Change the process, not just the product: a new approach to flexible offices

The office leasing market has changed structurally over the last three years with the rise of flexible leasing platforms, led by, but not confined to, London. This has provided challenges and opportunities for investors, occupiers and agents alike. New co-working providers have expanded their more established peers have fought to keep up. Whilst costly for operators’ balance sheets, levels of utilisation within the new spaces - so far - show that operators have shown some success in delivering what their customers need.

Market analysts are aware that quoted figures on market leasing activity and vacancy are now less transparent than they were. Different assumptions of the utilisation rates within flexible offices now need to be considered to determine market risk. One thing that is crystal clear, though, is that traditional leasing activity in London in units below 5,000 sq ft has declined and that this decline has correlated with the new wave of flexible office openings. Going forward, there is also an expectation that a greater proportion of larger deals will be served by flexible operators increasingly changing market function.

With this in mind, the responses from traditional landlords have varied substantially from doing nothing to launching a competing product at scale. Within these two bookends there are a variety of options including a greater acceptance of deals to flexible operators via traditional models or quasi-managed solutions which involve taking on the income risks but outsourcing the management, with a shared upside.

There may be no one “right answer” to how office landlords react to these market pressures.  Approaches are determined by each company’s risk tolerance and the wishes of their investors. However, what has become clear is that a significant proportion of occupiers have been tempted into flexible office provision by the speed and flexibility of the leasing process offered; not necessarily by the fit-out, shared experience and lively environment on which many providers brand themselves.

Legal and General’s approach focuses on creating an offer reflecting the best of traditional and serviced leasing.  This is a new approach for institutional landlords and is different from the offers you may have seen. We have branded this “Capsule”. This is available on all appropriate office holdings irrespective of size or location. It offers a prospective occupier speed and flexibility in taking space, while retaining the benefits of leasing from a well-respected and established institutional owner and having control over the accommodation. Where and how Capsule is used is as flexible as the offer but it might typically include five main elements:

  1. Short form leases: we have developed a clear standardised lease across only a few pages which can be offered on an all-inclusive basis, including dilapidation costs.
  2. Fit out: the accommodation will be offered with CAT B and critical furniture (desks, meeting rooms, IT) options to enable ‘plug and play’ occupation. Occupiers can still undertake further CAT B works or brand the space as they wish.
  3. Wayleaves: IT infrastructure will be in place to avoid frustrating and costly delays over wayleave negotiations with providers.
  4. More flexible lease terms: we accept the trend of shorter leases and believe that income risks can be mitigated by better service.
  5. Building experience: by ensuring the buildings are well- run and welcoming to staff and their guests we will enhance the flexible offer and enable occupiers to move between Legal & General assets as their business needs change with the confidence of consistent service.  Our property management service is currently under detailed review as we strive to redefine how our buildings and occupiers are serviced.

These options are not designed to be a panacea for the challenges faced by the sector, or indeed solution to the perceived threat of co-working. Capsule is not a “product” and there will be no launch party. There is no disintermediation of agents involved or intended. However, it is a re-imagined process offering the market an attractive and mutually beneficial option, acknowledging the frustrations that send many occupiers towards flexible providers, while retaining the traditional benefits of leasing from an established provider.

Article Published by CoStar

Article written by:

Bill Page

Business Space Research Manager, LGIM Real Assets