Flexibility and ease of entry and exit are key attractors for occupiers of serviced office space (alongside the quality of space and services offered), but these very features that appeal to occupiers also make the sector particularly vulnerable during a downturn as businesses can quickly reduce their property footprint.
Serviced office letting agreements will typically be a year or less in duration and can often be terminated with just 2 - 3 months’ notice, depending upon the length of the agreement. In contrast, larger businesses occupying conventional, non-serviced space will usually have signed leases for a period of between 3 and 5 years, often without the ability to terminate the lease beforehand.
The flexibility conferred on occupiers through a serviced office letting agreement will put the occupier in a strong bargaining position to re-negotiate the terms of their occupancy, including seeking a rent reduction in order to stay in business. However, this is not the case across the board, and our experience suggests that the extent to which this happens will vary according to the specific market and nature of occupiers within a building.
The serviced office sector’s bias towards smaller firms also adds to its vulnerability, as this market segment tends to be more vulnerable during a downturn. Typical serviced office agreements will be for fewer than 10 desks, and even in central London typical serviced office lettings tend to be sub-20 desks.
The technology sector has seen particularly strong expansion in the UK in recent years, and smaller technology firms have been a key driver of demand for serviced offices. However, many of these firms have been backed by venture capital funding and have yet to make a profit. In these changed economic times, it remains to be seen whether this source of funding will continue or whether some investors may simply cut their losses and sit on their hands until economic conditions become more benign.
It is therefore possible that a sizable number of unprofitable fledgling technology firms may disappear, while others may simply terminate their serviced office letting agreements to cut costs and work from home until economic conditions improve.
Those serviced office operators with a more diverse portfolio of occupiers, across different size bands and business sectors, are therefore likely to weather the current economic storm more effectively.