Behind the brick façade of 6 St Andrew Street in central London, eight floors of offices are fully equipped with desks and chairs, breakout spaces and carefully arranged shelves of potted plants and coffee table books.
The scene is a far cry from the typical new office awaiting tenants. They are usually offered completely empty, often without even carpets, to allow tenants to choose and usually pay for their own “fit-out”.
But owner Great Portland Estates bought the building in 2022, for £30 million, specifically to add it to its growing portfolio of “fully managed” offices. It will handle everything from reception and WiFi, to the yoga studio in the basement and activities planned in the communal kitchen upstairs as a perk for office workers.
“Any aggravation they have to face in space is not their problem. It’s our problem,” said Nick Sanderson, GPE’s chief financial and operations officer.
Around 10 per cent of central London’s office market is now some form of “flexible” space, according to property analysts Green Street, up from 6 per cent in 2019 and significantly higher than in other major cities. GPE is expanding its “flexible” offering to 1 million square feet, or 40 percent of its office portfolio.
There is no fixed definition of the word, but large landlords mostly prefer to offer equipped and managed office units of 50 to 100 desks on short leases, usually two years.
The rise of flexible, full-service options – sometimes called “office hotels” – is testament to the changing dynamics of companies trying to tempt staff back to the office and landlords trying new ways to attract tenants.
Sanderson said GPE had even banned the word “tenant” among its staff, preferring “client” instead.
“We are very used to everything being available at the touch of our iPhone. This is real estate’s response to this,” said Katie Oliphant, partner at Knight Frank. “For the occupants, it’s really obvious what the appeal is. . . Everything is done by them.”
Big London landlords such as Derwent, British Land, Land Securities, Canary Wharf Group and even the aristocratic Grosvenor estate are offering more flexible office spaces, a trend that began before the pandemic and has accelerated rapidly since.
Coworking, which generally means less space and shorter leases, remains largely the province of specialists such as IWG, Workspace, Industrious, WeWork and The Office Group, backed by Blackstone, many of which also offer fully managed units.
For managers managing large office complexes such as Canary Wharf, British Land’s Broadgate or Landsec’s Victoria development, flexible space allows them to accommodate tenants who want to expand or need space for special projects, without losing the client to another landlord. .
Canary Wharf Group, for example, landed a huge fully managed deal with Citigroup in 2022 as the bank refurbishes its office tower elsewhere in the port area.
Others, such as GPE, are attracting companies to move their entire office to fully managed premises with high rents, whether a medium-sized company or the London headquarters of a company based elsewhere.
Cal Lee, who advises on flexible workspaces at property agency Savills, said WeWork sparked a “sea change in the market” by attracting not only start-ups but also large companies looking for temporary space or smaller satellite locations. , although Adam Neumann’s company eventually overextended itself and had to declare bankruptcy.
For real estate owners and investors, the change in business model has profound implications. Traditionally, developers like GPE obtained 10- or 15-year leases for their buildings to help offset the risk of new construction projects.
Offering leases of just two years and the huge additional cost and headache of operating buildings can only be justified by high rents.
GPE is targeting a 50 per cent premium on rents for fully managed spaces compared to conventional offices, after subtracting its operating costs, and said it was currently achieving much higher premiums. St Andrew’s St is for sale for £200 per sq ft.
Owners also have to follow market demand. Savills said 77 per cent of office rents for tenants with fewer than 70 desks in far west London were flexible.
“Owners [of smaller buildings] “We are faced with the reality that this is where the market has come,” said Green Street analyst Adam Shapton.
One of the challenges of the flexible office market is the lack of robust performance data. Traditional vacancy rates generally consider flex space to be fully occupied because it is not available in the conventional leasing market.
Within flexible portfolios, Savills and Green Street estimate occupancy is around 80 per cent on average, which would add between 1 and 2 percentage points to London’s overall vacancy rate, which is already at a high of 20 years of almost 10 percent, according to the data provider. Co-star.
But flexible operators don’t want to be completely full either, because part of their business model is that they can allow customers to add desks in a very short time.
Shapton said both debt and equity investors appeared to be pricing in additional risk in flexible office portfolios as the trend was still fairly new and vulnerable if corporate tenants become more cost-conscious. The premium over fully managed space will likely be eroded by increased competition, he added.
“Could office occupants wake up from this post-pandemic fever dream?” said. “It feels like a permanent structural change, but it’s possible that some of that could be reversed over time. . . There is a lack of data and we certainly don’t have a full cycle of how these things work.”