Philip Grace: Why Serviced Offices Need a Rethink

Philip Grace recently shared his thoughts on the UK serviced office market and his predictions for 2016, during which he advised flexible workspace operators to tread carefully over the months ahead. Here he delves deeper into the UK industry, its “archaic lease structure”, and why building landlords could present an immediate threat to serviced office operators.

I’m often asked if I’m going to create another serviced office company.

In my view it’s the wrong time for a new start-up serviced office company. Serviced offices need a rethink.

It should be more ‘Retail’ in delivery, pop-up and reactive to the current demands of customers. Just look at a typical retailer; they will constantly change their face on the high street driven by fashion, seasons and trends.

The design of the office needs to change. Clients require something more – not a ‘business centre’, but a centre to do business. Not an office, but a location to work where and when they need it.

Archaic lease structure

Global scale is key and technology is very important. But exposure to just property leases needs to be mitigated.

In the UK, we currently have an archaic lease structure. Ten to fifteen year leases suit few companies in the 21st century.

America and Central Europe tend to have periods of five years and in SE Asia, three-year cycles are common. Interestingly, this does not seem to detract from people requiring serviced office space; although demand is generally from international corporates rather than local companies.

This suggests that zero CapEx and rapid set-up in foreign countries remains attractive to companies taking serviced office space around the world, but local companies can find serviced offices expensive when flexibility is able to be secured through the lease structure.

The new lease accounting rules will make it less attractive for companies to take long leases. So property institutions need to embrace the future, to deliver shorter lease terms in the UK, combining all inclusive costs and flexibility.

Serviced office threat

If landlords deliver shorter leases, this could be a threat to the serviced office industry but also a problem for property institutions, as they need to get it right. I believe the time is right for both innovative property owners and providers of serviced office space to work more closely together.

Whereas landlords used serviced office companies in the last recession to fill their voids and mitigate empty business rate liabilities, with a mature serviced office market, landlords now need to get ahead of the game and take greater interest in the sector.

When the next recession comes, they could control their own in-house solution to deliver serviced, flexible, managed space. Short term serviced space was in great demand during the last recession, and sceptics have often disputed the ability of the industry to ride economic cycles.

It’s clear that demand for the right product will ride the cycle. And with the most recent accounting changes, demand is set to increase.

I strongly believe in the sustainability of the industry and that it will see demand increase in the next five years, particularly in world financial centres.

As for my next moves, right now I’m talking to people, taking my time and developing ideas. I’m looking to work with likeminded people, institutions, and investors to create the next generation of sustainable flexible office space, not just in the UK, but a global solution focused on the world’s leading financial cities.