1. February 2019

  2. Bowing to demand: landlords respond to flexible workspace trend

    28 February 2019
    The trend towards flexible leasing shows no signs of abating as the average lease length across London continues to fall and the average period to the first break clause now at a record low of just 3.2 years. The trend suggests occupiers are increasingly focussed on wider events such as Brexit, as well as the need to build contingency into lease commitments, albeit at increased financial cost.
    It is no secret that the monthly cost of a co-working space can be 2-3 times that of a conventional lease, but the removal of upfront security deposits and fit out costs - along with the easy exit options afforded by serviced office models- are proving more than enough to woo tenants in droves.

    At the other end of the spectrum, there remains a market for newly refurbished, Category A specification space, although mostly in the 5,000 sq ft+ bracket. On smaller unfitted units landlords are experiencing longer void periods, but there will always be exceptions to the rule and established businesses are more likely to take a conventional lease and undertake their own bespoke fit out.

    But what about the middle ground? While almost every business would jump at the chance to reduce its upfront capital expenditure, not all companies want or suit a co-working environment. Yet the need to remain agile is making firms sensitive to the commitment of 5 or 10 year leases.

    For the majority of enterprises seeking to relocate, the desire is to complete the legal process and move as quickly as possible. Factoring in half a year (or more) for lengthy tenders, interior design conversations and fit outs just doesn’t really fit the model for many modern firms.

    Responding to the shift towards flexible workspace, some pro-active landlords are seizing the opportunity to bridge the gap between the extremes of CAT A and co-working, with the prospect of not only retaining an audience, but of reducing voids and shortening rent-free periods given at the start of a lease.

    There are now a growing number of case studies to support the benefit of recycling existing fit outs and undertaking new ones on a speculative basis. A prime example of the former is 77 Kingsway where we had two units to offer: the fifth floor refurbished to a CAT A specification, and the first floor with the previous tenant’s fit out in situ. While the fifth floor was let to an architectural practice looking to put their own stamp on the space, the first floor received a light touch refurbishment and the addition of some new furniture. The rents achieved on the floors were aligned, but the cost of refreshing the existing fit out on the first floor was around a quarter of the cost of returning the fifth to Category A. Along with the reduced void and rent free period on the first floor, this reflected a great result for the landlord. 

    In the main, landlords are far better placed than tenants to undertake a fit out, both in practical terms and in securing lower costs. Delivering plug’n’play spaces removes the demand for lengthy rent-free periods and allows tenants to move in immediately. While it does force the Landlord to second-guess how a prospective tenant might want to design their space, the fitting out costs are covered by a combination of shorter rent-free periods and a small rental premium of around £5-10 per sq ft. Equally favouring both landlord and tenant, it's a win-win situation for everyone.

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