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Plug-and-play offices: the new normal?

Plug-and-play is shaping up to be the new normal in the UK office sector. It’s going to mean big changes, but there’s nothing to fear, says David Thame.

05/10/2021 6 min read
the future works

The last 18 months of seething turmoil has, finally, produced an outcome. The new normal in the UK’s big city office market is going to be hybrid office buildings, and hybrid office buildings will mean as much as 30% of floorspace is reallocated to plug-and-play.

And, by plug-and-play, landlords and investors mean fully fitted out office suites, let and re-let several times, to occupiers who pay a single all-inclusive fee. It’s not quite serviced office space – the landlords will not make your coffee, do your cleaning or your photocopies – but something rather different. It is a halfway house between a normal long lease on Cat A office space, and the serviced offer of WeWork, The Office Group and their peers. In short, the ultimate hybrid office space.

At which point, let’s pause, because the last couple of paragraphs contained epic news. Today, the plug-and-play concept, in which landlords fit-out office suites, and tenants take them as seen with (maybe) some modest customisation, is a novelty. There are a handful of options in London thanks to big names like Shaftesbury and L&G, who have developed branded plug-and-play offers, Assemble and Capsule. In the regions, we find that some Manchester landlords have picked up the concept. Elsewhere it’s mostly tumbleweed.

The big takeaway is that plug-and-play is going to be big. Mix has spoken to a range of specialists in this field who are handling hundreds of thousands of square feet of plug-and-play plans in London. More is planned in Manchester, Leeds and – as we shall see – in sub-regional hubs like Slough. It will soon add up to a lot of square footage.

Volumes are hard to judge but the consensus is that as much as a third of routine office floorspace (that is to say, excluding the fanciest large floorplate Grade A office buildings) could be heading down the plug-and-play route sometime in the near future.

The idea is that office buildings become layer cakes of tenure types; traditional long leases occupying several floors of Cat A floorspace at the top, plug-and-play Cat B floorspace in the middle and, on the ground floor, the lightweight coffee shop anchored coworking space beloved by freelancers and start-ups. Without the plug-and-play space in the middle, this concept can’t provide an escalator for growing businesses – it is essential to the mix.

So now let’s take a trip to Slough to discover why landlords think this is such a good idea, why they will do lots more of it, and what it means for our readers.

AshbyCapital and development partner, U+I, have launched The Future Works Instant, a plug-and-play office space within The Future Works, the first 100,000 sq ft phase of a 360,000 sq ft Slough office scheme. Just as the theory suggests, plug-and-play is explicitly designed to offer a third option between flexible workspace and traditional office space.

Branded as ‘Future Works Instant’, the plug-and-play offer is a fully furnished and fitted office space of 6,900 sq ft, which is available to occupiers immediately,

The design-led workspace is located on the building’s second floor and Ashby says it offers high levels of natural light through floor-to-ceiling glazing.

And there’s all the usual stuff, of course. Wi-Fi connectivity, a ground floor all-day café, a double-height feature entrance hall, bike spaces, towel service, smart vending and secure basement parking with electric car charging spaces, and all moments from Slough rail station with the Elizabeth Line opening in 2022. Occupiers also get a 3,100 sq ft communal roof terrace with views of Windsor Castle.

AshbyCapital’s Property Director, Tom Smithers, says the appeal for tenants will be reducing the cost, time and hassle associated with fitting out new premises. And, of course, the relatively simple fee structure and lease. With no fit-out to pay for, there is equally no fit-out for tenants to strip out at the end of the lease, and hence nothing like the (expensive) dilapidation liabilities a traditional lease involves. It’s win, win, win.

It’s also a big win for landlords, which is why they are investing very substantial up-front capital expenditure on fit-outs.

Expensive is the word. The Future Works plug-and-play fit-out was not a corner-cutting, value-engineered endeavour, as Tom explains.

‘If you’re going to recycle a fit-out, it has to be well-thought-out, well-designed, good quality. The cheapest option will look good for six months, and maybe help you bag an occupier, but you will have problems further down the line. We spend more than most, I suspect – about £70 per sq ft, rising to £90 per sq ft if you include the furniture. Some want to target £30-40 per sq ft fit-outs, but that isn’t going to last.

‘Space that can be re-used two, three or four times saves the tenant money, and it removes a lot of waste,’ he says, but does not add that it obviously works out cost-effectively for landlords, too.

The green bonus involved in avoiding regularly stripping out perfectly serviceable fit-outs is one of the big appeals for landlords.

RICS data shows that the average fit-out goes to landfill after just 36 months. Fit-outs account for about a third of the carbon a building produces over its lifespan, taking into account construction and operations, and capping that wasteful cycle helps landlords meet their ESG targets. Tenants like that, shareholders like it, and so does the planet.

There is also a more direct reason: fitted-out Cat B office space scores premium rents. Expectations vary – some say 12-16% uplift, others 10-20% – but all estimates fall into the same generous ballpark. The short story is that rents go up enough for landlords to more than cover the fit-out costs.

‘This is filling the gap between traditional leases of Cat A floorspace, and the serviced offices that start-ups are using. It’s for growing businesses and it makes life easier for them. Rather than a long wait, a few months to a year, to sort floorspace and fit it out, they have just a couple of weekends of arranging the space how they want it, and the job is done,’ Tom explains.

‘And if it works for the tenant, it works for the landlord. We’ve identified real demand here, and we’re trying to react. But, of course, letting this space quickly means we can reduce the costly void periods on empty floorspace, and letting quicker means a real financial advantage to us.’

The cost of the fit-out, even if it is high, can be amortised over five, seven or 10 years – depending on expectations – making it remarkably cost-effective. Add the premium rent, and the avoided/reduced void costs, and it begins to make crystal clear sense.

On top of all that, landlords expect hybrid plug-and-play floorspace to let without the need for them to make contributions to the tenant fit-out (obviously, because the tenant isn’t fitting anything out) and without the normal incentives that oil the wheels of the office leasing scene. They may end up giving a month or so rent free, but that’s it. The rule for them is that incentives are reduced by about 85%.

‘Let’s be clear, this isn’t a massive money-spinner, but it is helpful, and whilst it won’t double the rents landlords can charge, it does broaden the scope of the tenants we can appeal to, and that is a good thing,’ Tom explains.

The widespread expectation is that plug-and-play will work best in a large part – perhaps a third – of the floorspace of older buildings and regional offices with floorplates of 10,000 sq ft or less.

It probably won’t work in buildings with large floorplates, mainly because they appeal to the kind of occupiers who are happy to organise their own fit-outs, and if landlords can let on traditional leases then this is (by far) what they would prefer to do.

For now, AshbyCapital is moving cautiously at Slough. ‘We’ll roll out more plug-and-play floorspace as it lets. We’ve got some interest in the half-floor we’ve already done, and the obvious next step is to do the other half, and then more further up the building,’ says Tom.

‘20-30% of the floorspace would be a good ballpark. For most developers, I think that will be the sweet spot, though some might go completely for plug-and-play,’ he speculates.

The big problem facing plug-and-play will be the approach adopted by valuers and, one step further down the line, by investors. Recently, property valuers have had some issues attributing realistic values to serviced office space – well advertised financial issues among serviced office providers have not helped.

The consensus is that valuation issues can be overcome and that, whilst hybrid offices might have shaved a quarter point or two off office valuations, that is not enough to upset investors. Indeed, investors might be pleased to see hybrid space included in a building because it broadens the product offer.

The valuers may not cause a problem. And investors might not care if they did. For now, the plug-and-play bandwagon is beginning to roll – and before long it will have rolled into an office building near you.

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