Choosing the right office can seem more challenging than ever as home-working policies and flexible work patterns continue to shift. Achieving the correct balance between flexibility of lease term and personalisation of space can be difficult and varies greatly from each requirement to the next.
Spring4 have summarised the pros and cons of the three most common pathways below.
Serviced office contracts range significantly in length, from monthly rolling to 24+ months. Serviced offices are therefore the ideal flexible solution while a business decides on the long- term strategy for office occupation.
All operating costs are typically included within the monthly contract fee, meaning it will generally include rent, business rates, service charge, maintenance, utilities, shared broadband and cleaning. It is normal for the monthly contract fee to be calculated on a ‘per desk’ basis. Having an all-inclusive monthly fee allows occupiers to focus on their core business, rather than administrative real estate matters. Importantly, the serviced office operator will also typically roll any initial cap-ex into the monthly fee, amortising it over the entire contract term.
Provision of communal amenities
Most serviced offices provide a selection of communal amenities for use by all occupiers. At a minimum, occupiers can expect communal kitchen, meeting and break out facilities, but often the amenities will go beyond this. Many businesses find this communal approach can create a collaborative environment and encourage interconnectivity and opportunities between occupiers.
Typically least cost effective
Serviced office operators typically charge a premium in return for operating the centre and providing an all-inclusive package. This will also cover their overheads and profit required for providing this service.
High density occupation
The density of occupation is typically higher in serviced offices. The rented area is typically 30-50 square feet per desk, compared to 100 square feet per desk on average in a traditional office. This is predominantly due to the fact that meeting / break out / kitchen facilities are provided communally and outside of the occupier’s private office space.
Lack of office individuality
Serviced office floors typically accommodate multiple different companies. Creating a sense of identity, particularly in the communal areas, can therefore be a challenge. Providers do allow internal office decoration and, in some instances, to incorporate external office branding.
Zero statutory rights to occupy
While serviced office contracts may contain an auto-renewal clause, they provide no legal protection to occupiers. The contract may be terminated on short notice at the end of the initial contract period, or earlier in some instances. Occupiers can also be moved to different offices within the same building on short notice.
Variety of products available
Managed offices take various forms and service levels differ considerably. The contract length for managed offices will typically be longer than serviced offices due to the time and capital that goes into the tenant fit-out works. It is also possible for tenants to identify specific properties of interest which the provider will then acquire and fit out on the tenant’s behalf.
Option for all-inclusive service
Service levels vary from simply undertaking the fit out, right through to providing stationary and beverages. As with serviced offices, there is normally an option for an all-inclusive, single fee contract. However, it is more common for managed office tenants to procure some services directly, such as cleaning.
On a per square foot basis, rents for managed offices versus serviced offices are generally lower. By procuring some services directly such as cleaning, tenants can avoid premiums that are ‘baked in’ to serviced office contracts.
Fit out control
Typically an occupier will benefit from some level of control over the fit out specification. Managed offices are sometimes acquired as empty spaces. In this scenario, an occupier might have the opportunity to retain full control, with the managed office provider delivering a fully bespoke fit out. More commonly, the office space will have a basic fit out already, with the occupier afforded the ability to control ‘finishing touches'.
Little / no communal amenities
With managed offices, tenants rarely benefit from the same level of communal amenity provisions as serviced offices. This is because managed office space is generally personal and private to the individual tenant. Tenants may be required to acquire larger offices to accommodate amenity provisions, such as meeting rooms. Density of occupation is typically higher in serviced offices. The rented area is typically 30-50 square feet per desk, compared to 100 square feet per desk on average in a traditional office. This is predominantly due to the fact that meeting / break out / kitchen facilities are provided communally and outside of the occupier’s private office space.
Potential quality control issues
Managed office providers will have preferred contractors and suppliers that you are required to use with regard to alterations and fit-out works. Tenants must use caution and take specialist advise to ensure their fit-out works are delivered appropriately and as per the agreed specification.
Lots of ‘grey areas’
The managed office sector is a relatively new burgeoning market. There are normally multiple stakeholders involved (e.g. provider, contractors, suppliers etc.), all of which have their own requisite profit margin. It is important for tenants to seek specialist advise so that all expenditure and stakeholders are correctly understood.
Security of Tenure
Securing a lease that is contracted inside the Landlord and Tenant Act 1954 can be vital for occupiers that require long- term certainty. Contracting ‘inside the Act’ gives tenants the automatic right to renew their lease at expiry. A traditional leased premises is the only option where tenants might obtain full security of tenure.
Full control of fit out options
Acquiring refurbished office space, otherwise known as ‘Cat A’, allows tenants to control and create a bespoke fit out from scratch. Tenants can appoint their own designers, contractors and project managers. Tenants can seek to fund fit outs by negotiating rent-free periods. Alternatively, a landlord might undertake a tenant’s fit out on their behalf, subsequently funding this through a rental premium.
Increasing flexibility of lease terms
Landlords of traditional office space find themselves increasingly in competition with serviced and managed office operators. As a result, these landlords have been forced to become more flexible in their offering by, for example, agreeing to earlier tenant-only break options.
Tenant release space opportunities
There has been significant growth in the amount of sublease space available since the pandemic. This is largely driven by the amount of occupiers still assessing their long-term real estate strategy and requirements. Highly competitive and flexible terms can often be negotiated with existing occupiers seeking to mitigate costs. Opportunities to inherit good quality existing tenant fit outs can be particularly attractive in financial terms.
Typically longer lease commitments
Tenants in traditional offices can still expect to commit to lengthier contracts than those in serviced or managed offices. This can be onerous if the long-term real estate strategy has not yet been developed, and is exacerbated by wider market instability. Tenants must seek advice to ensure flexible lease terms are secured if required.
Double overheads during fit out
If a tenant undertakes their own fit out works, this will likely result in a period of double overheads (i.e. between the existing lease expiry and new premises fit out period). This can be softened by negotiating a rent-free period.
Capital expenditure often required
Significant initial capital expenditure will be required if the tenant is to undertake a brand-new office fit out. Tenants will normally also need to accrue for reinstating the premises at lease expiry (i.e. dilapidations). Large amounts of capital expenditure are not typically required for serviced or managed offices, where costs are ‘rolled’ into all-inclusive packages.