What do landlords need to consider when thinking about setting up their own flexible office product?

The growing popularity in flexible office space from occupiers and the subsequent resurgence of the serviced office sector has not gone unnoticed by traditional landlords with many now questioning whether they are missing out on potential extra income, as well as increasingly find themselves competing with the serviced office providers when it comes to occupiers taking new space. This is most common on space under 5,000 sq ft, however it is also becoming increasingly more frequent on larger spaces or even whole buildings.

With the trend of companies taking flexible space continuing to grow, we are now seeing landlords not just considering flexible space, but actually setting up their own co-working offer in an effort to better service the changing occupier market. Examples include British Land and its sub-brand Storey, Commercial Estates Group and Alpha Works.

So what are the key considerations for a landlord when contemplating setting up a flexible workspace offering? We have prepared a short guide on some of the key areas to consider, which includes key tips from our own insight on tenant demand for flexible office space.

Does flexible space work for my location and building?

There is no fast written rule for whether your building and location will work. Each must be assessed on their own merits. There are though a few considerations that might help the decision process.

Flexible space for the sake of flexible space might be a dangerous strategy, it is not for every building and crucially not for every location. Setting up and managing the space requires a significant amount of resource. In addition to capital, you need to be sure that there is going to be demand in that location and that demand is at a price point which makes it viable.

You also need to consider whether your building is suited for flexible space. Does it have good natural light? How large are the floorplates? Many flexible spaces comprise a series of private offices of between 2 and 50 people across one floor plate, windows are key to allow natural light to spread through the private offices and floorplate, otherwise internal areas without a window can feel more like basement space. In addition, if it is a larger floorplate, then the internal private office spaces without windows are often much harder to sell and subsequently command a much lower price. 

Who is my target market?

It is important to consider when thinking about the potential design of the building, layouts and branding, who your target market is, as different sectors often have quite different needs when it comes to office space. Some locations might lend themselves more to tech-focused occupiers that often seek more trendy stripped back office space with strong amenity and breakout areas, whereas other locations might have a more corporate business base and therefore seek a more neutral office design. It is vital that you understand the local market and the different types of occupiers in order to build a space that caters for their needs.

To Brand or Not to Brand?

This is often one of the more difficult debates for landlords when considering creating their own flexible office product. It is the same for the co-working providers themselves, some like to put their brand on a building, such as WeWork or Regus, others do not and make the space more neutral, like The Office Group (TOG) or LEO.

The reason behind not branding it is often down to the historic stigma of your business being associated as being within a serviced office space. For a while many companies did not want to appear as though they were in a serviced office and were therefore attracted to unbranded spaces. However, with the resurgence in popularity of the sector and the growing understanding that serviced offices aren’t just blue carpets and white walls but a place your staff want to work, we are seeing more and more providers brand their space.  

A brand is also important when it comes to marketing and a new sub-brand can create an interesting new hook, it also differentiates the space from any existing offer you might already have as a landlord. In our experience, brand affinity is becoming increasingly prevalent amongst occupiers, where they find a brand they trust, they are more likely to stay with that name and renew their office or go to one of their other locations.

Designing the space; what is the optimal mix of units?

In general you want a mix of units to serve all parts of the market, the highest demand is usually between 4 and 12 desks (albeit usually a little higher in London), however there is often demand for larger units anywhere between 20 and 150 desks plus. Many serviced offices will now be designed to accommodate companies of 100 people across one open plan unit. They key is to understand your market and where the demand is likely to come from. Some landlords have simply focused on the larger scale-up market whereby companies are seeking between 30-200 desks and have therefore only built larger private office suites to accommodate.

One area that is sometimes overlooked by those not familiar with the serviced office sector is not making the space as flexible as it could be from a design perspective. Being flexible to meet market demand is key, so your ability to offer two private offices of 10 people, or be able to combine into one large private office for 20 people opens your space up to more enquiries no matter what size they are.

The best providers are able to design spaces so that most of the partitions are easily taken down or erected enabling them to meet the specific market demand, often in the space of a day or weekend. You might find you build a space for 30 people, but very few 30 desk requirements come along in the space of a month, to therefore put yourself in a stronger position it is important to be able to offer tenants alternatives, such as one of three 10 desk offices.

For further design consideration see our other guide.

What density per person should the office space be?

This is a key area when it comes to the financials and potential margin. Many serviced office operators will operate at density of around 1:40 sq ft, however the average is more like 1:55 sq ft. This is for the private offices themselves as does not account for the breakout areas.

Most serviced offices operate between 60% office space and 40% breakout and circulation space at the more generous end, to 80% office space and 20% circulation at the other end. The density you choose will be a key factor to your price and both go hand in hand when pricing the space.

What to charge?

The key here is to make it as simple as possible, forget quoting by sq ft and adding service charge and rates, just quote one all-inclusive rate. Try to avoid adding extras such as printing, phones or IT. One of the historic stigma’s of the sector was the extras you had added to your contract at the end of each month, this was a primary reason why tenants were keen to move out from serviced into a leased space. The sector however has moved-on and most providers now try to offer one all-inclusive rate. The only extra might be meeting rooms, however even then many providers offer a credit system or even free meeting rooms.

To calculate your quoting price, first understand what your density rate is, then work out what an appropriate price per person per month is compared to other competition on the market. Multiplying the two together will create your total price per month. If this is too low then it might be you need to increase the density of the space. It is harder to increase the price. It is also worth being aware that almost all occupiers like to negotiate on price and therefore it is important you have some negotiation room. Make sure your team are aware of the absolute lowest price you can sell the space for. Whilst it is important to market the space on a simple monthly desk rate, providers will also set and track their total costs on a £/sq ft basis. This way you are able to apply your margins and understand how the building is performing as each individual office will vary in size.

Marketing the space

Marketing the space is a different ball-game to marketing conventional space, with most of the marketing via online channels, including ourselves. In order to ensure you get as much exposure to the market as possible we recommend listing on a variety of brokerage platforms – it’s free to list in most cases and on a success only basis. They key is having someone in place who has experience of the market to manage the enquiries. This individual will also be responsible for undertaking viewings of the space. Having experience of the serviced office market on hand from the beginning is essential and can be the difference between a deal and no deal, as tenants move fast in the market and you are competing against providers with full sales teams.

Speed to market is key, the ability to provide any interested party with information quickly is essential. The need to provide confidence that you can deliver on the space in the timescales quoted is equally as important.

Management of the space

Flexible office spaces are generally more management intensive. If you have a space catering for many smaller businesses you will need to think about employee a community manager. Their role is to work with each business and help them collaborate with others on the floor or in the building. They help build networks and a community in the building which can be very attractive to prospective clients, this might be via events they arrange such as guest speakers to simple coffee and cake mornings for all clients. In most cases they will be based in the building and on hand to answer queries and sort any problems.

Other services such as cleaning, IT and reception will also need to be provided. Some might fall under the existing building management plan, some, like IT are likely to be extra.

What are the standard licence terms?

It is standard in the market for a tenant to sign a 12 month licence. Some often ask for a 6 month break. On larger spaces you might offer a two or three year licence with the option for a break. In some cases a period of rent free will be offered, however this is usually no more than one or two months unless under very special circumstances.

The terms themselves should be as short and simple as possible, designed as standard terms where you only change the respective company name, term length and price. Don’t forget many of the serviced office providers you might be competing against have standard format terms no longer than two or three pages. The more complicated you make it, the more likely you could lose out on a tenant.

There is a lot to think about here and this is only really designed as an introductory help guide. For anyone considering setting up their own space then please do get in touch. Workthere, together with Savills, offers a consultancy service to landlords entering the flexible office market.