Dramatic rise of serviced offices

The dramatic rise of serviced offices

Last year, the take-up by serviced office providers in Central London showed a 288 per cent increase on the long-term average. The figures for this year have already nearly equalled the total for 2013.

The number of deals involving serviced office providers has been rising steadily since 2011, but it's not entirely clear why the take-up has risen so dramatically recently. However, we can identify several contributing factors. 

The first is the rise in the Technology, Media & Telecommunications sector (TMT) and small to medium enterprises (SMEs). These businesses often have a small number of employees initially and cannot make the commitment to a traditional 10-year lease. They are therefore attracted by the flexibility of a short-term lease and the amenities and lower cost of a serviced office.

The appeal of a co-working environment is another contributing factor. The TMT sector has created a trend for office sharing, which works well in a serviced office environment. It would be convenient for an app developer, for example, to be located in the same offices as other tech companies and start-ups.

The consistent rise in general rents in Central London may have also had an effect on serviced office take-up. It's not just TMT and start-ups who are nervous about committing to a 10-year lease when rents are so high – so are many other types of occupiers, who may be hedging their bets by taking space in a serviced office for the next two or so years, hoping they will drop.

The all-in, fixed charge system for occupying a serviced office is a key attraction for occupiers as they are able to add certainty to business costs. Moreover, small companies are attracted by the ability to access high- quality space, which would not generally be available in small units or on short leases.

Lastly, as with many trends, the serviced office sector came from America, where it is very strong. A lot of the recent take-up is by US companies such as WeWork who have recognised an opportunity in the London market.

Demand for serviced offices will remain present as there will always be a type of occupier looking for the flexible workspace they can offer. However, they are as subject to the changing rental market as any business. As we see the occupational market gain strength each year, and rents subsequently rising within sought-after areas, there is the possibility that too much upward pressure on rents could cause massive problems for serviced office providers.

If base rents were to rise substantially and rapidly, providers of serviced offices would struggle increasingly to tie up deals for space for new centres as the market would be too competitive and too expensive to establish a profit. This type of risk can be mitigated by operators owning their buildings, or through a joint venture with a developer.

It would appear sensible to suggest there is a rising requirement for serviced office providers to establish co-working, low-cost centres on the city fringes as a rise in demand is likely to force occupiers to look further afield. Furthermore, this type of operator would attract start-ups who traditionally struggle to convince landlords of their stability. 

Further information

Contact Savills Commercial or view investment sales and acquisitions.

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