9.0 Literature Review

“Evaluating Office Space Needs and Choices”, Virginia Gibson, University of Reading, 1999.

(The original research document for “The Changing Face of Space” was prepared for MWB Business Exchange.)

This report identifies how rapidly the UK property market has changed within the last decade. Among other things, it looks at the ability of occupiers to make informed decisions about property in light of changes in the property environment in which greater choice is available as a result of landlords’ desire to secure continuous income from their investments.

The research looked at the current lease and freehold commitments of participating occupiers and compared this to the preferred situation for such occupiers.

The main points emerging from the research were:

• over 50% of occupiers were either in freehold or in leaseholds with in excess of 15 years remaining. Only 19% of such occupiers were happy with this;
• 21% of leaseholds were held on terms of 6 to 15 years. This compared to the desired requirement of 35%;
• 2% of occupiers used licences of 1 year or less, matching the desired amount;
• 17% occupied leaseholds held for between 1 and 5 years, with the desired amount being 39%. (This showed the greatest increase out of any of the categories.)

The researchers considered that the demand for more leaseholds of between 1 and 5 years arises from the fact that organisations today generally operate on shorter business cycles.

They also found that occupiers were more likely to consider a traditional lease or serviced space than freehold. Over the previous 3 years, one third of occupiers had reevaluated the type of accommodation that they required with the key requirement being for additional flexibility.

There is a current mismatch between what occupiers want and what they have.

Figure 2: Desired Corporate Portfolio Source: University of Reading

Figure 3: Current Corporate Portfolio Source: University of Reading

In terms of leases:

60% of organisations said they did not want leases of 10 years or more;

30% said they did not want leaseholds of 5 years or more;

One third of the respondents who wanted a freehold wanted all or a large proportion of the portfolio to be on these terms.

In response to this latter point, the researchers suggest the reason for such a large demand for freehold in portfolios was possibly because of the financial policy adopted by organisations and the belief that owning their office space offers greater flexibility. The researchers believe such surplus space (running at an average of 6% according to the Occupiers Property Databank in 1999) could be used to accommodate expansion requirements.

In our view, such a statement is financially damaging since unoccupied or under utilised space has a carrying cost attached to it. Indeed, 74% of all respondents believed holding surplus property could not be justified to meet rising flexibility requirements.

Change and Flexibility. “The Role of Serviced Office Space in Office Markets and Corporate Property Portfolios”, University of Reading, 2000.

The research pin-pointed two types of workers within an organisation: core staff and periphery staff.

(1) “The argument was that occupiers, and corporate property managers, should similarly differentiate between their core and periphery portfolio.”

Table 1: Types of Office Space

Source: University of Reading

Core space is long-term space (Table 1) which is typically on long leases and is expected to change its usage at some point in time. The two layers of periphery space are made up of the 1st Periphery, which consists of property on three to ten year licences/leases and the 2nd Periphery which is space demanded “on tap.”

While the core space serves the long term needs of the organisation and houses the principal functions of the business, there are costs attached to the management of the building and the necessary repairs and maintenance. The first peripheral layer is ideally suited to new ventures and projects with property time horizons which match the likely time horizons of the projects.

(2) “This layer is where speed of occupation and supporting services become the key driving force.”

The researchers believe that this is the type of space demand which serviced offices seek to meet. In our view, the first and second layers of periphery space are perfectly matched to the serviced office environment. It supports those who would argue that serviced office space can grow to represent up to 20% of total office space.

“Breaking Down Barriers to Entry”, The Chartered Institute of Purchasing and Supply (CIPS).

“Breaking Down Barriers To Entry,” looked at a comparison of costs between conventional office leases and serviced business centre offices.

The cost comparison analysis reviewed the key occupancy costs, which included:

• rent;
• furniture;
• building services;
• office administration;
• electricity;
• telephone;
• photocopying and faxing resources;
• floor space rental;
• cleaning;
• meeting rooms; and
• actual acquisition costs.

It is important to determine the type of space needed.

It did not, however, take account of exit costs. The analysis covered two centres; a high cost London centre and a lower cost provincial centre in Birmingham.

Regus serviced offices was used as the benchmark cost comparison. The figures for conventional leases were collected without the knowledge of equivalent figures for business centres, therefore avoiding any bias. From the data, a cost model was produced and different situations tested to produce results that could be related to the number of employees occupying space at any one time and their average length of stay.

The results show that significant savings can be made from using serviced centres in both the City of London and Birmingham. For example, the research identified that savings of 66% could be achieved in Birmingham, by using a serviced office for 10 people for 3 months (44% for 12 months), as opposed to using a conventional lease.

Table 2: % Savings Achieved Using a Fully Serviced Business Centre (Birmingham)

Source: CIPS

With regard to the City of London, 33% could be saved for 10 people occupying a serviced office for 6 months (9% for 12 months).

Table 3: % Savings Achieved Using a Fully Serviced Business Centre (London)

Source: CIPS

Significantly, the research showed at what point a serviced office ceased to have cost advantages. In the City of London, it showed 40 people occupying a centre for 6 months created a saving in favour of a conventional lease of 6%.

In Birmingham, savings of 19% were achieved when 60 people occupied a serviced office for 36 months; this compared with 45% in the City of London. The results from the research support the view that serviced offices can be a cost effective answer to shorter term space requirements. More recent information can be found in Appendix 2.

“The Total Office Occupancy Cost Survey, January 2001”, City University Business School and Actium Consult, for MWB Business Exchange.

This is perhaps one of the most significant research documents published in recent times. The aim of the research was to investigate the Total Occupancy Cost of offices in 25 centres throughout the UK. Data was taken from leading suppliers in order to obtain the capital and operating cost base for a 5,000 square meter office in a hypothetical Grade A building in a prime location.

Savings of 68% can be made from using serviced offices... …but not for ever. 15 The authors recognise that occupiers need to be aware of their total occupancy costs and require flexibility in their use of property. The survey attributes the demand for flexibility to changes in technology, working practices and accounting. This is backed up by IPD research, showing how the average terms of leases have almost halved in the time from 1990/93 to 1998/99.

Figure 4: Cost Per Workstation Differentials

Source: City University

The results from the survey highlight that occupancy costs are seriously affected by location. One can see that when occupancy cost comparisons are made between the West End and Nottingham, the price per workstation varies from £18,682 to £7,183 respectively (Figure 4). The average cost per workstation over all locations is £9,744 per annum.

Figure 4 has significant impact for those who neglect the considerable overhead cost which is attached to each member of staff in any location. For example, the cost of a person the West End of London, in addition to annual salary and other emoluments, should allow for an additional £18,682 office space cost.

Figure 5: Total Office Costs (per annum)

Source: City University

The break down of costs shows that rent is by far the greatest cost in the West End of London; conversely the cost of hard facilities management (FM) in Nottingham makes up a considerable proportion of total occupancy costs.

The percentage of total occupancy costs made up by rent is nearly 60% in the West End, compared to just 30% in Nottingham. Rent also makes up over 50% of occupancy costs in the West End, Midtown and City of London locations.

The survey then went onto look at the cost implication from early exit of a conventional 10-year lease in all locations. The analysis reveals some startling results. For example, the West End ranks highest in the cost of termination at £41,440 after one year compared to Nottingham, which is £17,250. After nine years, the cost of termination in the West End is halved to £20,524, whereas in Nottingham it is £7,763. From the figures, there is a trend showing the most expensive time by far to exit is after the first year. Take the West End for example; in the second year the cost falls from £41,400 to £29,340. This is a £12,100 difference in just 12 months and supports the view that there is a high price to be paid for flexibility under a conventional lease.

Figure 6: Exiting a Traditional Lease after 1,2 and 3 years

Source: City University

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