Office Space Advice
Q & A: Capital Expert Discusses Serviced Office Market
Published January 29th, 2010 by Jennifer LeClaire
Down markets breed consolidation, but finding capital to get deals done can be a challenge. What does this mean to the business center world?
aBetterOffice caught up with Jonathan Price, managing director of Business Centre Capital Co Lt and a columnist at Officing Today, to discuss how the credit crunch has impacted the serviced office landscape, the opportunities and challenges ahead for UK serviced office space providers, and how this might translate in the U.S. executive suites industry.
Established in 1999, B3C is the world’s leading fund management consultancy, specializing in investment in business centers, managed office space and flexible workspace. B3C has become one of the pioneers in alternative asset class investment and is a leading source of primary and authoritative research on the business centre, managed office and flexible workspace industry.
What does your business do?
B3C acts as adviser to business center companies that have capital needs or that wish to restructure themselves. It also advises investors or non-business center companies that are considering entry into the business center market. It also advises banks that have exposure to the industry.
Who have you worked with in the past?
From 2000-2007 B3C was under contract to Close Investments Ltd, part of the Close Brothers Group plc, a London listed investment banking group. During that period B3C designed, established and managed several mutual funds investing in business centers including Business Centre Properties plc, the world’s first public fund for investment in this sector.
How has the credit crunch impacted the serviced office landscape?
Unlike conventional offices, where voids have increased substantially, the occupancy rate of most good serviced office operators has held up quite well. To maintain this level of occupancy, the business center management staff have had to work harder – run faster to stand still! – and have had to discount rates from 2007 levels. We estimate that license fees have dropped between 10 percent and 20 percent over the last 18 months. As a comparison, in conventional office space, rents have dropped around 40 percent to 50 percent in many locations.
Business centers have always had an element of counter-cyclicality. When economic conditions are challenging, corporate customers hesitate to commit to longer leases and prefer the flexibility of short-term licenses. In addition, in locations where there are large numbers of executive staff redundancies, as in the City of London in 2008, business centers benefit from a high level of start up enterprises as those executives try to go it alone.
What does 2010 hold for UK business centers? Where are the opportunities and challenges?
The amount of debt built up by the UK and U.S. governments to fund the rescue of the banking sector and the economic stimulation undertaken in 2009 make it extremely difficult to predict what will happen in 2010. At some point taxes will have to rise to fund the payment of interest on that debt and to start making repayments. If this happens too soon, it could choke off the recovery. In the UK there is the added question of the currency.
I feel that there could be a sterling crisis as overseas investors shy away from buying sterling denominated government bonds (gilts). We may well start to rue not being in the Euro if this happens. The opportunity for the serviced office industry is to continue to demonstrate how the flexibility that it offers is valuable to companies in uncertain conditions. How clients can use this flexibility and the services on offer to their advantage in reducing costs.
The challenge facing operators is how to stay competitive. The number of serviced offices continues to rise all over the world; competition is increasing. It is important to think strategically and to have a plan for growth or exit in mind.
Do you have any thoughts on how the U.S. business center market will fare?
Similar comments apply to the industry in the U.S. We expect there to be consolidation of companies as competition makes achieving economies of scale more important. This process has already started and is likely to speed up. The Australian company Servcorp is positioning itself to take on the market leader Regus and several UK based operators are expanding in Asia. We expect to see international companies making another attempt to establish themselves in the U.S., thus increasing competition.
Does the business center industry need a ratings system?
We feel the question of a rating system is a bit of a red herring and there is a danger that companies may get distracted arguing about the desirability of ratings. As an outside observer and user of the industry, a rating system might be marginally useful, but its absence is not really a major problem.
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About the Author
Elizabeth Sanchez January 29th, 2010 at 2:02 pm
Interesting. This fellow has some dollars and cents takes on the serviced office industry. And it seems like he’s been watching business center growth for a long time. I feel confident when I read his take on these matters. Of course, no one has a crystal ball, but his point about how executive suites run counter to the cycles is well stated.
Bill Brookshire January 29th, 2010 at 3:05 pm
That’s a pretty bold statement about the UK wishing it had gone with the Euro. Wow… He is right about this, too – the competition among serviced office providers is increasing. Regus and Servcorp are poised to go head to head on more fronts. And there are smaller players expanding into new markets. So 2010 will be an interesting year for the executive suites industry.