Behind the brick facade of 6 St Andrew Street in central London, eight floors of offices are fully fitted out with desks and chairs, breakout spaces and shelves with carefully arranged pot plants and coffee-table books.
The scene is a far cry from the typical new office awaiting tenants. These are normally offered completely empty — often without even carpets — to allow tenants to choose, and usually pay for, their own “fit out”.
But landlord Great Portland Estates bought the building in 2022, for £30mn, specifically to add to its growing portfolio of “fully managed” offices. It will look after everything from reception and WiFi, to the yoga studio in the basement and activities planned in the communal kitchen upstairs as a perk for office workers.
“Any aggravation they have got to deal with in the space is not their problem. It’s our problem,” said Nick Sanderson, chief financial and operating officer of GPE.
About 10 per cent of central London’s office market is now some kind of “flexible” space, according to real estate analysts Green Street, up from 6 per cent in 2019 and significantly higher than in other major cities. GPE is expanding its “flexible” offering to 1mn sq ft, or 40 per cent its office portfolio.
There is no fixed definition of the word, but big landlords mostly prefer to offer fitted and managed office units of 50 to 100 desks on short leases, typically two years.
The rise of flexible, full-service options — sometimes called “office hotels” — testifies to the changing dynamics of companies trying to tempt staff back to the office, and landlords trying new ways to attract tenants.
Sanderson said that GPE had even banned the word “tenant” among its staff, preferring “customer” instead.
“We’re so used to everything being available at the tap of our iPhone. This is real estate’s response to that,” said Katie Oliphant, partner at Knight Frank. “For occupiers, it is really obvious what the appeal is . . . It’s all done for them.”
Big London landlords such as Derwent, British Land, Land Securities, Canary Wharf Group and even the aristocratic Grosvenor estate are all offering more flexible office space, a trend that began before the pandemic and has accelerated rapidly since.
Co-working, which generally means less space and shorter rentals, largely remains the province of specialists such as IWG, Workspace, Industrious, WeWork and Blackstone-backed The Office Group — many of which also offer fully managed units.
For managers that run large office complexes such as Canary Wharf, British Land’s Broadgate or Landsec’s Victoria development, flexible space allows them to accommodate tenants that want to expand or need space for special projects, without losing the customer to another landlord.
Canary Wharf Group, for example, in 2022 secured a huge fully managed deal with Citigroup while the bank refits its office tower elsewhere on the docklands estate.
Others, like GPE, are luring companies to move their entire office into fully managed premises at top-dollar rents — whether it is an entire mid-sized company or the London outpost of a business based elsewhere.
Cal Lee, who advises on flexible workspace at estate agency Savills, said that WeWork prompted a “sea change in the market” by managing to attract not just start-ups but also big companies looking for temporary space or smaller satellite locations — even though Adam Neumann’s firm ultimately overextended itself and had to file for bankruptcy.
For landlords and real estate investors, the change in business model has profound implications. Traditionally, developers like GPE would secure 10 or 15-year leases on their buildings to help offset the risk of new construction projects.
Offering leases of just 2 years, and the huge added cost and headache of operating buildings, can only be justified by top rents.
GPE is targeting a 50 per cent premium on rents for fully managed space compared to conventional offices, after subtracting its operating costs — and said it was currently achieving much higher premiums. St Andrew’s St is on the market for £200 per sq ft.
Landlords also have to follow market demand. Savills said 77 per cent of office lettings for tenants with fewer than 70 desks in the west end of London were on a flexible basis.
“Landlords [of smaller buildings] are facing up to the reality that this is where the market has got to,” said Adam Shapton, analyst at Green Street.
One of the challenges of the flexible office market is the lack of robust performance data. Traditional vacancy rates generally count flexible space as fully occupied because it is not available on the mainstream leasing market.
Within flexible portfolios, Savills and Green Street both estimate occupancy is about 80 per cent on average, which would add 1-2 percentage points to London’s overall vacancy rate — already at a 20-year high of nearly 10 per cent, according to data provider CoStar.
But flexible operators also do not want to be entirely full, because part of their business model is that they can allow customers to add desks at very short notice.
Shapton said both debt and equity investors appeared to be pricing in extra risk on flexible office portfolios, since the trend was still fairly new and vulnerable if corporate tenants become more cost-conscious. The premium on fully managed space was likely to be eroded by more competition, he added.
“Might office occupiers wake up from this post-pandemic fever dream?” he said. “It feels like a permanent structural shift, but it is possible some of that could reverse over time . . . There is a lack of data and we certainly don’t have a full cycle of how these things perform.”
