Landlords capitalise on changing office use to compete with rise of serviced offices

14 October 2019

New report “Avoid a void” by Avison Young has revealed that some landlords are taking matters into their own hands to compete with the rapid growth in the serviced office sector, with the creation of a new fit-out category that’s being dubbed ‘CAT A+’.

Figures reveal that the past few years’ growth in flexible working has had substantial implications for landlords with an exposure to smaller unit sizes, with demand for units below 5,000 sq ft in central London falling by at least 60% on this time last year.

In response, smart landlords are responding to the tightening of demand by ‘super charging’ their smaller spaces to a CAT A+, creating an emerging category that provides a fully fitted ‘plug and play’ solution, provided by the landlord rather than the tenant. Whilst this trend continues to be in its early stages, Avison Young’s research points out that whilst this is coming at significant upfront cost to the landlord over and above a traditional CAT A fit out, their evidence strongly suggests that this enhancement to CAT A+ is offering a rental premium in addition to the benefits of a reduced rent free period and smaller marketing void.

Chris Gore, Principal, City Transactions said: “Despite current upheaval in the serviced office market, this sector is too big to fail, and we can expect further changes in the near future. Tenant demand remains strong, and occupiers continue to seek shorter leases. Serviced offices are here to stay, and we’re seeing some creativity in how landlords are responding to the challenge.”

Jeremy Prosser, Principal, City Agency says: “Regardless of the additional costs to fit-out the premises, the CAT A+ solution gives landlords a competitive edge against the generic serviced office offering and also the protracted process of letting traditional CAT A space in uncertain times.”

Jeremy continues “Whilst the boom in serviced offices has been rapid and we may yet see consolidation, the improvements in customer care and service, as well as the inbuilt flexibility, put an increasing onus on landlords to position their assets accordingly in order to compete.”

There is a warning that this will not be a one-size fits all approach. Whilst there has been a significant increase in the provision of serviced offices in key regional cities, with the Big Nine reporting more activity than central London during Q2 2019, we have yet to see a significant response from landlords. This may remain the case for some time, as costs remain broadly similar but rental income far smaller.

This is not the only way that landlords are innovating to compete. Landlords are also responding by launching their own serviced office brand to compete with serviced office businesses. The space is believed to earn a significant rental premium, and landlords have the added benefit of owning their buildings, which lowers associated risk.

You can download our latest report, "Avoid a void" here.

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