Recession causes UK businesses to seek short-term office deals
At the conclusion of Q3, officebroker.com investigates the average initial length of office license signed by new clients, to identify trends and their association with the economic downturn.
Results show that throughout the year, average license lengths in the UK serviced office industry have dropped considerably quarter-on-quarter. The first three quarters as a whole show that the average length of term signed for is down -22% when compared with the same period last year, suggesting that the recession has taken its toll on the market.
Furthermore, the average length of license is also down for each quarter when compared year-on-year. Q1 2009 was down -14% compared to the same quarter in 2008, and the year-on-year figures continued to plunge, dropping -23% in Q2 and -33% in Q3.
See the below graph for a year-on-year comparison of average license lengths per quarter.
It is interesting to note that, while the UK recession officially started in Q2 2008, the average license length during this period dipped only marginally, before increasing again in Q3.
In comparison, the first three quarters of 2009 show a much more negative result. The recession and its many forms are the most likely culprit, causing license lengths to drop for several potential reasons.
Business confidence suffers
Firstly, business confidence has plummeted since the credit crunch first started to bite back in 2007.
External reports such as the ICAEW UK Business Monitor show that confidence has dropped quarter by quarter since Q2 2007, culminating in the lowest ever recorded level of business confidence in Q1 2009. This could be a contributing factor, as businesses may prefer to sign for shorter license lengths as first-time office tenants, or perhaps by way of testing the water in a new location.
However while business confidence may partly explain the shortened license terms at the start of 2009, it conflicts slightly with the more positive results shown in 2008, as business confidence was still reportedly dropping at this point.
Recession encourages rise in start-up ventures
Other contributing factors could be an influx of entrepreneurial activity. The recession has caused many workers to face redundancy, which in turn has led to a surge in new ventures through individuals spurred to start up on their own.
As a possible example of this, enquiries made through officebroker.com for single workstations in the first three quarters of 2009 are almost 41% up over the same period in 2008, which would suggest a possible growth in start-up enterprises.
Commenting on this trend, officebroker.com Managing Director Jim Venables says:
“From adversity comes opportunity. People learn skills in enterprise, and they acquire the skill-set which they can share with other businesses. There are a lot of good quality people out there that have been made redundant, and many of these skilled individuals are taking advantage of niche opportunities to set up their own business.”
This rise in single workstation requests suggests that an increasing number of smaller businesses may be searching for office space, and the flexibility of a serviced office is providing the ideal solution.
This is especially important as many businesses are currently facing uncertainty, which includes possible expansion or contraction of their workforce as a result of financial difficulty and potential staff cuts. In a traditional lease agreement, increasing or decreasing workspace is virtually impossible either side of a renewal, which lends massive inflexibility to the nature of a conventional office lease.
This is in contrast to the highly flexible serviced office, where clients can request changes to their initial contract agreement on a regular basis.
Therefore with the economy still against them, it’s possible that a large proportion of companies – including the increased number of start-up ventures – will choose to sign shorter than average license lengths to help establish whether or not their enterprise has the potential to succeed.
Interestingly, officebroker.com has also seen a trend emerging in a growing number of larger companies, who are choosing to take up serviced office space as opposed to a traditional lease. This suggests that the flexible nature of the serviced office is providing a valuable lifeline for larger corporations as well as SMEs.
Once the durability of a venture has been assessed and the initial license length has passed, many businesses may potentially seek to renew and even extend their agreed initial term.
While this could partly explain why license lengths have been dropping throughout the year, further reasons behind this trend could be linked to the use of incentives by landlords and office providers to help fill their vacant buildings.
As the decline continues to take its toll on property owners, many are forced to offer incentives in order to boost their take-up rate. Since the introduction of the empty building tax last year, landlords are placed under increasing pressure to fill their properties.
Combine this with a difficult economy, where businesses are increasingly cautious about signing up for space, and the result is that many landlords are being cornered into offering incentives such as rent-free periods, cut-price extras and discounted rental values.
This may have helped many landlords to obtain tenants in the early stages of the recession, and indeed into 2009. This would also encourage clients to sign longer terms in order to extend their discounted period for as long as possible – which could explain the longer agreements recorded in 2008.
But it’s possible that as initial contract periods came to an end, landlords became increasingly reluctant to renew the license on the same low-cost terms, and instead attempted to retract certain offers in favour of more profitable deals. In recent months tenants may have chosen to accept these terms, but the reduction in average license lengths suggests that clients are far more likely to sign for shorter periods in order to try and save money.
Chris Meredith, Head of UK Sales for officebroker.com, says that a low price for the short term does not necessarily reflect good value for money.
“While we are still seeing a number of long-term agreements coming through, there has been an increase in shorter contracts which seem to be directly linked to business uncertainty and an overall lack of confidence.
“For businesses seeking a shorter rental agreement to save money, we would try to encourage them to consider a longer term contract. We’re in a buyer’s market at the moment, and you may get a more favourable short-term deal right now. But in 3 or 6 month’s time when the renewal is up, you may find that the rental value has increased and you face the prospect of finding the extra money, or searching for a new office.
“Although price is always an important factor in office space, we would advise clients to look at the value of an office,” continues Chris. “What is included? Will the services benefit your business? If the answer is ‘yes’ then a slightly higher price may actually be better value for your business.”
New opportunities for serviced office market
As a sign of the continued turbulent economy and proof that the serviced office can provide valuable support for businesses large and small, Chris says:
“We’ve seen an increase in larger corporations who are considering serviced office space. These companies are looking for flexible office space that they can’t find in a traditional lease, and are finding a solution in the serviced office.”
This shows that aside from the negative side-effects of the downturn, such as reduced license lengths and a potential retraction in incentives for businesses (and the harmful knock-on effect this can have on the durability of SMEs), one plus-side of the decline is that the serviced office market is being exposed to larger corporate clients that may otherwise never consider a short-term flexible office.
This promotes a positive outlook for the industry, and suggests that the downturn may bring more opportunities in the future.
But in the meantime, the underlying attitude of businesses towards office space in the current market seems to be to proceed with caution, and this suggests that there is still some way to go before full faith is restored in the UK property market.
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