Alexandra Murphy, Senior Associate in the Real Estate Team at Mills & Reeve
Investment in office building stock across the UK has boomed in recent years. Commercial landlords and developers have capitalised on the burgeoning economy, post-recession, and with business success you need more ‘bums on seats’ to fuel future growth.
This has created a massive driver for office space, and it is not limited to the London market. Manchester’s high-end developments, such as No.1 Spinningfields, and a renaissance in ‘north-shoring’ has meant that the capital isn’t the only contender in the market. The astronomic growth of the TMT and other sectors has only boosted demand in the city centre.
For companies to attract the best people, you not only need the best offices but also access to desirable leisure attractions, such as 20 Stories at No 1 Spinningfields. However, these buildings don’t come cheap and are also in high demand – presenting a conundrum to businesses.
The lack of available Grade A office space is not down to the fact that people aren’t building offices. You only need to look out of the window to see the amount of construction going on that certainly isn’t all PRS – but businesses need to be mindful of the time constraints in which new developments are brought to the market.
The increased demand has driven office rents up to their highest levels, inevitably pricing some tenants out of the city’s core market. Businesses are having to think of alternatives in order to keep afloat as rising rents are cantering ahead of business growth and profit.
So, what is the solution to the lack of space? We’re seeing more businesses moving towards agile and flexible working models as a way of freeing up desk space and preventing the need to expand into larger offices. These models are often more attractive to staff and potential recruits, such as millennials, who expect flexibility and have a different idea of a healthy work/life balance.
Take the example of some law firms, who have made the change in making staff work at least two days from home on a
rota system – enabling them to remain in existing office space that is too small for the head count. Another option is refurbishment. If space is not your problem, a simple refresh to appease existing staff and attract new talent can be a good plan. Refurbishment can in turn create more space in using the floorplan more sensibly and creating the more modern spaces that millennials have come to expect. Tenants can agree with their landlords to do this and, in many cases, can procure contributions for works. For landlords it can be a useful way to procure direct investment into their asset to increase yields and stock values. Another alternative is for businesses to move further out, where space is less at a premium and more affordable rents are available. With city centre office space bursting at the seams, we’re already seeing a steady expansion of core areas – previously considered fringe. For example, Oxford Road and Ancoats in Manchester are becoming more desirable as an expansion of core areas, particularly with the development of related infrastructure. Ancoats, previously a more undesirable occupier location, is now booming. Indeed, Ancoats has been recently named the 13th coolest neighbourhood in the world – which is a far cry from where it was, even five years ago. But how far can the expansion of the core go – and should businesses look to move out of the city centre, especially as working practices become increasingly flexible and technological advances enable people to work from anywhere? I believe that the problem lies with attracting young talent. Young people want to be in the shiny new offices that are near bars and restaurants in CBDs and not necessarily out in the suburbs. Google was at the forefront of radical office space – and taking a tour of its New York space some six years ago, I was seriously impressed by the ping pong tables, modern breakout areas and free food and drink on tap. Now it’s becoming more commonplace, with young people attracted to the likes of WeWork in central locations, with their beer taps and leisure offerings – is that creating a new high bar in office space?