UK Landlords Embrace Flexible Office Spaces

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95% of UK landlords believe that flexible office space will soon become mainstream, according to a new report by world-leading commercial real estate firm CBRE.

77% of those surveyed are considering adapting their property to offer some form of serviced office arrangement, with 79% preparing to launch a flexible space in the next year.

Flexible office solutions – where a landlord rents out a shared and fully equipped business facility to multiple businesses on a flexible basis – have become increasingly popular in recent years, as businesses seek to avoid being burdened with long leases subject to escalating rent reviews.

Real estate investment expert Isabelle Scemama notes that demand for greater flexibility is emerging amongst commercial tenants in all sectors:

“All tenants across all industries are changing the way they look at their premises. They want more flexibility and want to be more agile. They also want to take a smaller number of square metres,” she says.

Landlords also see benefits to flexibility, with 39% of those surveyed by CRBE saying the potential to retain occupiers as businesses grow and contract was a key attraction.

CBRE research associate director Emma Jackson says that the findings “make it clear that the landlord community regard flexible occupation as a trend that is here to stay.”

Leases projected to shorten and streamline

As the flexible office format has proven successful for those using it—with nearly 60% of organisations saying that the solution has benefited business – larger corporations are starting to take note.

John Duckworth of flexible workspace provider The Instant Group, says the firm is seeing an increase in interest from larger corporations, with “larger desk size enquiries increasing by a quarter every year for the last 3 years.”

Fellow commercial property group Workspace has seen annual profits nearly double due to growing desire for flexible spaces, currently seeking a further £190m investment to keep up with demand.

Further, in a report indicating a 15% increase in City of London office space take-up in the first quarter of 2018 compared to 2017, UBS attributed the boost largely to the growth of flexible office spaces. The bank’s report adds that “the inflexibility of UK lease structures has provided a boon to [flexible solutions] as occupiers are willing to pay slightly more to avoid being locked in for 10-year terms with upward-only rent reviews.”

Provisions in most commercial leases allow for rent to be reviewed every three to five years, with the Code for leasing business premises in England and Wales listing rent reviews as one of ten requirements to ensure that a commercial lease is compliant with the code.

Legal professionals project that this heightened demand for flexibility will lead to the “streamlining and simplifying” of leases.

Property investment expert John Danes predicts: “Lease lengths will continue to shorten,” noting also that “tenants are increasingly exercising breaks in leases.”

As such, he advises: “The office of the future has to be fit for purpose and flexible,” with easily sub-divisible areas to allow for multiple lettings, as well as more communal spaces and meeting rooms, rather than individual desks.

Executive says landlords “must respond to structural shift”

Data shows that investors’ biggest reservations in entering the flexible office space market relate to fears surrounding a lack of experience in the field and the risk of cash flow disruption.

Landlords have expressed fears that a shared office scheme will reduce the overall value of a building, if co-working tenants occupy more than 40% of the space.

CBRE executive Nick Knight however says that these risks should not be overstated.

“It is too simplistic to say that incorporating flexible office space into a building that leads to shorter leases and a variable income stream will be detrimental to value,” he affirms.

“Landlords have to respond to the structural shift in occupational demand. Value is created by deriving the optimum level of income and at present the market is trying to determine the best model to achieve this.”

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