10.0 Results from the Close Business Centre Capital Survey

This section deals with the results of the questionnaire used in the study. The analysis is based on the responses by participating business centre and serviced office operators to a series of questions constructed around the following themes.

• Basic information concerning the firm’s activities, its structure, pricing policy and its competitive position.
• Occupational – examining the target market for services, the mix of clientele, their average tenure and contractual conditions.
• Qualitative – looking at the economic and business environment for serviced offices.

Q. What terms do operators offer potential occupiers?

The research shows that the average term length offered is a minimum of 4 months with a deposit, on average, of 1.5 months licence fee. The average time required for notice of termination is 2 months. The size demanded by occupiers is mainly up to 500 square feet with occupiers demanding easily adaptable and flexible space.

Of those who answered the question, the proportion of operators reporting an increase in demand for workstations per unit is 65%, while 34.5% report no change and ½ % report a decline. These changes reflect the demand for space by dot com companies and will have no doubt been severely impacted by their demise in 2001.

(In fact reports from Instant Offices show significant declines through 2001 and the start of 2002 with occupancy rates ranging from 40% to 70% in a number of UK city locations.)

Overall, this length of stay combined with an increase in demand for workstations suggests that the serviced office market is increasingly becoming more liquid.

Q. Why do people use serviced offices?

From the questionnaires, there are mixed responses as to why people use serviced offices. The main reasons are as follows.

1. To house project teams.
2. Staff overflow.
3. New product development.
4. Small and medium sized enterprise (SME) main offices.
5. Branch/Satellite office.
6. Office away from home.
7. Discreet space outside headquarters.
8. The principal office of start-up enterprises.

The most common responses were 1, 2, 4 and 5. This suggests that organisations use serviced offices as part of their 1st and 2nd Periphery space highlighted in the University of Reading Study (“Change and Flexibility”, pp16).

For example, project teams are likely to need housing in relatively short term overflow space while a project is created and implemented. On the other hand, a firm may take such space in order to establish a foothold in a particular locality through a low cost branch or satellite office. In terms of SMEs, a number of respondents suggest that serviced office space is the logical step as the enterprise grows.

Q. What are operators ultimately offering the occupiers?

The majority of operators believe that they are offering cost effective and quality working environments (85%). Half believe that they are offering short term flexible space and service, while 30% see themselves as reducing an occupier’s overheads.

Figure 7: What operators are offering

Source: CBCC

In the words of one respondent, serviced offices offer: “Good clean decent space at an unbeatable cost.”

Although these matters are inter-related, there is little doubt that, at the forefront of the majority of operators’ minds, is the desire to provide a fully serviced working environment. This can be seen as something of a contrast to the providers of traditional leasehold environments.

Q. What is the revenue split between licence fees and services and how has it changed over the last 10 years?

There has been a marginal narrowing of the split between licence fees and services although the results vary with location. The average Licence Fee/Service Revenue split is currently 73/27 compared with 74/26 ten years ago, reflecting little significant change.

Nevertheless, 50% of the centres report increases in the income from services versus licence fees, 12% report decreases, and 38% report that there has been no change (see Figure 8).

With an increasing amount of technology usage among businesses, it can be assumed that technology services have been making a greater contribution to overall revenues. Operators are increasingly cabling their buildings to provide high speed access to the Internet as well as providing advanced telephony services, among other things.

City locations tend to report a higher proportion of revenue from services suggesting that specific types of service, such as couriers, are more in demand as well as heavier use of advanced technology infrastructure.

One of the centres reports no change after introducing new technology facilities, but feels that technology enhances the overall product rather than specifically the revenues.

A possible reason why the revenue split has stayed constant for a number of operators is through the simple upgrading of existing technology, replacing one type with another, with no resultant change in the level of service related revenue. An example cited by one respondent was the simple replacement of fax communication with basic internet access.

On the other hand, decreases in the split reported by 12% of respondents suggest that some services have got cheaper or have ceased to be demanded. For example, demand for secretarial support has decreased, heavily reducing chargeable services. In addition, in some locations the rental level has significantly increased.

Figure 8: Change in Revenue Split over 10 years

Source: CBCC

Q. Is location important to business centres?

The majority of operators find that location is one of the most important ingredients to their success. Only 10% do not believe this to be true, and do not include it in their strategy. The importance of location rests upon a few main themes.

• Accessibility is key. This is as true for occupiers travelling from home to the office, as for their visiting clients. Good transport links are vital.
• Image of the occupier in a business centre is also important. This demands an attractive building with quality fixtures and fittings, providing a sense of professionalism or excellence.
• A few operators note that being near a well educated population is important because the centre benefits by attracting a more entrepreneurial class of individuals.

Transport links is the overriding theme with city based operators citing rail, underground and bus links as key factors. City centre location may also be a hedge in times of recession, enabling workers to decamp from their main offices to cheaper city locations.

In provincial locations, car parking is one of the prime issues concerning location.

Q. What services are included in a space charge?

Figure 9 shows the costs which are included in a space charge. Rent, rates, cleaning, security, electricity, water and sewage are included in the licence fee for all centres. Service charges and furniture are included in 94% of centres. Half the centres include telephone connections, whilst only 12% include refreshments. The inclusion of board/meeting rooms in the space charge is only found in 6% of the centres and all centres charge additionally for secretarial/clerical staff.

Figure 9: Services Included in the Licence Fee

Source: CBCC

Telephone connections tend to be through the provision of the line and equipment with calls charged either through the centre’s switch or paid directly by the occupier. In terms of meeting rooms, the cost of carrying capacity that is charged for, but not used is almost certainly outweighed by the benefits of charging separately for the meeting space which, if under utilised, can be let out as additional office space.

From the responses, it is clear that “overheads” like rates and utilities tend to be absorbed by the licence fee, whilst value added services are charged separately. Certain specialist operators are increasingly seeking to push their licensees up the value chain of services in order to increase their service revenues.

Q. What technology is offered in business centres?

The centres with the broadest technology infrastructure tend to have a prevalence of technology based or financial services occupiers.

Figure 10: Levels of Technology Offering in Centres

Source: CBCC

These occupiers tend to demand broadband internet access while other more general business occupiers tend to be satisfied with ISDN and ADSL/VDSL. The centres offering voice over IP currently have the highest mix of financial services and TMT occupiers (80%). Whilst under half a dozen centres have video conferencing, the general view is that this type of service can be bought in if occupiers specifically need it.

Q. Who occupies serviced offices?

Figure 11: Origins of Businesses in Centres

A majority of occupiers come from the local area. In the suburban areas, especially around major city centres, a large number are local entrepreneurs who require a work place away from their home.

Contrary to the much hyped advantages of working from home, it is rapidly becoming the consensus that the extent of teleworking is not as significant as had been anticipated. The reasons for this appear to be two-fold. Firstly, people tend to need a distinction between home and work. Secondly, it is generally accepted that people work more productively in a community where they have collaborators around them.

A large proportion of these local businesses are made up of business service companies (Figure 12). Not unsurprisingly, a number of these occupiers are identified as recruitment agencies, particularly in city locations. These businesses are not only best suited to operating at local level but they also tend to expand and contract in line with the level of demand for labour in the locality. Serviced offices therefore provide them with short term and flexible working space.

37% of occupiers are regional UK businesses principally made up of larger organisations requiring a branch office in the area. This supports the notion that companies looking to enter into new geographic segments are more likely to seek flexible commitments during the early stages of set up.

By far the majority of occupiers are small to medium sized enterprises (SMEs). SMEs range from one to 50 persons. Serviced offices therefore become a suitable solution for these types of businesses as they move through a period of physical growth. Since the SME sector is also particularly vulnerable in an economic downturn, serviced offices seem to be a natural hedge against over extending property commitments.

Figure 12: Types of Business in Centres

Source:CBCC

Anecdotal evidence suggests that more expensive branded centres have a greater proportion of larger multi-national clients while mid-market and unbranded centres tend to attract more SMEs.

Figure 13: Average Occupier Trend

Q. What is the average length of stay?

The average tenure in a serviced office has fallen from 2.1 years to around 1.4 years (Figure 14). This reflects a general softening of the business environment, particularly since the end of the dot com boom and a number of operators report departures of TMT businesses. In turn, this has had impact on other firms, particularly among business services like recruitment agencies.

Figure 14: Average Length of Stay in a Business Centre

Source: CBCC

Figure 15: Average Length of Stay in Central London

Source: CBCC

Figure 15 however shows that London has been a more resilient location; the length of period of occupation has remained unchanged. Overall therefore, the decline in average length of stay is therefore entirely attributable to provincial and suburban locations.

Q. How have occupancy levels changed over the last ten years?

The overall trend in occupancy levels has been upwards, despite the recession in the early 1990s. Figure 16 shows that occupancy levels declined marginally in 1991/92 from 76% at the end of the 1980s, to return to a peak of a 92% in 1998/99. The resilience of the sector can almost certainly be attributed to a number of factors. Firstly, operators are generally in touch with their occupiers. Typically, operators are on site on a day to day basis and are able to spot a softening in demand at an early stage. As a response, they are able to negotiate new licences at prices that reflect the change in demand.

Secondly, occupiers know exactly what they are paying for and can tailor their mix of services accordingly thus making savings on add on services like secretarial support, meeting rooms and other chargeable items.

Figure 16: Average Occupancy in All Locations

Source: CBCC

Thirdly, operators are able to respond in two ways to potential declines in demand. The first is to reduce prices in order to improve occupancy rates, the second is to accept slightly lower occupancy rates and maintain prices. The response is really contingent on the operator’s view of how sustained the decline is likely to be.

Figure 17: Average Occupancy in London Locations

London occupancy levels in 1990 were 7% less than the national average (Figure 17) but showed a significant rise in 1993 and 1994 after a low in 1991. This compares to the figures for the suburban and provincial areas (Figure 18) where levels declined significantly through the early 1990s. The rebound in these areas however, lagged that of London by about a year reflecting the lead that London takes in the business cycle.

While London has seen some fluctuation in occupancy rates through the latter part of the 1990s, the suburban and provincial areas have remained relatively stable. This almost certainly reflects London’s high concentration of serviced offices: a certain amount of over-supply can arise very quickly as a result of hiccups in economic and other factors.

Figure 18: Average Occupancy in Suburban and Provincial Locations

Source: CBCC

Further, demand can tail off more rapidly when the licence fee is high. Figure 19 shows the average prices charged per square foot in both London and the suburban and provincial areas from 1995 through 2001. Whilst London has corrected its pricing from a high of £134 per square foot in 2000 to a current level of £125 per square foot, the regions have continued to gently increase prices to reach an average of around £65 per square foot.

Figure 19: Pricing Differentials Central London and Suburbs/Provinces

Source: CBCC

Note: the figures include costs per workstation which are interpreted as the equivalent of 75 square feet. There is little doubt that as awareness of serviced offices increases there will be greater demand for occupancy. Despite falls in occupancy rates during times of recession, operators have generally been able to respond and be flexible. The average occupancy over the time series for both London and the provinces has been around 83%.

Indeed, it could be suggested that serviced offices are a haven for businesses in recession when there is a greater need to have flexibility in terms of space. Serviced offices also appear to be early beneficiaries of economic upturn.

Q. What sources are the most effective for generating leads for operators?

The most effective source for generating leads is introductions from Agents at 40% (Figure 20). This includes local agents, as well as relatively newly established specialist agents such as Instant Offices. Yellow Pages accounts for 12%, whilst other classified advertising accounts for 5%. Signage makes up 6% of leads, with the highest proportion associated with the provincial and suburban centres.

Interestingly, word of mouth produces a consistent percentage across all centres with an average of 19%. This suggests the importance of the role that centre staff play in providing an effective and personalised service which encourages occupiers to pass on their positive experiences to other potential occupiers.

Figure 20: Effectiveness of Source Leads

Source: CBCC

Q. Who are the most effective agents?

Figure 21 illustrates how these 40% of agent leads are split. The figure suggest that the leading specialist agents for serviced offices are SOS and Instant Offices. SOS appears to be marginally more effective than Instant Offices. However, SOS has been established in the market for a considerably longer period.

Figure 21: Effectiveness of Agents

Source: CBCC

The fact that agents make up 40% of the total leads suggests that the serviced office sector is no longer seen as a cottage industry and that it is generating enough economic value to sustain other ancillary sectors like agents.

Specialist agents do better in London than the suburban and provincial areas. Reasons for this may be attributed to the concentration of serviced offices in and around London which have given rise to specialist agencies. Traditional agents are unlikely to focus on the serviced office sector when they are already focussed on other, higher margin areas. In provincial areas, this is less likely and agents do not have the depth of market in which to specialise.

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