The Occupier 2019 Predictions: Serviced Office Rates to Plateau
This is the seventh in the 10-part series, The Occupier: 2019 Predictions.
The serviced office market has had its ups and downs and has come a long way since the original centres were set up in the 1960s. 2018 has been the year in which the market for serviced offices and flexible workspaces transformed into something that would be unrecognisable to those founding firms.
Room for Expansion
The flexible office has come into its own as those operators who frenetically leased up space in 2015-17 have since opened their centres, reporting high occupancy rates, high-profile customers and high-expectations for the year ahead. The demand for such space has spurred continued expansion by operators and there seems to be no abating of plans for both London and UK regional cities. Is there still room for more expansion and what can we expect to see in 2019?
Our research shows that in 2018 (and for the second year in a row), serviced office providers leased over 1 million sq ft across central London as the drive for coverage continued. It was the year that WeWork became the largest occupier of office space in central London, and a number of global operators and niche providers arrived on the scene. All of these operators are claiming a stake of the market and if that wasn’t enough then traditional landlords started to emerge with their own flexible concepts and solutions. The competition for customers just got that little bit tighter. The growth of demand for flexible office solutions ensured that average desk/office rates remained buoyant. Yet providers were compelled to launch a number of initiatives offering free months rent, discounted rates and a variety of other incentives. Getting firms over the threshold is one step. Sustaining relationships and loyalty is another.
Reactive Rental Levels
Rental rates for flexible workspace are relatively fluid with providers working on a reactive supply and demand model. Whilst this can sometimes be advantageous for new customers and negotiations, existing users will no doubt be seeking to capitalise on already being in-situ. It is this customer base that will be up for grabs in 2019. Whilst there are few signs suggesting that demand will reduce over the course of 2019, the growing number of centres, locations and solutions will be at the forefront of a providers pricing strategy. Current rates range from £450 per workstation, per month for locations in the City and East London, up to £1,500 in the West End. We believe that rates will start to soften somewhat within core submarkets with ranges plateauing and incentives continuing to play a large part of any proposed packages.
Competition for the Customer
As we enter into a year with a plethora of uncertainties, we believe that providers will have already prepared to capitalise on such unpredictable times. The majority of which have built their portfolios from scratch. As the market heats up, we could expect to see an element of cannibalisation with M&A activity. Smaller players with attractive locations and client bases could find themselves becoming a target during 2019. On the face of it this will be of minimal interest to the end-user, yet it could prove to be advantageous from a cost perspective. This will ultimately flow through to the bottom line and at a time where businesses are looking for any opportunity to get the most out of their real estate. We see 2019 as being another year where the sector will continue to grab the headlines as competition for customers heats up.