Over the last three years, the Dublin office market has seen the emergence of serviced office providers such as Regus, Premier Group and a number of smaller companies. These have established themselves to corner a niche in the office market and service tenants seeking "ready to go" offices on a short-term basis.
Their entry into the market came against a backdrop of unprecedented economic growth, which led to record levels of construction in the office sector. This in turn translated into record levels of take-up at headline rents. In line with this boom in the office sector the serviced office operators have reported excellent business with all centres operating to near full capacity all year round. So why has this sector done so well and can it continue to do so in changing economic times?
The "serviced office" phenomenon is relatively new in Ireland and to date has not had a significant impact on the office market in terms of take-up. But as the market changes and tenants demand greater flexibility, there is an opportunity for the sector to grow dramatically over the next few years. In brief, serviced offices provide the opportunity of taking immediate possession of fully fitted turnkey office accommodation for short periods ranging from two months to three years. They are normally furnished with office furniture and all workstations are "cable ready", allowing tenants to plug in their computers and start work immediately. Tenants are also given the use of the following:
Telephone system
Switchboard and reception services
Photocopiers
Meeting room/conference facilities
Cleaning services
Mail handling
Fully equipped kitchens
The aim is to provide the tenant with a fully operational office (usually in a prime business location) from day one. So what are the main benefits of serviced offices as opposed to "conventional leases"?
When analysing the pros and cons of serviced offices, the providers will normally point to cost/benefit analysis and to the fact that tenants generally fail to recognise the true overall cost in running an office building under a conventional lease.
In the UK, Regus recently sponsored a study undertaken by the Chartered Institute of Purchasing and Supply. This study found that a company with 10 employees occupying a serviced office in London under a six-month licence agreement could make a saving of 30 per cent compared with the same office under a conventional lease. Commercial leases in the UK and Ireland are generally similar in terms of placing onerous repairing obligations on the tenants during the term of a lease. When taking space under a conventional lease, tenants are usually faced with certain fit-out costs, such as furniture, partitions, photocopiers, equipment, cabling, and tea station or canteen, which must be incurred to enable the property to be fully functional. Tenants are also obliged to pay additional costs such as rates, insurance and service charges on top of the rent. Legal and agents' fees must also be paid.
The serviced office providers promote their product on the basis that some of the above costs will not apply and the rest can be condensed into one monthly payment, thus improving cash flow. They also point to the fact that covenant strength is rarely an issue and given the downturn in the technology sector, it will be difficult for companies in this sector to secure conventional leases from wary landlords.
Business are still not taking into account the true cost of running an office and often forget all the extras, such as local taxes, office cleaning, even down to the soap in the toilets, when comparing a fully serviced office with a bare-bones office space deal.
Regus, the Premier Group and new entrant MWB Business Centres have been working hard trying to change the traditional view that their product is "too expensive". They have held seminars for office agents throughout the UK and Ireland in an attempt to close the gap between the perceived costs of occupying serviced offices and market rent for office space only.
All providers have reported excellent business but there are increasing levels of vacant space becoming available in centres and prices are up for negotiation. A spokesperson for the Premier Group commented: "I can tell you we have been running at 95 per cent occupancy. I would see that falling back to 85 per cent from May through September and then coming back again in the autumn. There is a chill out there but luckily we are not feeling it yet."
The long-term sustainability of the sector has always been questioned. The defence put up by the providers has been that as we enter a downturn in the economy, occupiers will not have the confidence to commit to longer leases and will opt for a risk-free flexible serviced office. This may well be the case and it will be interesting to see if companies in the technology sector consider the serviced office option in light of current downsizing in the sector.
Critics, however, will point to the fact that the providers themselves have lease commitments on prime buildings at strong rents and a downturn in the market will lead to a fall-off in tenant demand, thus increasing vacancy rates within their centres and leading in turn to falling revenues.
Whatever view you take, the growth of the serviced office sector in Ireland is set to continue with the Premier Group planning to open up offices in Galway, Limerick and Cork. Regus planning to locate in Cork and MWB Business Centres plans to open a Dublin centre by the end of this year.
The success of the serviced office sector in Ireland to date has been as a function come as a result of the occupiers' need for flexibility and the "conventional" office market not being in a position to cater for this. As uncertainty in the technology sector continues, high-tech companies will be increasingly reluctant to commit to longterm leases. In addition, uncertainty in the sector will mean these companies will find it increasingly difficult to secure traditional office space. Serviced offices could offer the solution.
James Mulhall is a surveyor within the Office Agency division of Insignia Richard Ellis Gunne
