The UK Business Centre MarketA Report by The Business Centre AssociationJuly 2016

The UK Business Centre Market

The key trends: a flourishing market

The survey finds that the sector continued to thrive and change in 2014. Among the sample, occupiers (firms) were up by 10%, employees of occupiers up by 19%, floorspace by 9% and turnover by 32%, after adjusting for the fact that the 2014 sample was 9% larger than the 2013 survey. The centres surveyed are estimated to provide just under 21m sq ft of space for over 26,000 firms employing 135,000 workers.

This report is about the characteristics of the UK’s business centre sector, and about who takes space in these business centres. It is based on a survey of BCA members conducted by independent consultants CBRE. Survey responses were received from 47 members who between them operate 647 business centres – about 28% of the estimated total market. This report presents information on the state of the sector as at 31 December 2014, and builds on the BCA’s first report about the sector covering 2013. We define the business centre sector as comprising serviced offices, managed offices, and light industrial units.

Executive summary

The business centre sector experienced strong growth during 2014, with numbers of workers up 19%, and turnover up by 32%

Business centre models differ between London and elsewhere – with competition on price dominant outside London, but competition on quality and service more important inside London

There are more business centre facilities than ever before, with 20.6m sq ft in our sample and over 80 new centres opening in 2014. The average size of the centres stood at around 20,000 sq ft

Serviced office rates rose by 26% in 2014 but managed office and light industrial unit rates declined very slightly by around 1.5-2%. Serviced office rates are still between 23% and 30% cheaper than conventional leases on a like-for-like basis

Access to the latest technology is becoming increasingly important for occupiers, particularly superfast broadband and Wi-Fi capable of delivering videoconferencing

The mainstay sectors of business centre occupiers are business and professional services, and industrial and distribution; the proportion of occupiers in finance and insurance and creative industries declined slightly

Occupier firms increased in size and stayed longer in 2014, with the median business size being 5-6 workers (up from 3-4 workers), more firms staying for 3 years or more, and firms occupying 31% more space

There appears to be an increasing distinction between the models operated by business centres in London and the South East, and those operating elsewhere. London and the South East are dominated by a competitive, service-oriented model with high quality amenities and working environment. In these markets, operators are offering Grade A space and diversifying their service offering to stand out from the crowd.

Key findings of the 2014 survey

Executive Summary

Further afield, price competition becomes much more important and facilities are more basic, with a higher proportion of managed offices rather than serviced offices. Demanding customers and constantly changing requirements in London mean that the London market appears to be driving trends in the sector overall, with these trends gradually filtering out to the rest of the UK.

With an increase in enquiry levels and around 11% of enquiries resulting in the sale of space to an occupier, the market is a burgeoning part of the UK economy.

The centres: more, bigger, better

More centres opened in 2014 than ever before, continuing the trend first seen in 2013 as the UK economy began a strong recovery. By the end of 2014, business centre floorspace covered by the sample stood at an estimated 20.6m sq ft. This is a very significant source of supply (there is currently 72.5m sq ft of floor space in the entire City of London, according to CBRE data). Central London has experienced particularly strong growth in floorspace driven, in part, by the continued growth of the technology, media and telecoms sector.

Serviced office facilities have an average size of around 20,000 sq ft. Expansion appears to be most marked in offices with between 100 and 300 desks, and expansion looks set to continue as operators told us they planned a further 1.5m sq ft of additional space over the next five years (around a 10% expansion).

Occupancy rates have held up everywhere, with typical occupancy of around 80% – markedly higher in London and lower elsewhere. Falls in occupancy can partly be explained by a very large number of new centre openings in 2014 (as new centres take time to fill).

We find substantial increases in rates for serviced offices – 26% in one year – but very slight decreases in charges for managed offices and light industrial units. We find that serviced office charges are between 23% and 30% cheaper than conventional leases on a like-for-like basis, in London and the rest of the UK respectively, though these are by definition not necessarily providing a like-for-like service.

Facilities within business centres are changing as both technology advances and the way in which people and companies now work also evolves. Demands for faster and higher quality broadband and Wi-Fi are incessant, particularly to support video conferencing. But ‘lifestyle’ amenities such as showers, coffee, and co-working spaces also continue to be important.

Two thirds of business centres hold their premises freehold and of those who hold their centre leasehold the vast majority of leases are under 25 years long. This pattern of tenure prompts the question of whether business centres are likely to become a real estate investment asset class in their own right – we conclude that this prospect is being considered but is in its infancy.

The occupiers: staying longer and growing larger

Turning to the characteristics of occupiers, we find that around 22% of occupiers are in the business services sector and 23% in the industrial and distribution sector – these two sectors representing the largest concentrations of occupiers (except ‘other’). But there is a substantial creative sector presence: 15% of occupiers across the UK are in this sector, rising in London’s West End to 25%. The creative sector and the finance and insurance sector became slightly less represented in business centres in 2014 compared with 2013. Creative, finance, insurance, and business services together accounted for 43% of occupier businesses.

In our sample, there were 263 employees per centre in business centres in 2014, an increase of 6% compared with 2013. The distribution of employees across regions did not change substantially between 2013 and 2014. The median size of firm in 2014 was 5-6 workers, compared with 3-4 workers in 2013, which implies that business centres are holding on to firms for longer and that business centres are seen as suitable places to grow one’s small business. We find corroboration for that thesis in the average length of stay of firms, where there was a noticeable increase in the number of firms willing to stay for three years or more. It is very rare for business centres to play host to ‘sole trader’ or single employee businesses but they have an excellent capacity for supporting growing businesses and, in turn, supporting the local economies in which they are located.

The majority of serviced office occupiers enter into annual agreements, but the pattern for managed offices and light industrial units is much more mixed. Outgrowing the space was given as the most common reason for leaving (36% of leavers) with only 9% leaving the space because of business failure.

The average occupier occupied 686 sq ft of space in 2014, 31% more than 2013 – again pointing to a propensity to stay longer and grow larger. However density of occupation varies significantly. One worker on average occupies 110 sq ft of space, but 98 sq ft in London and 139 sq ft in Scotland. Price differentials will play a significant role here, as London businesses aim to maximise space efficiency.

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