 psf to The Tea Building in Shoreditch @ £10psf! – how rents have moved on, that building now achieves £50psf. Then came both Richard Susskind and the Hatton Real Estate teams who were on the front page of Shoreditch, Clerkenwell and Old Street. They really were visionaries and both companies have made the area a real success.
In addition, the lack of space in the West End encouraged companies to look East. The quality of building is slightly better in the City than Mayfair, at 50-70% of the cost of the West End. In Shoreditch and Clerkenwell you found amazing warehouse-type buildings that are now residential in the West End. Manhattan Loft Corporation started this in Wardour Street.
Seven underground Stations (Farringdon, Barbican, Old St, Bank, Moorgate, Liverpool Street & Aldgate) plus, if you whisper it quietly, London Bridge, which provides one of the most scenic walks in London (Waterloo Bridge being the other) means the East is fully connected – it always was, just needed that bit of PR.
Reduced supply generally meant sustained rents from 2008-2015 when the economy was recovering from the Financial Crisis.
Serviced Offices No Longer the Poor relation
The growth of the “Tech Occupier” which can expand from 10 people – 300+ people relatively quickly has provided serviced offices with a cash cow.
The serviced office was originally looked at as the poor relation to Conventional. Low quality buildings, no “services”, and a lack of flair made them unattractive. Today, they are light, bright, airy, creative and fun. Their model has meant Conventional Offices are now looked as the poorer relation – something I don’t think I agree with.
Serviced Offices take the risk off both the tenant and the landlord but, they cost 3x the price for 1/3 the space. There is the argument about how often a company uses meeting rooms, tea points – but overall, they are like hotels with no true permanency.
The Office Group are the market leaders and are fantastic as they put detail into every location. Regus (IWG Group) being the biggest. Service Office Operators are now “leasing” hundreds of thousands of square feet – again reducing the supply to the market – what was that about rents? We do a huge amount of work with them – their model is one we have wanted for conventional space for years, slowly, it is starting to happen.
As a result of serviced office growth, it has affected the 500-5,000 sq.ft market which is a massive part of our industry. It has nothing to do with the economy, there is still demand – it’s just serviced offices have hoovered that demand up and we now have to work harder to find the tenants.
Both reduced supply and increased serviced office offerings mean when your lease expires, there is not the supply you might expect out there.
Conventional Offices still provide certainty, own front door, the ability to design your own space and are cheaper – if you are patient and trust your agent (hopefully LONIC), you will always find something within budget, in the best location, on your terms – there are always flexible leases out there. Don’t let any agent tell you you’ll never find anything else – you always will.
Conventional Landlords should now offer:
All-inclusive outgoings – including dilapidations, rates, service charges. 20 Farringdon Street, EC1 offers this. It works:
- 10-page leases – maximum.
- Ability to conclude any letting within 10 days including consents. It is nuts that 2,000 sq.ft transactions take 3 months.
- Wayleave agreements dealt with, within 5 days.
Some landlords will and some won’t – our industry is slow sometimes to see changes and when we do, it’s too late. Our clients working models are changing daily – Artificial Intelligence (AI) will hit soon and we will have to respond accordingly. It is frightening, but fun too.
Hope you found this article of interest. Please get in touch with any thoughts or suggestions.
If you’re going on holiday, have a great time.