If you choose the wrong office space, the consequences can be far reaching. ‘I’ve actually stopped buying a public company because of the onerous contingent liability of a 25-year lease that was £500,000 a year in rent and well above the going rate,’ says Gary Ashworth, executive chairman of IT recruitment specialist InterQuest.
‘I knew that was going to be a £2.5 million contingent liability. If you do get your lease wrong, strategically it can be disastrous. Quite often, fairly junior people are tasked with negotiating the terms of agreement.’
Moving offices will test your financial skills and your ability to forecast how the company is set to grow. A poor choice could leave you with too much empty space or compel you to start searching again. Either way, the cash that could be used to invest in growth will be swelling a landlord’s bank account.
Ashworth, who sold Abacus Recruitment, the company he started aged 21, for £16 million in the late 1990s, has moved offices seven times during the past 15 years. He notes that, when a move goes well, it gives everyone a lift.
‘Like moving house, it can give the whole company a bit of a shot in the arm as it’s an opportunity to have a spring clean and start afresh. Generally speaking, I think that a company tries to improve when it moves,’ he says.
InterQuest recently opted to improve itself, although Ashworth chose to literally move around the corner as he wanted to make travel arrangements as easy as possible for employees: ‘In a competitive sector like recruitment, it’s hard to get quality staff. If you move and people have to go to a different tube station, it can be very unsettling.
‘So we kept it within the same tube station facility in Farringdon. It costs so much to hire staff and then replace them if they leave.’
Charles Black, chief executive of software-as-a-service specialist Nasstar, makes a similar point. He used to be a director of a company situated on the New King’s Road in Chelsea and remembers that, while the location was desirable, ‘it could take an hour and a half to get into the City’.
When selecting a location for Nasstar, he says he took the local transport into consideration: ‘If you recruit new people, things like that can make the difference. However, for the service we provide, we don’t need a large office so the rent is reasonable.’
Black, who has a background in law and has a chartered surveyor for a father, conducted discussions over the lease by himself. ‘The landlord wanted £19 per square foot and I got the rate down to £15 per square foot,’ he says, noting that he was in the stronger position because he knew the office space had been vacant for a number of months.
Unless you have this kind of expertise, the rule of thumb is to hire an expert who can negotiate on your behalf. Ashworth says: ‘We’ve taken a ten-year lease with the potential for a break after five years. People do want flexibility in their leases now, especially as technology means that it’s easier for staff to work from home.’
Andrew Pegg, managing director of Midas Corporate Consulting, an independent property adviser, comments that business owners ‘need to be aware of the opportunities that are out there to tinker with agreements’.
Property leases in the UK are, says Pegg, a lot less flexible than in Europe, notwithstanding the new Commercial Lease Code introduced in March, which states that break clauses should not carry a penalty.
‘You want to be sure that the code is in the agreement,’ says Pegg. ‘One of the issues that people are experiencing is that the landlords know the new code is there, as do the agents, but they don’t abide by it because they want to get the best deal.’
Once you’ve decided on your location, the next step is to minimise any business losses or disruption to customer services during the move. Ashworth says: ‘Even if you go down to the finest detail, it’s quite a challenge to get your IT to switch over systems at exactly the right time. It’s rare that you leave the office on a Friday, come in on the Monday, and there are no teething problems.’
In addition to this, your employees may be unsettled in the early days. ‘Staff won’t know where to buy a bacon sandwich and the milk might not be delivered or the kettle won’t work properly. It’s those basic things that make people happy in the office. There is always a period of settling in, which you have to take into consideration,’ he says.
A lot of people are taken aback by the cost of dilapidations in a commercial lease. Robert Hamilton, CEO of Instant Offices, which acts as an agency for serviced office providers, explains: ‘Unlike a domestic lease, every commercial lease requires that you restore an office to the state it was in when you first became a tenant.
‘That can be quite a hefty capital commitment at the end of your term, where you might have to recarpet and refurbish the premises, taking away everything you have installed, like your IT and cabling. That can easily cost at least £25,000 for a relatively small office of 25 to 30 people.’
Another catch often overlooked relates to the service charge paid for the upkeep of a building. ‘If you take on an office and there’s a problem, the landlord will deal with it, but it’ll still be paid for by you through the service charge,’ says Hamilton.
For Pegg, the core issue is judging what your organisation is trying to achieve and the space needed to meet that objective. The internet and advent of mobile working mean that you may not require as much space as you think you do.
‘Certain departments may not need permanent desks, such as a sales team, while departments like IT and finance certainly will,’ he says.
Nasstar’s Black agrees. ‘Technology means there is more flexible working,’ he states. ‘We have an employee who lives in Hampshire, works from home and pops into the office one day a week.’
Keep the cash flowing
Instant Offices’ Hamilton is in the middle of upping sticks from Knightsbridge to Paddington. ‘We’ve moved four times in close to nine years,’ he says. ‘It’s difficult to get it right as you definitely don’t want to take on so much space that it eats into your profits,’ he says.
For the latest move, Hamilton says that they were tied for a few more years to a lease but managed to sell it and generate cash in the process. ‘The rent for the lease we’ve taken on is quite low and for a short period. The cash we’ve got will pay for the works that we want to do on the new offices,’ he says, clearly pleased with the arrangement.
Good deals can be found but, by universal consent, it’s a landlord’s market and your negotiating skills will have to be at their best. For a piece of property in London’s Mayfair and West End, you can expect to be paying a whopping £120 per square foot (psf) and that’s before any service charges or furnishings are added. In the City of London, you can generally expect to pay around £80 psf.
Across the UK, rents are pushing up at the prime end. In places like Liverpool (£20 psf), Newcastle (£22 psf) and Sheffield (£18.50 psf), regeneration work has seen new office space spring up and businesses are seeking to upgrade their premises. It’s a trend that’s expected to continue over the next couple of years too.
This pattern is echoed in the wider global economy. Real estate service provider CB Richard Ellis monitored 176 office markets and found that 90 per cent of rents had risen during the 12 months to the first quarter of 2007.
London continues to lead the global rankings in terms of the highest occupancy costs, followed by Tokyo (£79 psf), Mumbai (£67 psf), Moscow (£59 psf) and New Delhi (£56 psf). Abu Dhabi in the United Arab Emirates has shown the fastest-growing occupancy costs, rising 102.9 per cent to around £35 psf.
At your service
If you find such upward pricing pressures and long-term commitments a little daunting, it might be worth considering serviced office space. The benefit of such an option is that you should be able to upscale or downscale the space you require with relative ease, unburdened by concerns about telecoms, furniture, utilities and cleaning costs.
Tim Worboys, sales and marketing director of serviced office provider Stonemartin, says: ‘Overheads are a drain on a company’s cash flow. Increasingly, finance directors are saying to their MDs or HR directors: “Sorry, I’m not approving your moving spend of £2 million to £3 million because it’ll hit the P&L too hard and damage the business’ growth.”’
That isn’t to say that going for serviced offices is cheap. Worboys says that the typical price in one of its regional centres is £600 per workstation for ten people or under, and that’s for a 12 to 18-month period.
As should be expected in the property world, prices vary. Instant Offices’ Hamilton observes that the average cost of a serviced office in London is £200 per workstation, although in the property twilight zone of Mayfair this can rocket to £800.
Outside the capital, you might be looking at £500 to £550 for a prime serviced office in, say, Manchester. ‘Most cities don’t vary too much,’ comments Hamilton. ‘The price is usually in the £200 to £500 bracket. They may seem expensive to begin with, but when you factor in all the other costs that you’ve got [with a commercial lease], it’s quite good value.’
If you don’t want all the trimmings that come with a serviced office, but desire the flexibility in tenancy agreements, then you can look at a managed office space. ‘If you’re taking a managed deal with us, you’re probably seeing a discount of 15 per cent and 20 per cent, based on an 18 month-plus term,’ says Worboys.
The latest variation on the formula is the shared office, which has just been introduced by Stonemartin. ‘Clients can share the environment they use,’ says Worboys. ‘It’s like compartmentalising an airport lounge so it becomes a business space. It’s a new concept and will reduce costs for clients by a further 20 per cent [when compared to renting managed space].’
The existing economic mixture of rising rents and climbing interest rates is, according to Worboys, causing those businesses in real estate hot spots to reconsider their options.
He says: ‘I do believe you will see the South East benefiting from the high rental increases in the West End and the City. You’ll see companies in the latter locations entertaining the idea of moving to places like Reading, Uxbridge and Milton Keynes to reduce costs.’
Midas’ Pegg detects edginess in the market. ‘Businesses are reluctant to move and are managing their cash. The ones that are moving are the ones that have no choice but to go elsewhere,’ he says.
This nervousness might be unwarranted. After all, the UK economy has been extraordinarily stable for the past 15 years and, historically, if interest rates do hit six per cent, that isn’t catastrophically high.
Bargains can be had if you give your move sufficient care and attention, and don’t be afraid to ask for a ‘rent-free’ period when signing an agreement be it for a serviced office or standard commercial lease. ‘For some managed deals of a term that’s for three years-plus, we would offer a prospective tenant a period where they don’t pay rent,’ comments Worboys. ‘It could be two to six weeks, depending on the agreement that was signed, or nothing at all.’
Hamilton is delighted with his company’s latest property and the speed at which it went through.
‘It’ll take you at least a month to find something you’re comfortable with and then it’s going to take a couple of weeks to negotiate the terms of the deal,’ he says. ‘On top of that, there will be around six weeks of legal documents to go through and, after that, at least another six weeks of arranging the furniture, fit out, telecoms and IT. We started looking in March, found what we wanted in April and moved in this month. I don’t think you can do it much quicker than that.’
Hamilton puts it down to luck, and then notes that he and his colleagues are mostly surveyors. ‘Given the field we’re in, I suppose we should be able to find good deals,’ he says.