The UK Business Centre Market A Report for The Business Centre Association June 2017

Transcription

1 The UK Business Centre Market A Report for The Business Centre Association June 2017

2 The UK Business Centre Market Contents Foreword 01 Executive summary 02 The key trends 03 The centres 03 The occupiers 03 Chapter 1. Introduction 06 Methodology: survey, interviews, literature review 06 Chapter 2: The key trends 09 Key statistics: the sector has kept growing 10 Key trends: hesitation, competition, sophistication 12 Resilience in the sector despite Brexit uncertainty 13 Views on changes in the market over the past 12 months 14 Customer demands keep on rising 14 Operators plan over 8m sq ft of expansion in the next five years 14 Co-working likely to expand further but not universally 15 Continued diversity across the UK 15 Chapter 3: The centres 19 Strong growth in centre openings 20 Floorspace growth in London and South East, falling in the regions 21 Business centre average size 22 Smaller centres on the rise 23 Average occupancy down from 80% to 76% 24 Income and charging basis of estimates 25 Serviced office rates rose by 13% in Managed office rates rose by 13% in Light industrial rates rose by 14% in Facilities continue to improve: focus on technology 29 Chapter 4: The occupiers 31 Characteristics of occupier businesses 32 Average workers per centre rose 9% in 2015, 7% in Modal occupier size has shrunk to 3-4 workers 35 Longer stays of over 3 years continue to become more common 37 Outgrowing the space still the most common reason for leaving 38 Average space per occupier now 328 sq ft 39 i

3 Contents Annex 1: Regional commentaries 41 Scotland 42 Wales 42 North East 42 North West 42 East Midlands 42 West Midlands 43 Yorkshire & Humberside 43 East of England 43 South East 43 South West 44 London 44 Annex 2: Regional boundaries 45 Annex 3: Mapping of figure numbers across BCA s previous survey reports 47 Bibliography 48 Acknowledgements 50 About the BCA 51 Table of figures Figure 1: Definitions used in this report 06 Figure 2: Number of centres in each region, survey responses compared 08 Figure 3: Proportion of centres in each region in 2016 survey 08 Figure 4: Key survey indicators, 2013 to Figure 5: Changes in key indicators from previous reports 11 Figure 6: What impact has the EU referendum had on your business? 13 Figure 7: Operators anticipated changes to floorspace dedicated to co-working in 2017 compared with Figure 8: Year of centre opening 20 Figure 9: Key floorspace figures, whole sample 21 Figure 10: Floor area (sq ft) by region and type of centre, Figure 11: Average size of centre by region and type of centre, Figure 12: Serviced offices: proportions grouped by number of desks 23 Figure 13: Average occupancy by region 24 Figure 14: Standardised benchmarked costs of business centres, Figure 15: Average price per 3 working spaces (Serviced Offices) 26 Figure 16: Average price per 3 units (Managed Offices) 27 Figure 17: Facilities provided by centres (% of those surveyed who said their centres offer the facility) 29 Figure 18: Occupier business by sector, Figure 19: UK sectoral distribution compared between surveys 33 Figure 20: Workers by region 34 Figure 21: Average number of workers per business 35 Figure 22: Typical size of business by region 36 Figure 23: Average length of stay by centre type 37 Figure 24: Average length of stay of customers by centre (months) 37 Figure 25: Main reason for leaving 38 Figure 26: Average occupancy density by region (sq ft per occupier) (Serviced Offices) 39 Figure 27: Average worker density by region (sq ft per person) (Serviced Offices) 40 ii

4 The UK Business Centre Market

5 Foreword Foreword The Business Centre Association is delighted to present its latest survey of members, bringing our understanding of this thriving sector right up to date. This report our third presents the results of two simultaneous surveys conducted by the BCA at the beginning of 2017, looking at the business centres market in 2015 and then A year on from the EU referendum, it s clear that 2016 was a year of some uncertainty for many in our sector. But although we do focus on the impact of Brexit in this report, it s important to remember that 2015 was a year of major growth for our sector, as it was for the UK economy as a whole. So flexible space providers entered 2016 in good shape, and this survey shows that the sector continued to grow and thrive amidst the uncertainty created by political events. While there was unquestionably some hesitation among customers and operators during 2016, the sector rebounded quite quickly. Some operators actually benefited from Brexit as providers of short-term solutions. And, of course, Brexit has not and could not have stopped the pace of technological innovation or stemmed the ever-increasing aspirations of customers for higher quality space and more responsive service from our members. This report shows that operators have risen to the challenge. And what of the future? The period from now until the point when the UK actually leaves the EU will undoubtedly bring fresh challenges. But, as this report shows, flexible space operators remain confident about their ability to face those challenges and take the opportunities that they present. Jennifer Brooke Executive Director, BCA 01

6 The UK Business Centre Market Executive Summary 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 31 members who between them operate around 580 business centres about 23% of the estimated total market. This report presents information on the state of the sector as at 31 December 2015, and as at 31 December 2016, and builds on the BCA s two previous reports about the sector covering 2013 and We define the business centre sector as comprising serviced offices, managed offices and light industrial units. Key findings of the 2015 and 2016 surveys Despite the challenges of Brexit and wider economic uncertainty, the business centre sector continued to grow in 2015 and 2016, with turnover up 13% and numbers of workers up 11%. The EU referendum caused growth to slow, with noticeable slowdowns in activity during 2016, and 38% of operators saying that Brexit had a negative impact on their business. However, the effects of the EU referendum had subsided by the end of 2016, and 20% of operators felt Brexit had been positive for their business. Competition in the market, and high levels of demand from small, new businesses, caused operators to continue to innovate, and create clearer and more distinctive customer offers. 35% of operators plan to increase the amount of space that they devote to co-working facilities in The sample covers about 18m sq ft of floorspace. The average size of serviced office centres is stable at around 19,000 sq ft and managed offices average around 52,000 sq ft. Over 70 centres opened in 2015, continuing the significant increase in centre openings seen in 2013 and Centres opening more recently are smaller on average than older centres. Occupancy was down on average in 2016 compared with both 2015 and 2014, falling from 80% in 2014 to 76% in The average cost of a standardised unit of serviced office space rose by 13% in 2016 compared to Managed office rates also rose by 13% and light industrial rates rose by 14%. Facilities continued to improve, with a clear focus on improving technology. The percentage of centres offering broadband connections has risen from 74% in 2013 to 98% in The type of occupier who takes space in a business centre has remained broadly the same over the four years we have conducted the survey. The biggest concentration of occupiers is in the business services (27%) and industrial/distribution (22%) sectors, though there are substantial regional variations. Occupier firms in business centre space are getting slightly smaller on average, typically taking 3-4 desks. But firms are staying longer than ever once they arrive, with the proportion of customers staying longer than 3 years almost tripling between 2013 (14%) and 2016 (39%). 02

7 Executive Summary The key trends The survey represents about 18m sq ft of floorspace (in 2016 the 2015 sample is slightly larger). The number of occupier firms in the centres included in the survey has risen by 28% each year on average since 2013 and the number of workers has risen by 11% each year on average. Turnover increased by 13% in 2016 compared with 2015 and by an average of 16% each year since this survey was first conducted in Space is being more efficiently used, with an 18% increase in average turnover per square foot and a 17% increase in average workers per centre between 2015 and The amount of space taken per worker has fallen by 8% annually on average between 2013 and The EU referendum caused both customers and operators of flexible space to pause, though most operators feel that this pause was temporary and that the sector has remained resilient in the face of Brexit. 38% of operators said Brexit had had a slightly negative impact on their business, but a further 34% said it had had no impact. Around 20% of operators said Brexit had had a positive impact. A combination of new entrants to the flexible office market, the rapid growth of demand from self-employed people and new small businesses, and rising external costs, have all generated fresh competition in the sector. Operators are becoming increasingly sophisticated and understand their market niche better than ever before. Customer offers are becoming more distinct. Merger and acquisition activity within the sector has created clearer strategies for competition and growth. This has not, however, put an end to experimentation and innovation. Demand for space has risen sharply over the last two years, but customers are also continuing to be demanding, particularly on technology provision and the quality of the office space. Around 35% of operators were planning to increase the space they devote in their centres to co-working, compared with only 4% who said they planned to devote less space. However, this does not mean that co-working has taken the entire flexible space world by storm: 50% of respondents planned no change in this aspect of their operations. The centres The strong pattern of new centre openings observed in 2014 has continued into 2015, though members opened rather fewer centres in 2016, possibly as a result of Brexit concerns. The operators in our sample opened over 70 centres in 2015, and over 20 more in By the end of 2016, the centres in the sample represented 17.9m sq ft of flexible space. The serviced office sector continues to dominate the market, particularly in Central London where 2.0m sq ft out of the total of 2.3m sq ft of space in the sample is serviced office space. As in previous surveys, the North and Midlands have a high concentration of light industrial and workshop space. The average size of a serviced office centre is 19,000 sq ft, which is in line with previous surveys. Managed office centres are typically larger than serviced office centres, averaging around 52,000 sq ft across the UK. Smaller centres seem to be on the rise. The average number of desks in serviced offices in 2015 and 2016 was around 200, whereas in previous surveys it was around 250. There is a noticeable increase in the number of centres with fewer than 100 desks, and a noticeable decrease in the number of centres with more than 450 desks. Average occupancy fell from 80% in 2014 to 76% in Regional differences observed in previous surveys persist, with Central London experiencing average occupancy rates of 80% compared with around 65-67% in Scotland and Wales. The average cost of a standardised amount of flexible office space grew by 13% between 2015 and 2016, and by 14% for light industrial and workshop units. Managed office rates and light industrial rates grew even more strongly between 2014 and 2015, by 24% and 16% respectively, after a period of stable pricing in 2013 and Data inconsistencies in older surveys mean that it is not possible to make long-run comparisons about serviced office rates. Facilities continue to improve, with a clear focus on providing the latest technology. Whereas in 2013, 74% of centres provided broadband, 98% of centres now do so. A similar trend is observed in WiFi provision. The proportion of centres offering coworking facilities rose from just over 50% in 2014 and 2015 to 66% in The occupiers The characteristics of businesses taking space remained broadly stable in 2015 and 2016 compared with previous years. Across the UK, around 27% of occupiers are in the business services sector, with the industrial and distribution sector accounting for 22%. Excluding uncategorised businesses, these two sectors again account for the largest concentration of occupiers. 14% of businesses are in the creative sector (technology, media and telecoms). There are substantial regional variations in business composition, reflecting specialisms and cluster effects. For example, 64% of occupiers in the City of London are in financial or business services while 39% of East Midlands businesses are in industrial and distribution. The average number of workers per centre continues to rise, from 209 in 2014 to 228 in 2015 and then 243 in 2016, reflecting increased occupational density. In a reversal of the finding of our 2014 survey, which saw an increase in the size of firms taking space, we now find that smaller businesses are again becoming more dominant, with a significant increase in the prevalence of sole trader businesses and a reduction in the number of firms with more than 5 desks. Firms are staying even longer, with a marked increase in stays over 3 years. In 2013, 14% of customers were staying for more than 3 years; by 2016 this had nearly tripled to 39%. The most common reason that businesses give for why they leave flexible space is that they ve outgrown it. The proportion of businesses leaving because of business failure is broadly stable at 13% in 2016 (compared with 9% in 2014). 03

8 The UK Business Centre Market 04

9 Report findings Report findings 05

10 The UK Business Centre Market CHAPTER 01: Introduction This report is about the business centre sector. In this report, as in our first two reports, business centre is used as an umbrella term for serviced offices, managed centres and light industrial centres. Our definition also includes co-working space which is present in a number of both serviced offices and managed centres. The offer included in these different types of space varies very considerably see Figure 1 for more detailed definitions. Figure 1: Definitions used in this report The offering of business centres can be broken down as follows: Serviced Office Rent and rates Cleaning, maintenance, etc Telephony and internet connectivity Electricity and other utilities Furniture Filing and storage space Dilapidations Managed Office Rent and rates Cleaning, maintenance, etc Telephony and internet connectivity Electricity and other utilities Furniture Filing and storage space Dilapidations Light Industrial/Workshop Rent and rates Cleaning, maintenance, etc Telephony and internet connectivity Electricity and other utilities Furniture Filing and storage space Dilapidations Methodology: survey, interviews, literature review The core of the evidence presented in this report is two fresh surveys of the BCA s members, which were conducted with the aim of measuring the characteristics of the business centre market across the UK during 2015 and Property consultants CBRE were appointed to contact every member of the BCA inviting them to provide information for each of their centres covering 37 data points. Members provided details, amongst other things, of: Building location Building size and type (according to the classification in Figure 1) Opening date Various metrics of occupancy, including type of occupier, occupier sector and size Financial performance of centres Services offered Responses to the BCA s first survey (see Bibliography) covered 588 centres and examined the state of the sector at 31 December The BCA s second survey, published in July 2016, covered 647 centres and looked at the sector at 31 December For this report a new survey was conducted, to which 31 BCA members responded. Members gave us information about their centres for both 2015 and We received data covering 637 centres (as at December 2015) and 581 centres (as at December 2016). 06

11 Chapter 1: Introduction For this new report two surveys were conducted and BCA members provided information on business centres (as at December 2015) business centres (as at December 2016) Estimating the size of the total business centre market is not straightforward owing to definitional variations from one estimate to another. In 2014, BCA estimated that there were 2,300 business centres in the UK, while in their 2015 annual review, broker Instant Offices estimate the number of serviced offices alone at 2,335 (see Bibliography). An unsourced estimate in Property Week in mid 2016 put the number of serviced offices even higher, at 3, Given the growth in the business centres sector over the last two years (see Chapter 2), we estimate that the total number of centres is now likely to stand at around 2,500, of which 1,200 are operated by BCA members, and thus it is estimated that this survey covers 23% of the total market, and 48% of the centres operated by the BCA s membership. Respondents were asked to provide 37 separate pieces of data. Some respondents were not able to provide full information on all the questions we asked, which means that some of the data aggregations presented in this report are based on a smaller sample size. Where the sample size gives some room for doubt about the findings, this is noted in the text. The questions which respondents were asked allows us to present results which are directly comparable with the BCA s first two reports. While it was possible to make comparisons between those two surveys, the fact that we now have four years worth of survey results makes it possible to be much more confident about actual trends as opposed to fluctuations in the data caused by sample variations. This means, for example, that we can now say with some confidence that there were outlier results in both of our previous surveys which may have caused some trends to have been missed or misinterpreted. The data provided by BCA members was supplemented by a series of interviews (see Acknowledgements, page 50) with a selection of key decision makers drawn from the BCA s membership. The aim of the interviews was to explore the issues raised by the survey analysis in more detail and draw out the key factors affecting the business centre market in 2015 and Throughout this report we have given colour to our findings by quoting those who were interviewed. We thank them all for their time and frankness. Finally, we also conducted a comprehensive literature review, identifying 631 results, focusing particularly on articles and reports published after the BCA s previous surveys. We identified 6 key reports on the sector since our last report. We have drawn on those reports in forming our conclusions. A Bibliography listing those publications we found most useful, plus a selection of reports identified by the BCA s previous reports, may be found at the end of this report in Annex 4. Figures 2 and 3 provide a summary of how survey responses compare on a regional basis across all the years surveys were conducted. Maps showing how we categorise centres to regions (or areas of London) are at Annex 2. The regional map matches the statistical NUTS1 regions used by the ONS and Eurostat. For London, we adopt the same definitions of Inner and Outer London as the GLA s London Plan. For sub-markets within Central London (for example The West End ), we use CBRE s standard sub-market definitions. In some cases, the sample structure of each of the BCA s previous surveys is different and therefore comparisons between them should be made with caution. Again, we place caveats in the text about this difference where appropriate. An increase in the number of centres in any given region in our survey does not (in itself) necessarily indicate the strength of growth in that region; it could simply mean that different BCA members elected to respond to the survey. That said, Figure 2 shows that the distribution of centres across parts of the UK is for the most part the same as the 2013 and 2014 samples (for example, Yorkshire and Humber represents around 8% of the sample in all surveys), giving us some confidence that the change in the size of the sample is representative of real change in the sector. CBRE did not have access to detailed data from the 2013 report. Respondents were assured of confidentiality relating to their submissions for this survey and thus BCA are not able to respond to enquiries seeking further details of the survey beyond the details set out in this report. 1 Property Week, 15 July

12 The UK Business Centre Market Figure 2: Number of centres in each region, survey responses compared No. % No. % No. % No. % Eastern 27 5% 32 5% 33 5% 33 6% Central and Inner London* % % Inner London* % 70 12% Central London, of which:* % % London City % 57 10% London Mid Town % 21 4% London West End % 58 10% Outer London 65 11% 33 5% 41 6% 39 7% North East 31 5% 41 6% 30 5% 18 3% North West 56 10% 67 10% 72 11% 61 11% Scotland 47 8% 55 9% 51 8% 30 5% South East 87 15% 74 11% 78 12% 75 13% South West 36 6% 25 4% 20 3% 19 3% Wales 5 1% 10 2% 10 2% 5 1% East Midlands 20 3% 27 4% 31 5% 22 4% West Midlands 24 4% 42 6% 47 7% 32 6% Yorks & Humber 44 8% 55 9% 52 8% 37 6% Northern Ireland 3 1% 1 0% 1 0% 2 0% Channel Islands 0 0% 1 0% 1 0% 1 0% Total UK** % % % % *In BCA s previous survey reports, references to Central London often included Inner London. We have now separated out these categories (see Annex 2 for definitions). This means that the data presented for 2013 and 2014 for Central London (including Inner London) is occasionally not comparable with the Central London data presented in this report. **The 2016 total includes one centre for which regional information was not provided. Figure 3: Proportion of centres in each region in 2016 survey (sample size: 581) P A Eastern 6% B Inner London 12% L M K J I N H O A G F B E C D C London City 10% D London Mid Town 4% E London West End 10% F Outer London 7% G North East 3% H North West 11% I Scotland 5% J South East 13% K South West 3% L Wales 1% M East Midlands 4% N West Midlands 6% O Yorks & Humber 6% P Other 1% 08

13 Chapter 2: Key trends CHAPTER 02: The Key Trends In this chapter we describe the key trends affecting the business centre market, synthesising the survey results presented in subsequent chapters and our interviews with key operators in the marketplace. Key findings The survey represents about 18m sq ft of floorspace. The number of occupier firms in the space included in the survey has risen by 28% each year on average since 2013 and the number of workers has risen by 11% each year on average. Turnover increased by 13% in 2016 compared with 2015, and by an average of 16% each year since this survey was first conducted in % turnover increase in 2016 compared to % of operators plan to increase the space they devote in their centres to co-working in 2017 Space is being more efficiently used, with an 18% increase in average turnover per square foot and a 17% increase in average workers per centre between 2015 and The amount of space taken per worker has fallen by 8% annually on average between 2013 and The EU referendum caused both customers and operators of flexible space to pause, though most operators feel that this pause was temporary and that the sector has remained resilient in the face of Brexit. 38% of operators said Brexit has had a slightly negative impact on their business, but a further 34% said it had had no impact. Around 20% of operators said Brexit has had a positive impact. A combination of new entrants to the flexible office market, the rapid growth of demand from self-employed people and new small businesses, and rising external costs, have all generated fresh competition in the sector. The sample covers about 18m sq ft of floorspace. The average size of serviced office centres is stable at around 19,000 sq ft and managed offices average around 52,000 sq ft. Operators are becoming increasingly sophisticated and understand their market niche better than ever before. Customer offers are becoming more distinct. Merger and acquisition activity within the sector has created clearer strategies for competition and growth. This has not, however, put an end to experimentation and innovation. Demand for space has risen sharply over the last two years, but customers are also continuing to be demanding, particularly on technology provision and the quality of the office space. Around 35% of operators plan to increase the space they devote in their centres to co-working in 2017, compared with only 4% who said they planned to devote less space. However, this does not mean that co-working has taken the entire flexible space world by storm: 50% of respondents planned no change in this aspect of their operations. 09

14 The UK Business Centre Market ,000are likely 581 business centres in our 2016 sample to employ some 141,000 workers Key statistics: the sector has kept growing Figure 4 sets out some key statistics relating to the sample. As in previous years we have extrapolated our results up to the full sample size where the sample size for any individual question asked was smaller than the full sample. We also perform the same control for sample size as in our previous report, which means that the percentage increases shown can be treated as like-for-like comparisons. According to Valuation Office Agency figures for 2016, England has 923m sq ft of office space. So the 2016 sample of around 18.4m sq ft represents about 2% of that floorspace slightly more when adjusting for the fact that our sample is UK wide, not just England. On a like-for-like basis, we find that the number of occupiers (firms) taking space in business centres has fallen somewhat, by 12% from 2015 to However, the number of workers (employed by customers) in business centres has risen by 7%, implying that the number of workers per firm has also increased. This finding might seem somewhat at odds with our finding in Chapter 4 that the average number of workers per firm has fallen (see Figure 21), but Figure 4 implies an average firm size of 3.1 workers in 2016 compared with 5.1 in 2014, consistent with our finding in Figure 21. Looking longer term, the number of occupier firms has risen 28% since 2013 while the number of workers has only risen by 11%, again implying that the firms taking space are getting smaller. Our decision to control for sample size exaggerates the percentage fall in occupying firms. Figure 5 presents the data on workers and occupiers graphically. On a like-for-like basis, turnover increased by 13% between 2015 and 2016, an unsurprising finding when compared with the increase in charges that we identify in Figure 14. However, this growth in turnover is actually a slight slowing of the longer term growth rate, which averaged 16% over the four years for which we have data. Seen in this longer term perspective, we now think that the 32% increase in turnover which we reported for 2014 (compared with 2013) was likely to have been an overestimate. This demonstrates the importance of having longer-run data in order to separate trends from the effects of sampling volatility. Our previous report found clear evidence of increasing efficiency within the business centre sector. That conclusion can again be drawn from our new results, with an 18% increase in average turnover per square foot and a 17% increase in average workers per centre. The amount of space taken per worker has also fallen by 8% annually on average between 2013 and 2016 (the 9% increase between 2015 and 2016 implied by Figure 4 is entirely due to our decision to control for sample size and seems unlikely to reflect an underlying trend). The average number of firms per centre has fallen somewhat, but this should not necessarily be taken as additional evidence that occupancy rates have fallen (though they have see Figure 13). This is because centres also appear to be getting smaller on average (see Figure 12), so it is equally possible that this is the driver of a smaller number of firms per centre. Figure 4 shows that the 581 centres in our 2016 sample are likely to employ some 141,000 workers. This estimate can be used to calculate an estimate of the total GDP generated by these workers. ONS figures show that at the end of 2016 there were 31.6m employees (or self-employed people) in the UK, and 2016 GDP (in current prices) was 1.94 trillion. So GDP per employee was 61,381. Therefore, the gross GDP created by the centres in the survey sample was 8.7 bn. The sample represents 48% of all centres covered by BCA membership, so that the annual gross GDP supported by BCA members can be estimated at 18.0bn. Using a GDP per capita measure (rather than GDP per worker) would roughly halve this number. As we warned in our previous report, this gross measure does not reflect the fact that company growth and formation would still be likely to occur to a very great extent irrespective of the precise type of space which firms occupied. In other words, this contribution to GDP is not simply or even mainly due to the existence of the business services sector. Nevertheless, it does show that the contribution to the UK economy by firms hosted in the business centre sector is substantial. 10

15 Chapter 2: Key trends Figure 4: Key survey indicators, 2013 to 2016 Sample Measure % Change % per year (extrapolated)* (extrapolated)* (extrapolated)* 2015 to 2016** 2013 to 2016 Centres % 0% Occupiers 21,597 26,181 56,211 45,040-12% 28% Workers 103, , , ,079 7% 11% Sq ft (NIA) 17,393,852 20,880,352 19,191,514 18,398,978 5% 2% Turnover ( ) 492,858, ,060, ,684, ,476,876 13% 16% Sq ft per worker % -8% per sq ft % 14% Firms per centre % 28% Workers per centre % 12% *Extrapolated figures indicate what these indicators would be if the sub-sample is representative of the whole sample. **The estimated % increase in this column is adjusted to reflect the different sample sizes of each survey; this column is intended to provide a like-for-like comparison between surveys. The percentage figures shown in the final column are not adjusted for sample size. Figure 5: Changes in occupier and worker numbers, 2013 to , , , , (extrapolated) 2015 (extrapolated) 2016 (extrapolated) 80,000 60,000 40,000 20,000 0 Occupiers Workers 11

16 The UK Business Centre Market Key trends: hesitation, competition, sophistication Hesitation It is undeniable that Brexit has caused both customers and operators of flexible space to pause in their real estate decisions. We return to the specific Brexit effect below. However, there were other factors in the UK economy which would, in any case, have caused a temporary slowdown in decisions of businesses to expand into new space. The UK economy was already approaching full employment and concerns about inflation and interest rate rises were already causing some hesitation in business investment. According to the ONS, unemployment now stands at a record low of 4.6% at the time of writing, which implies an inevitable slowing in the rate of employment growth, especially when coupled with the lower level of net migration into the UK experienced in 2016 compared with 2015, of 248,000 people. Meanwhile, reports of rising inflation, with CPI now at 2.7%, and concerns about the path of consumer spending arising from that increasing inflation, have also caused some hesitation among businesses about expansion. So some of the effects attributed to the EU referendum may, in our view, have happened even without it. Competition We find that a combination of new entrants to the flexible office market, the rapid growth of demand from self-employed people and small businesses, and rising external costs, have all generated fresh competition in the sector. The key competitive forces which we found from our survey include: New entrants have been attempting to disrupt the market with different offers at a different price. The effect is particularly noticeable in London, with a number of international entrants expanding rapidly. The significant rise of self-employment, particularly part-time self-employment, has meant that the demand for occasional space or start-up space has risen quite sharply. For example, ONS figures show that there were 750,000 more selfemployed people in the UK economy in 2015 than in 2008; the number of part-time self-employed people rose by 88% between 2001 and 2015; and there were 383,000 business start-ups in 2015 the highest since the dot com boom in External costs are rising. For businesses in London and the South East in particular, the recent business rates revaluation (April 2017) has caused substantial increases in bills, though bills in other parts of the country have fallen. Wage inflation, staff shortages, apprenticeship levy, and rents in hot office markets are also of concern. Sophistication Finally, we find that an important response to this competition has been an increasing sophistication and diversification among operators. Even at the time of BCA s last report, it was clear that there was an increasing diversity of flexible space business models, and an increasing defiance of categorisation. Brands are becoming more important, product has become more important and as a result of that, the focus on the customer base is more important. John Spencer, i2 Office Our interviewees said this process has continued. We judge that the sector is rapidly maturing, and that in particular a better understanding of the customer (and the competition) has helped businesses in the sector occupy more clearly identified niches with more distinct offers. A significant amount of merger and acquisition activity may also have assisted in this maturation process, by weeding out less clear or less successful models. We judge that there is still plenty of experimentation within the sector, but it seems more studied than at the time of our previous report. If you stand still you re going to die... you ve got to be in tune with the way people are working, and technology developments John Spencer i2 Office Occupiers are now demanding more flexibility... because the market is now more receptive to that, it is having a knock on effect in that occupiers can get it, therefore you have to give it. Andrew Butterworth Bruntwood We, as a business, continue to be across what s going on in our market sector, looking at the changes that other operators are making. I think the risk is... not keeping in touch with change. Sallie Maskrey Portal Business rates have had a massive impact... we can t instantly pass that cost onto our clients. Charlie Cudworth Prospect 12

17 Chapter 2: Key trends Resilience in the sector despite Brexit uncertainty In light of the outcome of the EU referendum held in June 2016, operators were asked what impact the referendum had on the levels of demand for their space (Figure 6). None of our respondents said they had seen a big negative impact on demand in their centres, with a majority (38%) saying they had experienced a slightly negative impact. Supplementary comments from respondents in response to this question suggest that although there was an initial drop in demand immediately following the vote, enquiry levels have returned to normal levels for a number of operators. A number of operators commented that enquiries were particularly low before the referendum as customers held off on making strategic decisions. One third (34%) of respondents experienced no impact as a result of the referendum outcome. The initial uncertainty surrounding the referendum result has seen customers become less likely to commit to space, according to a number of respondents. The outcome of the 2016 EU referendum was felt to have stagnated the market as decisions were delayed pre-vote and with minimal activity immediately after the results. This reluctance to enter into long leases would appear to play to the strengths of the business centre market, which provides much-needed flexibility. However, only 20% of respondents have seen a slightly positive or big positive impact on their business as a result of the EU referendum. Those operators that had experienced a positive impact did cite increased uncertainty as the driver for increased demand as customers become more averse to buying buildings, or taking long leases. However, some respondents commented that a number of firms had shelved plans to expand the space they occupy, with some clients actively downsizing. Respondents said that business has begun to bounce back after the vote, albeit with firms seeking more flexible, low commitment deals. The EU referendum outcome was also a key theme that emerged from the interviews we conducted with operators. Operators said the biggest impact from the referendum was firms deferring decision making around the space they occupy as they took stock and assessed the future. Many were reported to be staying on in their existing business centre space rather than moving onto larger spaces. Some interviewees also mentioned the differing impacts which the referendum result had on businesses of different sizes. Operators were more positive about the impact of Brexit on small businesses. Such businesses tend to only operate within the UK, with limited importing and exporting, and are less exposed to wider economic fluctuations. Figure 6: What impact has the EU referendum had on your business? (Sample size: 29 operators) 38% 34% 17% Slightly negative impact No impact Slightly positive impact 6% 3% 0% Don t know Big positive impact Big negative impact 13

18 The UK Business Centre Market Views on changes in the market over the past 12 months Respondents were asked to give their views on any changes they have witnessed in the business centre market over the last 12 months. While there were a significant number of operators who said they had not seen any changes in the market, overall operators had seen positive change in the business centre market in the form of increased volume in, and quality of, demand. However, the market is not without its challenges. Demand for space has increased. Specific examples given by respondents suggest this is stronger in London and the South East than with the rest of the UK. Respondents to our 2014 survey also said they had experienced an increase in demand. Some operators had also been an increase in the demand for bigger space. A number of operators commented that they were seeing demand for a larger number of desks. One respondent no longer plans for space fewer than 2 desks, setting a minimum of 5 desks (but compare this with our findings in Figure 21). There were some business centre operators who experienced a lower volume of enquiries over the last 12 months. However, the quality of enquiries had increased. This has led to a decline in occupier churn. The increases in demand, enquiries, and the quality of enquiry were cited as causes for increased occupancy seen by operators. However, average occupancy across the UK has decreased over the last 2 years (see Figure 13 below). Increased competition within the business centre market has limited the ability of operators to increase customer rents. Respondents to our 2014 survey reported increased rents due to a proliferation of start-ups and a shortage of supply. Operators in the 2014 survey also commented on the impact of Permitted Development Rights on the demand for business centre space. This was again mentioned in our 2016 survey as a driver of demand. However, it appears the conversion of office space to housing has begun to affect the business centre sector more negatively, with one operator suggesting independent business centres have been closed and the buildings they occupied converted to residential use. Customer demands keep on rising We also asked respondents to comment on whether their customers demands were changing, and if this had any impact on operators business models. Again, a significant number of operators said they had not seen any change in the demands of their customers. Key points identified by respondents were: As we found in our 2014 survey, the industry continues to be very responsive to user needs. One respondent stated that they survey customers on a regular basis to ensure they are aware of user expectations. There is growing demand for more community space (breakout and lounge space) as customers look to engage more and network with other firms. As this becomes a higher priority for customers, the demand for formal meeting rooms is falling. Technology is hugely important, as our 2014 survey showed. Customers continue to require vastly improved connectivity, speed, and availability (as one operator stated), as more services move online and as customers choose VOIP over traditional telephony. A number of operators mentioned requests from customers to install their own leased lines. While many operators commented that they were continually improving this area of their business, there was a sense that these improvements did not directly increase income; however, investment in IT infrastructure and telecoms is needed to attract customers. As more ancillary services move online, respondents have seen a decrease in the demand for photocopying and landlines. Despite increased demands for IT and internet improvements, operators stated these services are becoming a harder sell as demand increases for inclusive pricing, a trend that appeared in our 2014 report. Operators noted that customers were becoming more discerning in regards to the decoration and the design of their work environment, a trend not identified in previous surveys. Operators plan over 8m sq ft of expansion in the next five years Over the next five years, respondents said that they planned to expand their existing operations by an average of 213,800 sq ft, with one operator alone planning to expand by 3 million square feet. Of all the respondents to our 2016 survey, 27% have no plans to expand within the next five years. The majority of operators that plan to expand are based primarily in London. However, in the interviews we conducted there were a number of operators who thought Central London has become overcrowded with business centres. In the City particularly, this has created increased competition as centres try to attract the same clients. One operator stated that the biggest risk is trying to grow in a market you know is overheated. The operators surveyed plan to expand into a total of 8.2m sq ft around the UK in the next 5 years. This compares with the 1.5m sq ft of expansion which was reported to us in With an average worker density in 2016 in the UK of 328 sq ft per firm (see Figure 26), this represents an approximate increase of 25,000 additional firms in business centres in the next 5 years. 14

19 Chapter 2: Key trends Figure 7: Operators anticipated changes to floorspace dedicated to co-working in 2017 compared with 2016 (Sample size = 26 operators) 60% 50% 40% 30% 20% 10% 0% Much more Slightly more The same Slightly less Much less Don t know Co-working likely to expand further but not universally Co-working space is a hot topic currently in the business centre market. The BCA s website defines co-working as follows: Co-working spaces are shared office spaces operated to create a community spirit among members. The set-up is typically casual and open. Spaces are designed to encourage interaction and a sense of community. Most include amenities, meeting rooms, some private offices and social hours (complete with adult beverages). The cost is based on the frequency of use and packaged as monthly or long-term memberships. With this in mind we asked operators how much change in floorspace dedicated to co-working they anticipated making in 2017 compared with 2016 (see Figure 7). Around 35% of respondents said they were planning to dedicate slightly more or much more space to co-working in The majority of respondents (50%) plan to dedicate the same amount of space in However, these results may hide the true demand for co-working space within the business centre market. One operator plans to introduce only slightly more co-working space because they already dedicate 35% of their space to co-working. On the other hand, another respondent who plans to dedicate much more space to co-working in the coming year qualified their response by stating they currently only had a small area of 500 sq ft for co-working, and this may double. Similarly, of those who responded that they did not plan to change the amount of space for co-working, a significant number did not currently offer any co-working space at all. Despite the apparent positive sentiment towards co-working, interviews with business centre operators revealed a different story. A number of interviewees were sceptical of the co-working trend. Generating this opinion is the experience of operators who have converted space for co-working and have seen poor take up. This sentiment may be location-based, as it was more prevalent in operators with centres outside of London, where there does not seem to be demand for this type of space. One respondent commented: I am yet to see a business model where coworking makes money and provided anecdotal evidence of dedicated co-working locations converting space back to traditional service office configurations. Continued diversity across the UK Our new survey shows once again that the business centre market is extremely varied across the UK, with a clear responsiveness to local needs and economic characteristics. Throughout this report we present regional breakdowns in our graphs, though small sample sizes for some parts of the UK, particularly Wales, unfortunately make it difficult to do so consistently. Many of the features of regional and national markets that we illustrated in our 2014 report (page 12 of that report) remain in place. In particular, we continue to find London dominant in the serviced office market, and the North and Midlands showing a strong leaning towards light industrial and workshop space. Scotland continues to exhibit an impressive diversity, with a good mix of centre types and offers. In the North West, Manchester drives a very significant offer of over 2m sq ft space. Occupier types also reflect regional characteristics. Unsurprisingly, regions like the Midlands do well in distribution businesses, while Central London has a high concentration of financial services and creative businesses. A fuller picture of the diversity of the UK s business centre market is presented in the regional summaries at Annex 1. 15

20 The UK Business Centre Market 2016 was a pretty positive year... post Brexit saw larger occupier demand cooling off but, regardless of Brexit, micro- and small businesses continued to perform strongly. Gareth Evans Bizspace I think before the result the economy was generally in a boom... Brexit then made people stop and think and has caused some concerns over what the future might look like... customers that we already have in our centres are probably holding tight to see how things go. The impact will be relatively low because [our customers] are UK-based businesses mostly trading with UK-based customers. We only have a handful of customers doing business overseas. Charles Wates Needspace? After the referendum, almost immediately enquiry levels and demand levels fell... but they have now come back and tracking long term averages now. Business confidence started to return and people decided they needed to crack on with running their businesses. Andrew Butterworth Bruntwood After 23 June there was a complete change in the market; it was rising up until then and then people took stock and were hesitant. Now that Article 50 has been served, people will calm down and realise that life goes on. David Saul Business Environment Perspectives on Brexit The underlying demand doesn t seem to have changed... there has been more reticence for people to make long term commitments on conventional property... people we thought would leave to go conventional have renewed instead as they feel a bit unsure about the future. John Spencer i2 Office People are a bit more nervous about moving and committing to costs, which is what we ve experienced at the start of 2017 and the end of Whereas, before, people were more willing to move. Charlie Cudworth Prospect We have done business this quarter with larger businesses and it s because they don t want to make a longer commitment than the next 12 months. Ordinarily these people would have elected to go down a conventional route... they have been candid in saying to us they don t want a long term commitment. Tom Mulvaney UBC 16

21 Chapter 2: Key trends 17

22 The UK Business Centre Market 18

23 Chapter 3: The centres CHAPTER 03: The Centres In this chapter we focus on the characteristics of the centres themselves describing their average size, income, occupancy rates and facilities. Key findings The strong pattern of new centre openings observed in 2014 has continued into 2015, though members opened rather fewer centres in 2016, possibly as a result of Brexit concerns. By the end of 2016, the centres in the sample represented 17.9m sq ft of flexible space. The serviced office sector continues to dominate the market, particularly in Central London where 2.0m sq ft out of the total of 2.3m sq ft of space in the sample is serviced office space. As in previous surveys, the North and Midlands have a high concentration of light industrial and workshop space. 80% 76% The average size of a serviced office centre is 19,000 sq ft, which is in line with previous surveys. Managed office centres are typically larger than serviced office centres, averaging around 52,000 sq ft across the UK. Average occupancy across the UK down from 80% to 76% Smaller centres seem to be on the rise. The average number of desks in serviced offices in 2015 and 2016 was around 200, whereas in previous surveys it was around 250. There is a noticeable increase in the number of centres with fewer than 100 desks, and a noticeable decrease in the number of centres with more than 450 desks. Average occupancy is down from 80% in 2014 to 76% in Regional differences observed in previous surveys persist, with Central London experiencing average occupancy rates of 80% compared with around 65-67% in Scotland and Wales. The average cost of a standardised amount of flexible office space grew by 13% between 2015 and 2016, and by 14% for light industrial and workshop units. Managed office rates and light industrial rates grew even more strongly between 2014 and 2015, by 24% and 16% respectively, after a period of stable pricing in 2013 and Data inconsistencies in older surveys mean that it is not possible to make long-run comparisons about serviced office rates. Facilities continue to improve, with a clear focus on providing the latest technology. Whereas in 2013, 74% of centres provided broadband, 98% of centres now do so. A similar trend is observed in WiFi provision. The proportion of centres offering co-working facilities rose from just over 50% in 2014 and 2015 to 66% in

24 The UK Business Centre Market Strong growth in centre openings Figure 8 shows the business centres opening each year in the UK. The 2015 and 2016 survey results show the continued strength of the business centre market; although openings have decreased slightly from 2013 within our sample. As mentioned in our 2014 report, we were unable to replicate the findings of the 2013 survey which showed fewer openings in 2013 compared with the 2014, 2015 and 2016 results. Our 2015 and 2016 survey results are also lower than the results reported in previous surveys across all years; however, they display the same general cyclical trend which we noted in our previous report. One reason for the lower numbers for earlier years is simply that, since we started surveying in 2013, some of these centres have simply closed and are no longer reported in the sample at all (we do not ask about centres that the operator used to operate but has sold to other operators not represented in the sample). Even bearing these issues of sample structure in mind, the number of business centres opening each year has increased significantly in the past few years, recovering from the last economic downturn in good time. It is important to note the significantly lower number of centre openings in 2016 shown in Figure 8, which is surprising given the level of expansion seen in 2014 and We suspect that this low number underrepresents the actual level of centre openings, particularly in London and particularly from operators not in the sample; but it may also reflect temporary operator caution in the light of concerns over the EU referendum. It will be interesting to see in due course whether 2017 stages a recovery. Figure 8: Year of centre opening (Sample size: 2016 = 482, 2015 = 412, 2014 = 594, 2013 = 556) Pre

25 Chapter 3: The centres Floorspace growth in London and South East, falling in the regions The key overall floor space figures from our 2015 and 2016 surveys are shown in Figure 9. In total, our 2016 sample covers 17.9m sq ft of floor space in the UK. While the total figure is down on previous survey results, this is explained by the slightly smaller sample sizes in our 2015 and 2016 surveys. Figure 10 shows the amount of floor space by region in our 2016 sample, which shows a similar trend to the 2015 results. Given the similarity between 2015 and 2016, we do not reproduce the 2015 numbers here. As with previous years, serviced office space dominated the business centre market, particularly in Central London where 2.0m sq ft out of a total of 2.3m sq ft is serviced office space. In the West End the amount of serviced office space grew significantly between 2015 and 2016, increasing 240,000 sq ft to just over 900,000 sq ft in Meanwhile, the amount of managed office and industrial space was broadly unchanged at the national level. Most UK regions have little to no managed office space, South West and Wales most notably. In contrast, managed offices make up a sizable proportion of total space in the North West and Inner and Outer London suburbs. Unsurprisingly, light industrial space is almost non-existent in London and the South East, with less than 10,000 sq ft in Central London. Elsewhere, the Midlands (East and West Midlands together) have 0.94m sq ft of light industrial space in 2016, Yorkshire and Humberside has 0.84m sq ft, and the North West has 1.2m sq ft. The results and patterns seen in our two most recent surveys are roughly similar to those reported in the 2013 and 2014 surveys. Even as sample sizes have changed, the general pattern of distribution of space has remained the same. Figure 9: Key floorspace figures, whole sample UK Floorspace (sq ft) All types of centre 20,589,899 18,890,707 17,892,293 Serviced offices only 10,361,403 8,734,615 7,167,465 Managed offices only 4,387,088 5,316,322 5,513,969 Light industrial centres only 5,841,408 4,703,550 4,378,463 Note: unextrapolated figures (compare Figure 4). Figure 10: Floor area (sq ft) by region and type of centre, 2016 (Sample size: 2016 = 565) 0 1 million 2 million 3 million 4 million Yorks & Humber West Midlands East Midlands Wales South West South East Scotland North West North East Outer London London West End London Mid Town London City Central London Inner London Eastern Serviced Office Managed Office Light Industrial 21

26 The UK Business Centre Market Business centre average size Figure 11 shows the average size of centres, broken down into regions and centre type, in As with the 2014 survey, the majority of serviced office centres average around 15,000 to 25,000 sq ft, while the UK average is slightly above 19,000 sq ft. Serviced offices in the South East and around London are typically larger than those in the rest of the UK. In our 2014 report we noted an increase in the size of serviced offices from 2013 results. This trend is not present in our 2015 or 2016 results. However, as there is no significant difference in results between 2015 and 2016, we could conclude that this is the result of changes in the sample between years. difference is much less marked in Scotland and is thrown into reverse in the South East and London s West End. Light industrial facilities average 66,000 sq ft across the UK in This is an increase from the 51,000 sq ft reported in the 2014 results but, as noted above, this is probably due to changes in the sample between surveys. The regional differences in the average size of light industrial facilities are still present. This pattern was observed in all previous surveys conducted and so it seems the large size of these facilities is due to specific characteristics of each market. In 2015 and 2016, managed office centres are again significantly larger than their serviced office counterparts, typically % larger. This Figure 11: Average size of centre by region and type of centre, 2016 (sq ft) (Sample size: 2016 = 565) 0 20,000 40,000 60,000 80, , ,000 Yorks & Humber West Midlands East Midlands Wales South West South East Scotland North West North East Outer London London West End London Mid Town London City Central London Inner London Eastern All UK Light Industrial Managed Office Serviced Office 22

27 Chapter 3: The centres Smaller centres on the rise Figure 12 shows the proportion of serviced offices grouped by the number of desks for each of the surveys conducted. Immediately obvious are the significant rise in the proportion of centres with less than 100 desks and the fall in proportion of centres with over 450 desks. While this could be due to changes in sample structure, it seems unlikely. Furthermore, in our interviews we heard about a number of operators efforts to reduce the number of desks firms take within their centres. Countering this argument is the fact that the proportion of centres with desks has remained roughly the same. In the 2016 survey the average number of desks per serviced office is 201 (2015 = 201). This number is well down on the figures recorded in the 2013 and 2014 reports of 249 and 257 desks respectively. This might be explained by the increasing dominance of London and the South East in our sample. Figure 12: Serviced offices: proportions grouped by number of desks (Sample size: 2016 = 105, 2015 = 94, 2014 = 417, 2013 = 341) % 30% 25% 20% 15% 10% 5% 0% < >450 Number of desks 23

28 The UK Business Centre Market Average occupancy down from 80% to 76% Average occupancy across the UK was down in 2016 at 75.6% (Figure 13), with average occupancy in regions ranging from 66% in Wales to 84% in Inner London. The average occupancy in 2015 was 77.2% across the UK. With the exception of London s Mid Town and the Eastern region, occupancy decreased in all regions from 2015 to A similar trend is seen when comparing 2015 results with 2014 s survey. While East Midlands and Yorkshire & Humberside occupancies rose from 2014 to 2015, occupancy levels decreased in all other regions. Overall, there appears to be a trend of decreasing occupancy across business centres in the UK, albeit by only a few percentage points. Occupancy levels fell in London. The 2014 survey reported an average occupancy in Central London of 86% (not weighted by floorspace). This figure fell to 80% in 2016 (81% in 2015), as occupancy levels in both the City and West End submarkets decreased. This might be explained by significant openings of new space in London in 2015 and Outside London, only business centres in the Eastern region recorded increasing occupancy levels in 2016, up from 72% in 2015 to 77% in However, occupancy in 2014 was 78%, down from 85% in 2013, implying that the 2013 Eastern region sample structure may contain unusual outliers. Figure 13: Average occupancy by region (Sample size: 2016 = 549, 2015 = 626, 2014 = 593) 0 20% 40% 60% 80% 100% Yorks & Humber West Midlands East Midlands South West South East Scotland North West North East Outer London Central London London West End London Mid Town London City Inner London Eastern All UK 24

29 Chapter 3: The centres Income and charging basis of estimates This section presents the information gleaned from the survey about income and charging. An obvious factor influencing the income of a centre is the charging schedule which is implemented. As with the previous reports, the 2015 and 2016 survey respondents were asked to provide information distinguishing between serviced, managed, and light industrial spaces based on a standard package as shown in Figure 14. Figure 14 also presents the headline averages for all the surveys conducted to date. This calculation is extremely challenging to perform and our results should be treated with caution. In some cases the results are counter-intuitive and point to likely errors in the way operators record the information; we set out the main caveats in the discussion on each of the types of business centre below. Figure 14: Standardised benchmarked costs of business centres, Type of Basis of Inclusions 2013 UK 2014 UK % 2015 UK % 2016 UK % centre Charging Average Average change Average change Average change to 2014 to 2015 to 2016 Serviced The charge - Rent, rates 14,097 10,543* -25% 8,694-18% 9,848 13% Office for 3 desks and utilities for 12 months - Furniture - Filing and storage space - Telephony and internet connectivity - Electricity and other utilities - Dilapidations - Cleaning, maintenance, etc. Managed The charge - Rent, rates 9,701 9,516-2% 11,773 24% 13,248 13% Office for 360 sq ft and utilities of space for - Telephony 12 months and internet connectivity - Electricity and other utilities - Dilapidations - Cleaning, maintenance, etc Light The charge - Rent, rates 3,969 3,908-2% 4,524 16% 5,144 14% Industrial for 500 sq ft and utilities unit for - Telephony 12 months and internet connectivity - Electricity and other utilities - Dilapidations - Cleaning, maintenance, etc *In our 2014 report this figure was stated as 17,696, implying a 26% increase in the benchmark compared with The figure has been recalculated (see main text). 25

30 The UK Business Centre Market Serviced office rates rose by 13% in 2016 We find very significant differences in the benchmarked cost for serviced offices in these updated figures compared with both the 2013 and 2014 surveys. Despite strong growth in the UK economy, and growth in office rents generally, operators reported substantially lower rates in 2015 and 2016 compared with 2013 and These differences are so significant, and so difficult to reconcile, that the 2015 and 2016 figures must be compared with previous surveys with extreme caution. In order to understand this discrepancy further we have revisited the figures we were given in We now think that the figures provided by one operator (operating a substantial number of centres), were mis-stated and that this led the benchmark figure for 2014 ( 17,696) to be significantly overstated. We have therefore removed this operator from the 2014 sample and recalculated the benchmark (the average cost of 3 desks for 12 months) for 2014, which now stands at 10,543. We have more confidence in the responses provided by this same operator for the 2015 and 2016 surveys and therefore those responses remain in the sample for those years. While this 10,543 figure is still larger than the figures for 2015 ( 8,694) or 2016 ( 9,848), and thus remains rather counter-intuitive, it is certainly more comparable. The difference is more easily explained by variations in sample structure between 2014 and We remain unable to explain the very high figure for 2013, and do not have access to the figures underpinning this calculation. Despite the differences between the surveys, we can at least be sure about consistency in the 2015 and 2016 samples, because we conducted them at the same time. This shows that the average cost of 3 working spaces in UK serviced offices increased 13% from However, the 2016 average is 7% lower than the 2014 UK average of 10,543. As was evident in the 2014 report, some regions experienced more significant price growth than others. Figure 15 illustrates the regional picture. London submarkets in fact reported decreasing rates in 2016, with the Central London average falling from 19,831 per 3 workspaces in 2014 to 15,403 in This is likely to be due to the substantial competition and new centre openings in the London market at the time. The North West also reported decreasing rates, although less severe, falling from 3,751 in 2014 to 3,701 in Both the South East and South West saw the price of 3 workspaces increase from 2014 to We have not shown the 2014 figures for a number of regions due to small sample sizes. Prices in Central London are unsurprisingly the highest, reflecting the general rental levels. The price in 2016 for 3 working spaces in serviced offices in the City is 17,980, slightly above the pricing in the West End of 17,092. Figure 15 Average price per 3 working spaces (Serviced Offices) (Sample size: 2016 = 441, 2015 = 410, 2014 = 127) 0 5,000 10,000 15,000 20,000 25,000 30, Yorks & Humber West Midlands East Midlands South West South East Scotland North West Outer London London West End London City Inner London Central London* Eastern All UK 26 Central London is an average of the City, Mid Town, and West End submarkets. Serviced office costs in some regions have not been reported due to small sample sizes.

31 Chapter 3: The centres 13% 13% Both Serviced and Managed office rates up 13% Managed office rates rose by 13% in 2016 Across the UK the average cost of 360 sq ft in managed offices increased 13% in our 2016 results, from 11,773 to 13,248. Although the differences are less striking, there is still a potential discontinuity between the 2013 and 2014, and 2015 and 2016, results. As with serviced offices, the results for 2014 look like the outlier in 2014, we reported a slight drop in costs compared with 2013, whereas the 2015 and 2016 results imply continued growth, which would be more logical given the economic backdrop over the last 4 years. If we are right, managed offices rates have increased by an average of 11% each year since the survey began in As with serviced offices, there is a clear regional divergence in pricing. Despite the relative lack of managed offices in Central London, they still command pricing well above the rest of the UK, at 18,532 for 360 sq ft. Central London reported average prices increasing 1.2% from Figure 16: Average price per unit (Managed offices) (Sample size: 2016 = 123, 2015 = 127, 2014 = 140) 0 5,000 10,000 15,000 20,000 25, North West 2016 Inner London Central London All UK A number of regions have been excluded due to small sample sizes. Central London is an average of the City, Mid Town, and West End submarkets. 27

32 The UK Business Centre Market 14% Light industrial rates rose by 14% in 2016 Our benchmarking exercise also covers light industrial and workshop units, where the benchmark is 500 sq ft of space rented for 12 months. In line with the 2013 and 2014 survey, respondents were asked to include rates and telephony costs in their benchmark, although light industrial operators reported that they often do not cover these costs in practice. These results need to be interpreted with that in mind. Overall, the cost of light industrial space rose by 14% between 2015 and 2016, from 4,524 to 5,144. This is a substantial increase, matching that seen in office centres, but in fact rates rose faster between 2014 and 2015, at 16%. Because of the quite distinct operator cadre in the light industrial and workshop sector, which does not overlap significantly with the serviced office sector, we have no concerns about the comparability of these new results with previous surveys. The latest results imply a strengthening of the demand for light industrial and workshop units, compared with the broadly flat pattern seen in 2013 and 2014 when the UK s economic recovery looked less assured than in Because of the small sample size in the 2015 and 2016 surveys (66 centres were able to provide benchmarking information in 2016) it is not possible to present a meaningful breakdown of light industrial centres by region. Facilities continue to improve: focus on technology Figure 17 shows the trends in the facilities offered by our sample of business centres. The vast majority of centres offer virtual office facilities, broadband and WiFi services, a reception, and breakout and meeting rooms. In our 2014 report we noted some sharp changes in the provisions offered by business centres. We concluded that although some of these changes can be associated with a change in sample structure, the sector appears to be fleet of foot in responding to changing customer demands. We find the same trend in the results of the 2015 and 2016 surveys. Looking at the results from all four years, two main trends emerge: first, the increased importance of technology/it provisions, and secondly, the growth of communal and collaborative space. In 2013, 74% of centres offered broadband. Our latest survey shows that in 2016 broadband provision had risen to 98%. The relatively low proportion of centres in 2013 and 2014 offering broadband can be explained by light industrial centres not requiring it. The sharp rise in provision of broadband to 100% in 2015 and 98% in 2016 would suggest that light industrials now do in fact offer broadband internet services. This would perhaps also indicate that broadband is now expected to form part of the base package offered by business centres. A similar trend is seen in the provision of WiFi, again showing the increasing importance of technology in the sector. Increasing WiFi provision also hints at an emerging trend of communal and collaborative workspaces with individuals not wanting to be tethered to a fixed space. The technologies offered by business centres were a common theme discussed in the interviews we conducted with operators. They were quick to mention the hugely important role technology plays in their customers decisions about which space they take. A number of interviewees stated that the technology offering of centres had the potential to be USPs for operators, reinforcing the notion that technology is a key factor in the decision making processes of business centre customers. We asked about co-working facilities offered by business centres for the first time in our 2014 survey with 54% of centres offering such space. The proportion of centres offering co-working in 2015 stayed roughly similar (51%) but increased sharply in 2016 to 66% (see also Chapter 2). This is perhaps unsurprising given the press and media attention given to this trend in recent months. The proportion of centres with cafés remained relatively stable when comparing 2016 and 2014 (10% and 12% respectively). Of the centres with cafés, 51% were in London (up from 42% in 2014) suggesting this market in particular values the socialising aspect of the serviced office offering. Also related to this emerging trend of communal and collaborative space is the significant increase seen in hot-desking and breakout area offerings. 28

33 Chapter 3: The centres Our analysis of our customers show that there is quite a broad sector spread, but the one thing they do seem to have in common is a high digital dependency. Chris Pieroni Workspace People are asking for areas on their property to get out of the 4-6 person office and go and grab a coffee and have an informal meeting with a colleague or client. Andrew Butterworth Bruntwood We get asked if the client can not take our IT services; they want to put their own bandwidth in. We are getting asked that more and more, so rather than wanting more tech, they want less... because they want to put their own line in and stick some IP phones on desks. Charlie Cudworth Prospect Figure 17: Facilities provided by centres (% of those surveyed who said their centres offer the facility) Facility Trend Sample Size Virtual Office 91% 98% 73% 82% Co-working 66% 51% 54% n/a Hot desking 67% 74% 57% 49% Café (2013: café or refreshments) 10% 5% 12% 51% WiFi 93% 98% 73% 69% Broadband 98% 100% 78% 74% Video Conferencing 59% 70% 56% 38% Gym 2% 1% 4% 5% Showers 42% 30% 63% 40% Air conditioning 72% 77% 67% 59% Meeting rooms 84% 87% 82% 82% Breakout areas 94% 97% 76% 57% Photocopying 82% 87% 73% 76% Reception 86% 90% 79% 80% 29

34 The UK Business Centre Market 30

35 Chapter 4: The occupiers CHAPTER 04: The occupiers In this chapter we look at the characteristics of the occupiers of business centres, with a particular focus on the types of business that take space in business centres, changes in business size, length of stay, and reasons why businesses decide to leave. Key findings The characteristics of businesses taking space remained broadly stable in 2015 and 2016 compared with previous years. Across the UK, around 27% of occupiers are in the business services sector, with the industrial and distribution sector accounting for 22%. Excluding uncategorised businesses, these two sectors again account for the largest concentration of occupiers. 14% of businesses are in the creative sector (technology, media and telecoms). There are substantial regional variations in business composition, reflecting specialisms and cluster effects. For example, 64% of occupiers in the City of London are in financial or business services while 39% of East Midlands businesses are in industrial and distribution. The average number of workers per centre continues to rise, from 209 in 2014 to 228 in 2015 and then 243 in 2016, reflecting increased occupational density. In a reversal of our 2014 survey findings, which saw an increase in the size of firms taking space, we now find that smaller businesses are again becoming more dominant, with a significant increase in the prevalence of sole trader businesses and a reduction in the number of firms with more than 5 desks. Firms are staying even longer, with a marked increase in stays over 3 years. In 2013, 14% of customers were staying for more than 3 years; by 2016 this had nearly tripled to 39%. The most common reason that businesses give for why they leave flexible space is that they have outgrown it. The proportion of businesses leaving because of business failure is broadly stable at 13% in 2016 (compared with 9% in 2014). 31

36 The UK Business Centre Market Characteristics of occupier businesses stable Figure 18 shows the composition of business centre occupiers by region in our 2016 results. The 2015 results show a similar distribution. Figure 19 shows how these have changed from previous surveys. Across the UK around 27% of occupiers are in the business services sector with the industrial and distribution sector accounting for a further 22%. As with our 2014 results, these two sectors represent the largest concentrations of occupiers (excluding others ). Again there is a substantial creative sector presence of 14%. Together, the business services, finance, insurance, and creative sectors now account for 49% of occupier businesses. In 2014, they accounted for 43%. In common with our 2014 results, a significant proportion of business centre occupiers in London are in business services and finance and insurance: around 50% in the West End and 64% in the City. The creative sector also represents a substantial proportion of occupiers, particularly in Mid Town (32%) and in Inner London (33%) which includes the emerging tech clusters on Central London s fringe. As they have the highest proportion of light industrial centres it is not surprising that the North West (33%), South West (34%), East and West Midlands (39% and 34%), and Yorkshire & Humberside (38%) have the highest proportion of industrial and distribution occupiers. There are a surprisingly high number of public sector occupiers in Scotland; however, this is due to changes in the sample structure between surveys. We asked the operators we interviewed about the reasons large professional services firms take space in business centres. The majority of interviewees noted that such firms take space in their centres for one-off projects. We had heard anecdotally of large professional service firms taking such space in order to interact with smaller companies in order to win their business. However, operators did not report this as having taken place. Rather, such firms may have taken space to interact with the employees of smaller companies as a talent spotting and recruitment strategy, although this was only mentioned by one operator. The most notable difference in occupier distribution across the four surveys is the decrease in the business services sector, from 27% in 2013 to 20% in Notwithstanding differences in sample structure, our most recent surveys would suggest this is due to a rising number of finance, insurance, and creative industries occupiers taking space in business centres. It is also important to mention the rising number of occupiers that have been classified as other. More research is needed to determine whether these occupiers do not sit within these traditional business classifications, or if there is a sampling issue. I would love to be able to tell you what sector they all come from... but they re a really diverse bunch. We ve got solicitors, recruitment consultants, IT companies, design companies a real cross-section of different companies. Survey Respondent We position our buildings for the types of occupiers that work out of them, being a little more selective at times about who we lease space to in which building so we can make sure that we create a community within those buildings. Andrew Butterworth Bruntwood 32

37 Chapter 4: The occupiers Figure 18: Occupier business by sector, 2016 (Sample size: 2016 = 581) 0% 20% 40% 60% 80% 100% Yorks & Humber West Midlands East Midlands South West South East Scotland North West North East Outer London London West End London Mid Town London City Central London Inner London Eastern All UK Finance and Insurance Business Services Creative Public/Charity Industrial and Distribution Other Other regions not shown are omitted due to small sample sizes. Figure 19: UK sectoral distribution compared between surveys (Sample size: 2016 = 268, 2015 = 259, 2014 = 223) 35% 30% 25% 20% 15% 10% 5% 0% Finance and Insurance Business Services Creative Public/Charity Industrial and Distribution Other 33

38 The UK Business Centre Market 9% 7% Increase in average workers per centre Average workers per centre rose 9% in 2015, 7% in 2016 Figure 20 shows the regional distribution of workers in the business centre sector. As in previous surveys, the majority of workers (56%) are in London and the South East. However, the proportion of workers in Central and Inner London has fallen from 42% in 2013 to 33% in Similarly, the proportion of workers in Outer London decreased from 15% to 6%. There has been no significant increase in one single region in the rest of the UK; rather, each region has seen variations of a few percentage points. The average number of workers per centre was 243 in 2016 and 228 in 2015, increasing 7% from the 2014 high of 209. We erroneously reported this figure as 263 in our 2014 report (page 35 of that report). Figure 20: Workers by region (Sample size: 2016 = 473, 2015 = 550, 2014 = 439) Region 2016: 2015: 2014: 2013: % Workers % Workers % Workers % Workers Central London and Inner London* 33% 24% 41% 42% Central London, of which:* 28% 21% - - London City 12% 10% - - London Mid Town 2% 1% - - London West End 14% 10% - - Inner London 5% 3% - - Outer London 6% 5% 8% 15% South East 18% 17% 18% 13% South West 4% 4% 3% 4% Eastern 7% 6% 5% 4% East Midlands 3% 3% 2% 3% West Midlands 5% 7% 5% 3% Yorks & Humber 7% 7% 5% 4% North West 9% 14% 7% 7% North East 2% 3% 1% 1% Scotland 4% 7% 4% 3% All UK 97% 97% 100% 100% All London and South East 56% 46% 67% 70% Other regions not shown are omitted due to small sample sizes. *Disaggregated Central London figures were not provided in previous reports. An aggregated Central London and Inner London figure has been provided to allow comparison between this and previous reports. 34

39 Chapter 4: The occupiers Modal occupier size has shrunk to 3-4 workers Figure 21 shows the average number of workers in each business. As with previous surveys, smaller businesses predominate. In our 2016 survey, the modal occupier firm size was 3-4 employees. In both 2015 and 2016, slightly over 60% of centres had a typical firm size of less than 5 workers. As one interviewee stated: The bread and butter for most operators is 1-6 desks. Even accounting for variations in the sample structure, the differences between the 2013 and 2014 results and the two surveys presented in this report are quite significant. In comparing the 2013 and 2014 results, our 2014 report argued that the increase in the median size of business showed that businesses found serviced office spaces a good place to grow their firms. Our interviews with business centre operators lead us to believe that this is still the case; however, a number of operators expressed the desire to reduce the average number of desks taken by firms in their centres. We believe this explains the reduction in modal firm size in recent years, at least partially. The main reasoning for this trend is the vulnerability and risk exposure that are associated with firms that occupy a large number of workspaces terminating their agreements. Indeed, in the interviews we conducted this was mentioned as a particular concern, with one operator going as far as making a conscious effort to reduce the average number of workspaces each firm occupies in their space. This was of particular relevance in 2016, and continues to be so given the economic uncertainty that surrounds the EU referendum. Figure 22 shows the typical size of firms in business centres for each region in the UK. For the majority of regions, centres reported that most occupier firms have between 2 and 5 employees. This ranges from 62% of centres in London s West End and East Midlands reporting this as the typical firm size, to 100% in London Mid Town and Wales (though sample sizes are rather small). East Midlands centres had the highest proportion of single employees at 24% of firms, above the UK average of 8%. There are still a significant proportion of firms with 6-10 employees, with the national average of 19%. In Yorkshire & Humberside 31% of centres said firms fell into this category. The London City submarket had the highest proportion of firms with 6-10 employees at 40% and 11+ employees at 16%. As discussed in regards to Figure 26 we believe a small number of larger occupiers have taken space in the business centres in the London City market which would provide a partial explanation for the larger typical firm size. A number of regions had centres with no occupiers of this size, notably London Mid Town, Inner London, and East Midlands. Figure 21: Average number of workers per business (Sample size: 2016 = 462, 2015 = 543, 2014 = 180) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% >

40 The UK Business Centre Market Figure 22: Typical size of business by region (sample size: 2016 = 559) Single employee employees employees employees Yorks & Humber 3% 63% 31% 3% West Midlands 0% 68% 25% 7% East Midlands 24% 62% 14% 0% Wales 0% 100% 0% 0% South West 6% 71% 18% 6% South East 10% 64% 12% 11% Scotland 14% 72% 10% 0% North West 4% 67% 21% 7% North East 6% 67% 17% 11% Outer London 10% 73% 13% 3% London: West End 9% 62% 24% 2% London: Mid Town 0% 100% 0% 0% London: City 2% 37% 40% 16% Central London 4% 66% 21% 6% Inner London 14% 82% 5% 0% Eastern 21% 75% 4% 0% All UK 8% 66% 19% 5% Some regions do not sum to 100% as not all respondents provided information on the size of their customers. Some of the old beliefs are being challenged, in the sense that in the last 6-12 months we have had more enquiries on the [longer] end. They are typically [asking] for a 12 month stay or at least a nominal term of 12 months but there are some which are 2 or more years. Tom Mulvaney UBC 36

41 Chapter 4: The occupiers Longer stays of over 3 years continue to become more common Figure 24 shows how long customers stayed in business centres on average from 2013 to As with all the results given in this report, the potential for differences in sample structure to affect our ability to compare years should be borne in mind. In particular, we are somewhat suspicious of the claim made by operators that only 1% of their customers stay for less than 6 months, even though this percentage has been consistently low. Despite this, and as we argued in the 2014 report, we think there is a clear trend towards longer stays of over 3 years. In 2013, 14% of customers were staying over 36 months; in 2016 this has risen to 39%. There have also been slight increases in the proportion of firms staying between 19 and 24 months, and 25 to 36 months. There has been a corresponding decrease in 7-12 month and month stays. A number of reasons were given for the increase in length of stay. One operator noted that part of the appeal of business centres was the ability for clients to work nearer to home, and therefore that they did not want to relocate. This trend also provides evidence for the previous argument that firms see business centres as ideal locations to grow their businesses. Looking to the immediate future, we expect the move to longer stays to continue for now. A number of operators discussed the role of the uncertainty around the UK s exit from the European Union in delaying their clients decisions to relocate to larger spaces and therefore renewing their existing agreements in business centres. Figure 23 shows the average length of stay by centre type. It is immediately obvious that firms in light industrial space stay longer than those in serviced and managed office space. Serviced offices reported the shortest average stay: 21 months in 2016 compared with managed offices 35 months. Figure 23: Average length of stay by centre type (Sample size: 2016 = 264) (months) Type All centre types Serviced Office Managed Office Light Industrial Figure 24: Average length of stay of customers by centre (months) (Sample size: 2016 = 264, 2015 = 258, 2014 = 134) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% >

42 The UK Business Centre Market Outgrowing the space still the most common reason for leaving Figure 25 shows the reasons given for customers leaving business centres in 2016; the results for 2015 are similar. For this new survey, we removed some categories of response that had been offered in previous surveys, namely relocation and end of contract. We consider that these options were ambiguous, or axiomatically implied by the decision to leave flexible space. We instead added two new categories, namely cheaper business rates elsewhere and space did not suit business needs. This change caused a significant increase in the number of respondents saying that customers left for other reasons, which may mean that in future surveys BCA needs to reintroduce further, clearer responses to this question which relate to the circumstances of the occupier for example, that project-based work had ended. The most common reason given for firms leaving, as per 2014, was they had simply outgrown the space. This implies that the demand for larger business centres is still unsatisfied. An equal number of firms said business centre space did not suit their business needs as the number of businesses that failed. Pleasingly, the proportion of businesses that left due to failure was not significantly larger than in our previous survey (13% now compared with 9% in the 2014 survey). Interestingly, only 2% said they left because they had found cheaper business centre rents elsewhere, which contrasts somewhat with the perception among operators of fierce competition between them. Figure 25: Main reason for leaving (Sample size: 2016 = 206, 2015 = 192, 2014 = 220) 47% 24% 13% Other reason Outgrown space Business failure 13% Space did not suit business needs 2% Cheaper business centre rates elsewhere 0% Working from home instead 38

43 Chapter 4: The occupiers Average space per occupier now 328 sq ft Figure 26 shows the amount of space which the average business takes in serviced offices by region in The national average space occupied in 2016 was 328 sq ft, down from 420 sq ft in There are notable differences between the results of the different surveys so direct comparisons cannot be drawn between years, at least at regional level. This is most likely the result of differences within the sample structure. We can, however, look at the relative differences in regional distribution. In 2013 the East Midlands had the lowest average occupancy density of 710 sq ft per business, with the South East relatively close behind (600 sq ft per business). By contrast in 2014, the South East had the lowest density with an average occupancy density of 1,120 sq ft per business, but the East Midlands reported the highest density of 460 sq ft per business. The 2015 and 2016 results present a different, and perhaps more intuitively rational, result. In general, we find a pattern of higher densities (lower space per occupier) in London and the South East, and lower densities further afield. The one exception is the North East, where density was recorded as very low in 2015 but very high in This is very likely to be an error in the supplied data for that region. A breakdown of the Central London submarkets has been included for the first time with our 2015 and 2016 results. The average amount of space each business takes in London centres is lower than most other regions around the UK. In 2015, the average occupancy density was 101 sq ft per business in the West End, while the national average was 420 sq ft per business. Average occupancy density in Inner London was roughly in line with Central London submarkets at 132 sq ft per business in The surprisingly low density in the City of London observed in 2016 (468 sq ft per business) is due to a small number of large occupiers whom we speculate have taken a relatively luxurious amount of space to suit the expectations of their customers. The Eastern region also reported a high occupancy density, nearly on par with Central London at 194 sq ft per business in This regional pattern was also observed in Figure 26: Average occupancy density by region (sq ft per occupier) (Serviced Offices) (Sample size: 2016 = 359, 2015 = 437, 2014 = 160) ,000 1, Yorks & Humber West Midlands East Midlands South West South East Scotland North West North East Outer London Inner London London West End London Mid Town London City Central London Eastern All UK Other regions not shown are omitted due to small sample sizes. Figures for Inner and Central London are not shown for 2013 and 2014 as these two regions were merged in previous survey reports. They are separately identified here. 39

44 The UK Business Centre Market Figure 27 shows the average amount of space occupied by 1 worker in serviced offices. At the national level, there appears to have been a decrease since 2014, from 112 sq ft per worker to 78 sq ft per worker. Given the issues with sample structure between surveys we are hesitant to draw hard conclusions. However, combining the average worker density with the average space per business in 2016 (328 sq ft) gives an average business size of 4 workers, in line with Figure 21. Across the regions there is a substantial variation in worker density, from 53 sq ft per worker in London s West End to 166 sq ft in Scotland in With the exception of the South East, the regions with major population centres and office markets have the highest worker density. For example, the North West, thanks to Manchester, reported a density of 64 sq ft per worker. Worker density in the South East was relatively low (100 sq ft per worker) given its proximity to London. Figure 27: Average worker density by region (sq ft per person) (Serviced Offices) (Sample size: 2016 =364, 2015 = 439, 2014 = 426) West Midlands East Midlands South West South East Scotland North West Outer London Inner London London West End London City Central London Eastern All UK Other regions not shown are omitted due to small sample sizes. London Mid Town has not been included due to small sample size, but has been included in the aggregated Central London figure. 40

45 Annex Annex 41

46 The UK Business Centre Market ANNEX 1: Regional commentaries Scotland This survey found around 680,000 sq ft of business centre space in Scotland in 2016, most of which is serviced office space. Business centres in Scotland are typically smaller than the UK average. Occupancy has continued to fall at a greater rate than the UK average, with occupancy falling from 84% in 2013 to 67% in Serviced offices in Scotland are somewhat cheaper than the national average, at 7,700 per 3 desks for 1 year compared with the UK average of 9,848. While the sample size for 2014 was too small to report, there was a small decrease (-3%) in charging rates between 2015 and Business centre occupiers broadly reflected the sectoral distribution seen in the rest of the country. The proportion of business services, finance and insurance, and creative sector occupiers was in line with the UK average in 2016, with these firms accounting for 30% of occupiers in Scotland. However, the proportion of public and charity firms in business centres in Scotland was much higher than elsewhere in the UK at 42%. Conversely, the proportion of industrial and distribution occupiers was on the lower end at 14%, compared with the UK average of 22%. The average size of space occupied by a firm in Scotland was 276sq ft in 2016, down 32% from 2013 s 410sq ft. Wales The small sample size of Wales makes it difficult to draw any concrete conclusion regarding the state of the business centre market in Wales. With only serviced office centres present in our 2015/16 survey results, the floorspace covered by our sample totals 94,000sq ft. Our 2014 sample had no serviced offices in Wales, so differences between surveys are not conclusive due to these sample structure differences. The average size of Welsh serviced offices of 18,726sq ft is similar to the UK average of 19,322sq ft. Average occupancy was 66% in 2016, below the national average. North East By floorspace, over half the North East sample of business centres is in the form of light industrial. Of the 471,219sq ft of business centre space in the region, around 259,500sq ft is light industrial. As a percentage of total business centre space, this is the highest proportion of light industrial space in the UK. At 18% of the North East sample, the proportion of managed office space in the North East was below the UK national average of 27%. Similarly, the proportion of serviced office space in the region was only 27%; a total of 128,347sq ft. North East light industrial centres in 2016 were smaller than the national average of 52,836sq ft. Serviced offices in the North East were slightly bigger than the national average, averaging 21,391sq ft compared with the UK average of 19,322sq ft. Occupancy in the region has remained relatively stable, only falling 1.7 percentage points from 2013 to 75.3% in The UK average occupancy in 2016 was 75.8%. Costs in North East light industrials were the lowest of the UK, at 2,877 per 500sq ft in The UK average light industrial cost was 4,733. Turning to occupiers, the dominant sector was Industrial and Distribution, accounting for 29% of occupiers. Given the majority of space in the region is light industrial, this is an unsurprising departure from the overall UK sectoral distribution. There is still a significant proportion of business services firms in the North East (21%), although it is slightly below the 2016 national average of 27%. North West In our 2016 results, the North West had a significantly larger amount of business centre floorspace than most other regions, bigger than any market outside of London, at just over 2.0m sq ft. As with our 2014 report, we found the North West offers a similar amount of serviced office, managed office, and light industrial space (around ,000 sq ft each). With the exception of the East of England, the North West has the most serviced office space outside London. Both serviced and managed offices in the North West were roughly the same size as the 2016 national average. Light industrials in the North West had an average size of 56,700sq ft in 2016, compared with the national average of 66,340sq ft. The cost for business centre space in the North West is less than the UK average. The price for 3 desks in serviced office space in the North West in 2016 was 3,701, compared with 9,848 for the UK. With its roughly equal distribution of serviced offices, managed offices, and light industrials, the North West s sector distribution of occupiers is roughly in line with the UK average. The exception is the industrial/distribution sector, which account for 33% of occupiers in the North West. Given the high proportion of light industrial space in the region (33%), this is unsurprising. The average amount of space occupied by one firm (319sq ft per firm) is slightly lower than the UK average. This has decreased from 650sq ft per firm in 2014, while the UK average fell from 675sq ft per firm to 328sq ft per firm. East Midlands Our survey found that the majority of space (53%) in the East Midlands is managed office space. With the exception of Inner London, the East Midlands had the lowest proportion of serviced office space of all the regions at 11%, representing just 104,000sq ft. As with the 2014 survey, we found more light industrial space in the East Midlands (317,800sq ft) than the West Midlands (242,400sq ft). Light industrial centres in the region were on average smaller than the UK average, at 52,974sq ft. Average occupancy in the East Midlands (73%) was only slightly lower than the UK average (76%). The East Midlands had a high proportion of occupiers in the industrial and distribution sector (39%). The proportion of firms in the business services (15%) and finance and insurance (3%) sectors were well below the UK averages. There were also a higher proportion of public and charity sector firms, accounting for 24% of the regions occupiers. On average, each firm occupies 339sq ft in East Midlands business centres. This has decreased from 710sq ft per firm in 2013, while the UK average fell from 425sq ft per firm to 328sq ft per firm. 42

47 Annex West Midlands Of a total of 710,400sq ft of business centre space in the West Midlands, just under half (324,500sq ft) is serviced office space. A further 20% is managed office space (143,500sq ft) and 34% is light industrial (242,400sq ft). The average size of a serviced office in the West Midlands was 16,227sq ft in 2016, lower than the UK average of 19,372sq ft. Similarly, the average size of light industrial centres (30,296sq ft) was significantly lower than the national average of 66,340sq ft. Somewhat unusually for a region outside of London, costs for business centre space in the West Midlands were close to the national average. Three desks for one year in a West Midlands serviced office averaged 8,298 in 2016 compared with the average of 9,848. Light industrial space (500sq ft for one year) costs an average of 6,616 in the West Midlands, compared with the UK average of 5,144. Over one third of business centre occupiers in the West Midlands are industrial/ distribution firms. Of all the regions, the West Midlands has the lowest proportion of occupiers in the business services sector, just 12% compared with the national average of 27%. The region also has a relatively high proportion of occupiers in the public/charity sector (24%). The average floorspace occupied by one firm in the West Midlands is 420sq ft. This has decreased from 500sq ft per firm in 2013, while the UK average fell from 425sq ft per firm to 328sq ft per firm. Yorkshire & Humberside In the 2016 survey there was 455,310sq ft of light industrial space in Yorkshire & Humberside. With business centres as a whole totalling 987,961sq ft this represents 46% of the total floorspace in the region. Slightly over a third (34%) of space is serviced office (333,704sq ft). The average serviced office in Yorkshire & Humberside was 15,168sq ft in 2016, lower than the UK average of 19,372 sq ft. Light industrial centres in the region were also smaller than the national average at 45,531sq ft compared with 66,340sq ft nationally. Average occupancy fell from 75% in 2013 to 72% in 2016, while the UK average occupancy fell from 80% to 76% over the same period. Serviced office space costs (3 desks for one year) were 5,721 in 2016, below the national serviced office average of 9,848. Light industrial costs ( 3,666 for 500sq ft for one year) were also below the UK average ( 5,144). The proportion of industrial/distribution firms in the Yorkshire & Humberside region was higher, at 22%, than the UK average in At 38%, it has the second highest proportion of such occupiers of all the regions. The proportion of public/charity sector occupiers (13%) was only slightly lower than the national average of 14%. Occupiers in this region were less likely to be in the finance/insurance sector (3%) or creative sector (2%). These firms occupied an average of 402sq ft each in This has decreased from 610sq ft per firm in 2014, while the UK average fell from 675sq ft per firm to 328sq ft per firm. East of England In the East of England, 64% of the total 1,045,400sq ft of business centre space in the region is serviced office space (672,970sq ft). Managed office space totalled slightly under 197,000sq ft while light industrial floorspace was 175,600sq ft in the region. Serviced offices in the region were, on average, bigger than the rest of the UK, with an average centre size of just under 25,000sq ft compared with 19,372sq ft nationally. By contrast, light industrial centres were smaller, averaging 58,522sq ft in 2016, compared with the UK average of 66,340sq ft. Occupancy in business centres in the East of England has fallen 8 percentage points in recent years; from 85% in 2013 to 77% in While we were not provided with data for light industrial costs in this region, the average cost for 3 desks for one year in the region s serviced offices was 5,922 in The national average in the same year was 9,848. Looking at the type of occupiers in the region, 27% of occupiers in the East of England s business centres were from the business services sector in 2016, the same as the UK average. In the Eastern region, occupiers are significantly less likely to be from the creative (8% compared with the UK average of 14%) and public/charity sectors (7% compared with the UK average of 14%). The average space occupied by one firm in the region was the second lowest of all UK regions at 193sq ft per firm, and well below the UK average of 328sq ft per firm. This has decreased from 470sq ft per firm in 2013, while the UK average fell from 425sq ft per firm to 328sq ft per firm. South East Beyond London, the South East had the largest amount of serviced office space in the UK with just under 1.4m sq ft of floorspace. Along with a further 166,000sq ft in managed office space, the business centres we surveyed cover a total of 1.6m sq ft in the South East. There was no light industrial space in the South East in our 2016 survey. The average size of the serviced offices in the region was 24,925sq ft in 2016, above the national average of 19,372sq ft. Average occupancy in the South East fell over 10 percentage points from 2013 (82%) to 2016 (71%). Over the same period, the UK average fell from 80% in 2013 to 76% in The average cost for 3 desks for one year in South East serviced offices was 7,558 in 2016, compared with the national average of 9,848. The South East had the highest proportion of occupiers in the business services sector in 2016 (45%), no doubt as a result of its proximity to London. Similarly, 10% of occupiers in the region are in the finance and insurance sector. The proportion of occupiers in the creative sector and public/ charity sector (both 8%) were below the UK average of 14% for both sectors. The proportion of firms in the industrial/ distribution sector in the South East was also much lower than the UK average, 11% compared with 22% nationally. In the South East, each firm occupied an average of 396sq ft in This has decreased from 600sq ft per firm in 2013, while the UK average fell from 425sq ft per firm to 328sq ft per firm. 43

48 The UK Business Centre Market South West Of the 676,200sq ft of business centre space in the South West, an almost equal proportion is serviced office (51%) as is light industrial (49%). There was no managed office space in the region in our 2016 sample. Serviced offices in the South West were bigger on average than in the rest of the UK, averaging 23,069sq ft compared with the national average of 19,372sq ft. Light industrial centres in the region were much larger than the 2016 UK average of 66,340sq ft, averaging 165,090sq ft in Occupancy in the South West has decreased from 79% in 2013 to 70% in 2016, while at the national level it has fallen from 80% to 76%. In 2016, 3 desks for one year in South West serviced offices cost 8,322, while the UK average was 9,848. No data was provided for light industrial centre costs. The highest proportion of occupiers in the South West in 2016 were from the industrial and distribution sector, with 34% of firms in this sector compared to 22% nationally. The proportion of business service occupiers (22%) was slightly lower than the UK average of 27%. In 2016, 17% of occupiers in the South West were in the public and charity sector, slightly higher than UK average of 14%. In the South West, the average amount of space occupied by each firm was 343sq ft in This has decreased from 510sq ft per firm in 2014, while the UK average fell from 425sq ft per firm to 328sq ft per firm. London In terms of serviced and managed office space, London dominates the business centre market. There is a small amount of light industrial space (about 7% of the whole of London s 6m sq ft). Taking London as a whole, 93% of business centre floorspace is either serviced or managed offices. Serviced office space is concentrated in Central London, 2m sq ft in 2016, while there is less than 300,000sq ft of serviced office space in Inner London. In contrast, there is just over 2m sq ft of managed office space in Inner London. Serviced offices in the City submarket are bigger (25,118sq ft) than the other Central London submarkets. West End and City serviced offices were bigger (19,519sq ft and 25,118sq ft respectively) than the UK national average of 19,372sq ft. Managed offices in Inner London were unsurprisingly bigger (55,694sq ft) than those in the Central London submarkets (City 54,129sq ft; Mid Town 34,084sq ft). There were no light industrial centres in either the City or Mid Town. Light Industrial in Outer London averaged 38,478sq ft in 2016, while those in Inner London averaged 29,470sq ft. London occupancy levels were the highest in the London markets in 2016, with Inner London having an average occupancy of 84% while the UK average was 76%. The City had the lowest occupancy, at 77%. In the 2013 report, only an aggregated Central London occupancy figure was provided. A disaggregation was only provided for the first time in Comparing the most recent results from our 2016 survey to the 2014 results, we see occupancy decreasing in all submarkets (Mid Town excluded due to small sample size in 2014). The most dramatic fall was seen in the City submarket where average occupancy fell from 83% in 2014 to 77% in West End and Outer London both fell about 3 percentage points. From 2014 to 2016, the UK average occupancy decreased from 80% to 76%. The average cost of 3 desks for one year in Central London s serviced office space was 16,026 in In London as a whole, this figure is 13,914. London s business centre occupiers are much more likely to be in the business services sector than occupiers elsewhere, with 37% of occupiers in this sector in the City compared with 27% for the UK average. This is the highest proportion of any region in the UK. With the exception of Outer London (27%), all other submarkets had over 30% of their occupiers from this sector. Finance and Insurance occupiers followed closely in the City, accounting from 27% of the occupiers in this market, compared with 8% nationally. Similarly, the creative sector accounted for 32% and 33% of the Mid Town and Inner London markets occupiers, whereas the UK average was 14% in Industrial and distribution firms were unsurprisingly less likely to occupy space in Central and Inner London, with just 3% of firms coming from this sector in the City market. In Outer London, however, 21% of occupiers were in the industrial and distribution sector, in line with the UK average of 22%. The average amount of space occupied by one firm was the lowest across the UK in Inner London, at 161sq ft per occupier in Both the Mid Town and West End submarkets had lower average space occupied by each firm (244sq ft and 206sq ft per firm) than the UK average of 328sq ft per firm. However, in the City, the average space occupied by one firm was 469sq ft in

49 Annex ANNEX 2: Regional boundaries SCOTLAND NORTHERN IRELAND NORTH WEST NORTH EAST YORKS & HUMBER EAST MIDLANDS WALES WEST MIDLANDS EASTERN LONDON SOUTH WEST SOUTH EAST 45

50 OTHERHITHE TUNNE L PADDINGTON MARYLEBONE T VICTORIA EUSTON ST PANCRA S KINGS CROS S MILLBANK YORK WAY The UK Business Centre Market ANNEX 2: London boundaries Outer London Inner London Enfield Barnet Hillingdon Harrow Ealing Brent Kensington & Chelsea Hammersmith & Fulham Camden Westminster Haringey Islington City Hackney Waltham Forest Tower Hamlets Newham Redbridge Barking & Dagenham Havering Hounslow Richmond upon Thames Southwark Lambeth Wandsworth Lewisham Greenwich Bexley Kingston upon Thames Merton Bromley Sutton Croydon REGENTS PARK ALBANY STREET KING S CROSS ST PANCRAS ROAD CALEDONIAN PENTONVILLE ROAD MARYLEBONE MARYLEBONE ROAD PORTLAND AVE EUSTON ROAD EVERSHOT STREET EUSTON EUSTON ROAD WOBURN PLACE MIDTOWN GRAY S INN ROAD CLERKENWELL ROSEBERY ROAD AVENUE HATTON GRD GOSWELL ROAD CITY ROAD OLD STREET FARRINGDON GT. EASTERN STREET LIVERPOOL STREET S PADDINGTON EDGWARE ROAD BAKER STREET WIGMORE STREET MARGARET STREET NEW BOND ST OXFORD STREET REGENT ST CHARING CROSS RD HIGH HOLBORN LONG ACRE STRAND HOLBORN FLEET STREET VICTORIA EMBANKMENT FARINGDONSTREET LONDON WALL CITY BLACKFRIARS CANNON STREET FENCHURCH STREET ALDGATE HIGH ST KNIGHTSBRIDGE HYDE PARK PARK LANE GROSVENO PICCADILLY WHITEHALL BROMPTON RD SLOANE AVENUE SLOANE STREET KING S ROAD PLACE BUCKINGHAM PALACE RD BELGRAVE ROAD VAUXHALL BRIDGE ROAD VICTORIA ST PIMLICO RD R WEST END CHARING CROSS WATERLOO LONDON BRIDGE VICTORIA GROSVENOR RD 46 BATTERSEA PARK

51 Annex ANNEX 3: Mapping of figure numbers across BCA s previous survey reports This Report 2014 Report 2013 Report 1 1 Unnumbered see page No equivalent 4 4 Unnumbered see page 28 5 No equivalent No equivalent 6 No equivalent 7 No equivalent Unnumbered see page 21 No equivalent No equivalent No equivalent 23 No equivalent No equivalent No equivalent

52 The UK Business Centre Market ANNEX 4: Bibliography A full range of literature associated with the business centres and flexible space sector was provided in our previous survey report, published July Below we list the most substantive newer reports published since then. Serviced offices: A new asset class (Capital Economics, sponsored by Office Space in Town, 2016) A new era of co-working (JLL, 2016) Coworking: a corporate real estate perspective (HOK Group in partnership with Corenet Global, 2016) U.S. Shared Workplaces (CBRE with Longview Global Advisors, 2016) Flexible Workspace Review (The Instant Group, 2016) More than one million people will work in spaces in 2017 (Deskmag with Social Workplaces, 2017) 48

53 Annex 49