UK LANDLORDS & INVESTORS EMBRACE THE FLEXIBLE … · CBRE Limited, 2018 UK Landlords & Investors...

© CBRE Limited, 2018

UK Landlords & Investors Embrace the Flexible Revolution 1

UK LANDLORDS & INVESTORS EMBRACE THE FLEXIBLE REVOLUTION CBRE Research, 2018



INTRODUCTION

Technological advances, evolving economies, and structural changes in the labour market are all transforming the way businesses are organised and the types of workspace they require. Organisations seek agile workplace strategies for their portfolios that put efficiency, people and experience at the heart of their real estate decision making. Flexible office solutions, combined with traditional leasing models, are a key strategy tenants are exploring to deliver real estate agility. We highlighted these trends in 2017 in our report: The Flexible Revolution: Insights into European flexible office markets and continue to track occupiers’ current views in our 2018 EMEA Occupier Survey.

Now, in a new study, we focus on the owners and landlords of traditional office space in the UK, and identify the way in which the UK landlord community are reacting to the evolving demands of occupiers. We surveyed a large cross section of landlords, of various types, sizes and geographical coverage. Well over a hundred landlords participated. A smaller sample from the survey participants also gave their time for detailed one-to-one interviews, to provide added contextual insights for this report.

https://www.cbre.co.uk/research-and-reports/European-Flexible-Office-Markets---The-Flexible-Revolution-November-20170

https://www.cbre.co.uk/research-and-reports/European-Flexible-Office-Markets---The-Flexible-Revolution-November-20170

https://www.cbre.com/research-and-reports/EMEA-Occupier-Survey-2018




EXECUTIVE SUMMARY

92% of landlords surveyed agree with the statement ‘flexible office space is on the brink of becoming mainstream’.

The most common ‘flexible’ option currently offered by 66% of survey participants is office space on shorter leases (less than five years). This must be considered the barest form of flexible option.

The largest perceived upside to offering flexible office space solutions is an increased ability to retain occupiers as they grow and contract. There is a strong desire to maintain income streams, as occupier behaviour evolves.

A comparison of current versus future flexible space options shows aspirations are heading towards a more sophisticated offer. There is a significant increase in most categories of flexible office space, with by far the largest being co-working space.

77% of survey participants state they are currently considering some form of flexible provision and when asked in what time frame, 79% declare an intention within the next 12 months.

Despite concerns over experience, cashflows and valuation, 38% would offer their own brand of flexible office space and 49% were citing entering some sort of relationship with known brand providers.

The biggest barriers to offering flexible office space (by some margin) are seen as: lack of experience to run flexible office space, disruption to existing cash flows, valuations and asset liquidity.

We asked landlords where they would consider providing flexible office space. Perhaps unsurprisingly London and the bigger cities were the most popular locations. However, nowhere was considered off limits.



Flexible office space: The landlord response – Page 17

CONTENTS PAGE

Serviced offices Short term/managed offices Co-working space

The UK in contextPage 6

Key survey findingsPage 8

How much future flex space?Page 15

What are flexible offices? Page 5

Accelerators Incubators

Ripple or wave

Benefits & Barriers

Time to act

Future provision

Own brand/known brand/partnership

Geographical presence

Flexible office space allocation: How does it

stack up?Page 16



‘Flexible offices’ has become a catch-all term to encompass those businesses offering occupiers a mix of office space and ancillary services with terms ranging from as short as a day to terms extending indefinitely.

FLEXIBLE OFFICES: WHAT DO WE MEAN?

Serviced officesPrivate offices leased on flexible terms, fully

fitted out space inclusive of service charge and

rates, usually with reception services.

Short term\ Managed offices

An office leased and fitted out by an operator to the occupier’s specification, who then pays a monthly

licence fee.

Typically taken on a short term.

Co-working spaceOn a membership or per desk basis, co-working

offices provide a sociable working environment

where users can network, collaborate and do

business with each other.

Hybrid

AcceleratorsThese spaces hold accelerator programs in which start-ups spend time working with

a group of mentors over a set timeframe, often with the

opportunity for seed funding at the end of the program. Space

is typically open-plan with plenty of collaboration space.

IncubatorsSimilar to accelerators, incubator

spaces accommodate start-ups, but are focused on a

specific sector with sponsorship from larger firms and public institutions. While the space

types are similar the underlying tenant is typically different.


Broadly speaking, the sector can be split into five different formats – traditional serviced and short term/managed offices on the one hand, and newer formats – co-working, incubators and accelerators – on the other.

Increasingly, hybrid versions have emerged incorporating co-working space with managed or serviced offices to capture a greater range of occupiers. The range of offer has been driven by growing occupier requirements.

As these formats converge, it becomes more meaningful to talk about flexible offices as a broad and largely interchangeable set of products rather than treating them individually, not least because of the ease of reconfiguring space from one format to another, or simply altering the terms of design of otherwise conventional office space.



Serviced office and co-working providers have long been part of the UK office market landscape. However, demand for office space from this sector has accelerated sharply in recent years. In 2017 this sector contributed 18% of overall take-up in Central London, up from an 8% share in 2016. 2017 also saw flexible office providers significantly expand their presence in the South East (including outer London), in locations such as Hammersmith and Reading and regional cities such as Birmingham and Manchester. Whilst the serviced office sector has always been an active participant in these markets, the level of demand from operators in 2017 was unprecedented, leading to some very large proportional increases in take-up for the sector (see Figure 1).

THE UK IN CONTEXT

Occupier demand has fuelled the boom in flexible space provision. Businesses with smaller requirements (under 5,000 sq ft) in particular, are increasingly acquiring space direct from flexible office providers rather than taking conventional office space. Already this trend appears to have affected the volume of transactions in Central London under 5,000 sq ft, which have noticeably reduced since Q2 2016.

CBRE’s 2018 European Occupier Survey shows that larger companies also increasingly see flexible office space as a key element of their corporate portfolios. The survey highlights a strong and growing focus on corporates deploying technology, wellness and flexible space as core elements in an agenda focused on enhancing the user experience. At a general level, the proportion of companies whose use of flexible space is moderate to substantial is expected to rise from 30% currently to 45% in three years’ time.

Some landlords have reacted to the rising demand for flexible space, whilst others are considering future strategy: British Land for example, launched its own flexible space brand ‘Storey’ in 2017, which operates within its existing London assets. Regional developer Bruntwood, have for many years offered a range of flexible options in various buildings, including serviced office and co-working space. Many are getting involved at various levels or evolving their views on what action to take. Our survey was aimed at capturing current thinking in this area.

Figure 1: Take-up surge from serviced office space operators across the UK

Source: CBRE

0

0%

1,000,000

50%

100%

2,000,000

150%

3,000,000

200%

Central London

Central London

Regional CBD’s

Regional CBD’s

South East

South East

Sq ft

Total take-up (year to end Q4 2017)

% difference from 5 year average

+80%

+154% +181%


In order to achieve the insight needed for this report, we surveyed a large cross section of UK office landlords. Over one hundred shared their views, with respondents representing a range of business types, sizes and geographies.

FLEXIBLE LANDLORD SURVEY: THE PARTICIPANTS

Participants included a mixture of company types – from institutions to private investors, and from unlisted property companies, to developers and Real Estate Investment Trusts (REITs). These companies held office investments in all regions across the UK. 42% of investments were held in London and the South East with the rest fairly evenly split across the nations regions.

Traditional estate/charity 4%

Other 4%

REITS and listed property company 12%

Institutional (insurance companies and pension funds) 26%

Developer 11%

Private Investors 18%

Unlisted property company 25%

Central London 20%

Outer London 11%

South East/East 11%

South West 9%

Midlands 13%

North West 11%

Yorkshire/North East 8%

Scotland 11%

Wales 4%

Northern Ireland 2%

Type of business Where investments held





The landlords surveyed overwhelmingly endorsed flexible office space as a wave rather than a ripple. 92% of survey respondents disagreed or strongly disagreed with the statement ‘flexible office space is a fad’ and the same percentage agreed or strongly agreed with the statement ‘flexible office space is on the brink of becoming mainstream’.

RIPPLE OR WAVE?

Source: CBRE Flexible Offices Landlord Survey 2018

Figure 2: Landlord perceptions“ Flexible office space is here to stay. More businesses are considering core and flex models of occupation.”

Landlord views (unattributed):

“ There is more recognition within businesses of the impact that real estate can have on productivity and business perception. Therefore, more are looking at flexible space options.”

“ Tenants want shorter and shorter leases because business can grow or shrink more quickly than they used to.”

“ We are concerned with falling take-up from smaller occupiers. We do not want to lose these occupiers.”

Agree/Strongly Agree Disagree/Strongly Disagree

8%

92%

92%8%

Flexible office space is a fad

Flexible office space is on the brink of becoming mainstream



The biggest perceived upside (selected by 39%) of offering flexible office space solutions was seen as increased ability to retain occupiers as they grow and contract. The next two positives, scoring 22% and 21% respectively were: ability to attract occupiers and reducing void in buildings. The perceived benefits, therefore, all point to landlord’s desire to maintain income streams, as occupier behaviour begins to evolve.

PERCEIVED LANDLORD BENEFITS



“ We’re doing it because we think its good for our buildings and another way to keep them full and income producing although its not a business model for us.”

“ We aim to retain occupiers by offering a more managed office space solution if they should require it.”

“ We’re doing it because we think it helps boost the appeal of our buildings although there is a limit to how much we want to have.”

“ We really believe it will be a good thing to have in the building in terms of getting occupiers through the door.” Figure 3: What are the upsides from the provision of flexible office space?

39%Increase ability to retain occupiers as they grow and contract

22%

21%

6%11% 1%

Ability to attract occupiers through provision of flexible office space in a building

Reducing void in building

Improved cashflow and valuation premium

Opportunity to diversify the portfolio

Other



The biggest barriers to offering flexible office space (by some margin) were seen as: lack of experience to run flexible office space (30%), disruption to existing cash flows, valuations and asset liquidity (28%). CBRE’s 2018 Global Investor Intentions Survey corroborates these concerns. On balance, investors think that co-working tenants will reduce the value of a building when they occupy more than 40% of its space.

PERCEIVED LANDLORD BARRIERS



“ If you’re valuing a building with a quasi co-working space run by the landlord it gets quite tricky. This is something the industry is still getting to grips with.”

“ Providing our own co-working space would bring an extra burden of resource and work to manage and we are concerned it could affect building liquidity as well.”

“ Even if we were operationally ready there’s still a big income risk. That is something our investors would be uncomfortable with.”

Figure 4: What are the barriers to providing flexible office space?

Nick Knight, Executive Director, Valuation, CBRE:

“ 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. 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: Go it alone and create an operational platform, let space to a serviced occupier or take a profit share position? At the moment we are gathering performance data on current operational platforms. Do they deliver optimal net rents? Can we adequately benchmark running costs? How variable is the income through the cycle? As the market matures and there is more data available the task for valuers will be clearer and simpler.”

“ If we were to set up our own co-working operation the first and foremost hurdle would be the scaling up. How many people would we need to run that operation and which buildings would it suit?”

Disruptions to existing cash flows, valuations and asset liquidity 28%

Competition from other landlords/flexible space operators 30%

We don’t have the right type of space 19%

Lack of experience to run flexible office space 7%

Other barriers 16%

https://www.cbre.com/research-and-reports/Global-Investor-Intentions-Survey-2018


Our survey demonstrates clear landlord intentions to respond and incorporate the flexible office space phenomenon to some degree, within their own offering. 77% stated they are currently considering some form of provision and when asked in what time frame, 79% declared an intention to make provision within the next 12 months. Given the quality and volume of response, this could imply a significant surge in the offering of flexible office space in the immediate future.

TIME TO ACT?

Stewart Smith, Managing Director, London, A&T Occupier, CBRE:

“ Our survey clearly shows landlords will provide more flexible office space. Their challenge appears to be whether they self-deliver or outsource to a third space. In making this decision they are actively engaging to understand the depth of occupier demand and the impact of changing market circumstances on future pricing and occupancy.”


Figure 5: In what time frame may you introduce flexible office space?

“ Frankly we’ve dithered about it for ages. We’ve decided to buy the building, bite the bullet and get on with it now!”

79% 5%16%

Next 12 months Next 5 years Next 10 yearsNext 3 years

0%





There is little doubt from the survey findings that landlords intend to provide more flexible office space. But what does this actually mean?

Of those currently offering some form of flexible office space, by far the biggest offering (68%) was shorter leases (less than five years)/managed office space, possibly as this has been the simplest way to include a ‘flexible’ offering with minimal disruption to current management practices. This must be considered as the barest of offers that really does not respond to the core market requirement for a variety of flexible options and additional services. A comparison of current versus future considered flexible space offering indicates that aspirations are heading towards a more sophisticated flexible offer with a significant increase in most categories of flexible office space, with by far the largest increase for co-working space.

THE FUTURE LANDLORD PROVISION


“We recognise the advantage of having a co-working amenity in a building.”

“ We’re having a floor of serviced and managed office space put into one of our buildings along with a coffee area/business lounge for any occupier in the building. If that goes well, we’ll roll out another floor and then we’d probably be happy to do another floor after that.”

“Our views are still evolving but we’re close to reaching a conclusion as to how we deal with it.”

Figure 6: Current flexible offering versus under consideration


“ It is the flexibility, the curation of space, the collaboration that must be attractive.” Shorter leases/managed office space

Co-working space

Hybrid space

Serviced office space

Incubators

Accelerators

0% 100%

Considering

Existing

80%60%20% 40%



Opinion was fairly evenly split between landlords offering their own brand of flexible space into a portfolio (38% in favour) and letting space to a known brand of provider (30% in favour), whilst a significant 19% signalled they would be happy to work in partnership with a flexible office space provider.

The finding that 38% would offer their own brand of flexible office space is strong, given that the principal perceived barrier to implementing flexible solutions was identified as lack of experience. Nevertheless, 49% were citing entering some sort of relationship with known brand providers, either by letting space or through a more formal partnership arrangement.

OWN BRAND, KNOWN BRAND OR PARTNERSHIP?


“ In our Birmingham building we have seen the benefit of letting space to a known flexible office space provider. They run the ground floor and it is an attractive offering for tenants.”

“ Currently we are not certain whether to do our own thing, or to partner with an existing provider. It is very early days and our thoughts are not yet fully developed.”

“ We’ve been in discussions with a serviced office space provider for a while. But the issue for us is that they want us to pay for their fit out and if it goes well for them they might give us some rent. We’re thinking we might as well do it ourselves and take all the rent.”


Figure 7: Would this provision be either through?“ We are debating the best way forward, whether it will be a premium or a budget offer” 38%

Your own brand of flexible office space into an

existing building or portfolio

30% Letting space to a known

brand of flexible office provider 19%

In partnership with a flexible

office provider?

13% Other



“ It won’t work in every building or every location. Provision must be assessed on a case by case basis.”

GEOGRAPHICAL PREFERENCE?


“It won’t work everywhere and there’s a risk of providing too much in some areas”

“ In some London locations, you almost have to put some form of flexible space to compete with the presence of established service office space providers.”

“ We made a serviced office space provision in an out-of-town core regional city location in a building we bought that had quite a lot of vacant space. The building has good transport links to the city and we took a view that some companies might wish to be based there on flexible terms.”


Figure 8: Where would you consider offering flexible office space?

We asked landlords where they would consider providing flexible office space. Perhaps unsurprisingly London and the bigger cities were the most popular locations. However, nowhere was considered off limits with 29% stating that they would offer flexible office space in any UK city or town.

These views align with CBRE’s 2018 Global Intentions Survey. Investors surveyed were clearly of the opinion that co-working operators will be most successful in core locations in gateway cities. This is understandable, since the core areas of gateway cities tend to be occupied by the highest value-adding service sector firms, often the type of occupier drawn to co-working.

In any UK city or town 29%

In London and other principal regional cities 35%

In London only 36%





In our one-to-one discussions, the majority of participants suggested 10%–20% of an office building would be the optimum allocation for flexible to conventional office space within a building. However, on closer questioning most admitted this was the commonly cited industry figure and they were actually uncertain.

To gain further insight we utilised CBRE’s database of leasing transactions across the UK. We analysed buildings where serviced office occupiers or co-working providers had acquired space during the past three years. This revealed on average 41% of space in London building was given up to these operators compared to 19% in the core regional cities. However, in London, in buildings larger than 100,000 sq ft the share dropped to 24%.

Additional analysis reveals the average deal size taken by serviced office space providers has noticeably increased in the last three years compared to the previous three years. Therefore, all the evidence points towards continued expansion from this sector, with ever more space being devoted to flexible and agile workspace.

HOW MUCH IS ENOUGH?

Source: CBRE, 2018

Figure 9: Average deal size by serviced office space providers“ We think no more than 10−20% of a building should be on flexible terms, so there is a limit to our comfort level.”

Joshua Beer, Head of Flexible Workspace & CBRE 360, CBRE:

“ The optimum level of flexible space in a building will vary, depending on the nature and location of the building. We expect to see some form of flexible accommodation being included in all major new developments across the country going forwards.”

0

40,000

2012 2013 2014 2015 2016 2017

London Regions

Sq ft

30,000

25,000

20,000

15,000

10,000

5,000

35,000

The building stacking plan in Figure 10 indicates how survey respondents would allocate flexible space in a hypothetical, category A office building of 100,000 sq ft, based on an assumption of 70% apportioned on conventional lease terms. This is just one possible scenario.

On this basis, co-working/serviced/hybrid/ managed and others accounted for 18% of the building and space let on three-year short term flexible leases accounted for 11%. This strengthens the hypothesis that traditional landlords are looking to widen their flexible office space platform beyond short term leases.

HOW DOES IT STACK UP?: ONE POSSIBLE SCENARIO

Figure 10: Flexible office space allocation in a hypothetical new building

Source: CBRE, 2018

Conventional Lease 70%

Accelerators/Incubators 1%

Co-working/Serviced/Hybrid/Managed/Other 18%

3 year flexible lease 11%





Flexible workspace will continue to rise as occupiers seek and expect more experience based services from the workplace. This reality is acknowledged by the majority of real estate providers surveyed, who are actively developing experience based solutions and/or product offerings to meet this demand to attract and retain occupiers.

THE LANDLORD RESPONSE

A flexible space race beckons. We predict this will lead to an increasingly diverse range of ‘flexible’ offerings for occupiers, particularly in London and the core cities. But how much flexible provision will be enough? Opinions on the level of response vary widely. Views are still evolving. Ambitions to introduce innovative approaches will be constrained to some extent by existing management structures. There is nervousness about going down this road for some, due to inexperience and capital risk, whilst others that currently anticipate going ‘all in’ may be underestimating the challenges involved.

For those still to be convinced of the sustainability of the serviced office sector expansion, a ‘lighter’ response is favoured. There is general acknowledgement that better quality space, technology provision and amenities are needed to satisfy more demanding customers. There is also admission of the need to implement more short form leases that take days to sign rather than months, and space that is more ‘oven ready’ in terms of wifi and fitouts. Others are convinced (if not doing so already) of the need for a ‘heavier’ response and are in the process of gearing up for a more significant jump into flexible office space provision.

Whichever course of action individual landlords decide is right for their particular blend of properties, occupiers and circumstance it is clear that the ‘flexible revolution’ is here to stay. The arms-length relationship that has existed between landlords and occupiers is rapidly becoming a thing of the past.

“ It is too risky to sit back and do nothing!”


We hope you have enjoyed this report. You may be interested to know CBRE provide Flexible Workspace strategic advice and offer a full range of flexible office solutions to landlords and occupiers through CBRE 360.

Introducing CBRE 360

CBRE 360 delivers enhanced employee experiences in the workplace. Built to help occupiers and investors worldwide create transformative workplace solutions and destinations of choice by integrating property services and amenities with advanced digital technologies.

Leveraging our market-leading strengths in workplace strategy and occupancy planning, design and build-out, and property and facilities management, along with our industry-leading technology capabilities. Solutions will be customized to deliver on each client’s unique culture and workplace requirements.

Business

Joshua BeerHead of Flexible Workspace & CBRE 360 for EMEA +44 207 182 8284 [email protected]

Research

Emma JacksonAssociate Director, UK Research +44 207 182 2574 [email protected]

Andrew MarstonDirector, UK Research +44 207 182 3907 [email protected]

CBRE DISCLAIMER 2018

CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.

To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at: cbre.com/researchgateway

ABOUT CBRE GROUP, INC.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at cbre.com.

cbre.co.uk/research-and-reports© CBRE Limited, 2018

https://www.cbre.co.uk/research-and-reports

UK LANDLORDS & INVESTORS EMBRACE THE FLEXIBLE … · CBRE Limited, 2018 UK Landlords & Investors...

Documents

Transcript of UK LANDLORDS & INVESTORS EMBRACE THE FLEXIBLE … · CBRE Limited, 2018 UK Landlords & Investors...