Ben Jaffray, Finance Director at Gilbanks, shares some insights to help you better understand the true cost of your workspace. Below he explores some of the commonly used pricing tactics used by workspace providers to confuse customers, as well as making the case for why a serviced office can often be more cost-effective than a traditional lease.
In the property world, the conventional wisdom is that serviced offices are more expensive than a traditional leased option. This perceived cost premium is regarded as justified through serviced office providers offering a more compelling value proposition and will typically be achieved by a combination of operator branding, building location, office design, customer service or exclusive access to a community of like-minded businesses.
The challenge facing the serviced office industry as a whole is how to educate potential customers, particularly those less familiar with the product, that serviced offices often make sense as both a cost as well as a value proposition.
On the face of things, this ought to be a simple exercise. However, if we look more closely at the different pricing strategies within the industry, it soon becomes apparent that things aren’t as straightforward as they seem.
Whether you are a property expert or the decision maker within a business, this article will distil some of the complexities of the different pricing models and help you better understand the cost of taking a serviced office versus a traditional lease.
For simplicity, let’s assume you are a business owner looking for a space to accommodate a team of 30 people within a good-quality workspace. In the example below, we compare pricing proposals from two serviced office providers, who we will refer to as Operator A and Operator B.
Example 1: Comparing pricing proposals from two different serviced office providers
Operator A, despite quoting a desk rate of £500 per month (18% higher than Operator B), comes out at a total cost £/sq ft. of £133 per annum, which is actually 26% lower than than annual cost £/sq ft. for Operator B.
Why is this?
Cost per person or cost per workstation is the most typically used pricing metric but ignores one crucial variable – sq ft. per person. When we buy a pint of beer, we know how much we are getting and are easily able to compare the cost between one pint and another. Unlike pints of beer, serviced offices do not have an equivalent industry standard, or ‘one size fits all’ measure for sq ft. per person.
My advice is to focus on £/ sq ft. cost. Operators may try to quote attractive desk rates but disguise the fact that they ‘highly dense’ their offices by allocating less space or sq ft. per person. For a true like-for-like comparison, always convert cost per workstation into a £/ sq ft. cost.
Look out for hidden costs, too. Serviced offices are generally sold as an ‘all-inclusive’ monthly cost but some are more inclusive than others. One commonly used sales method in the industry which is known as ‘The Ryanair tactic’, is to quote a low desk rate with optional bolt-ons, such as connectivity. When comparing the cost of one workspace with another, always ensure that you are comparing like-for-like services.
Next, we will compare the cost differential of a serviced office versus the cost of taking space on a traditional lease over a 3-year and 5-year period.
Example 2: Comparing the cost of a serviced office vs. a traditional lease
Comparing the cost of a traditional lease against a serviced office is where things become more complex due to some fundamental differences in the product features. For example, a traditional lease typically involves a 3-5 year minimum commitment and requires the occupier to fit out the space, incurring large capital expenditure. Serviced offices tend to be on a 12-month commitment with access to shared amenities such as meeting rooms and breakout space based on an all-inclusive monthly cost.
Sticking with our previous example of a business looking for a space to accommodate a team of 30 people, the table below compares the annual cost £/ sq ft. equivalent for a traditional lease on 1) a 3-year term certain and 2) a 5-year term certain compared with the equivalent serviced office. This is again assuming a comparable quality of workspace for both options.
Note 1: Occupational density per person for the traditional lease is based on 1 person:100 sq ft. in line with BCO guidelines and the serviced office density is based on 1 person: 45 sq ft. The reduced space per person for serviced offices is due to the occupier not paying for circulation space and use of shared amenities including kitchens, break-out areas and meeting space.
Note 2: Operations cost of the traditional lease includes front of house (0.5 FTE), utilities, cleaning, refreshments, connectivity and repairs and maintenance costs.
Whilst the £/ sq ft. rate of the serviced office is higher than for a traditional lease, the overall cost of occupation is lower due to the different occupational densities for traditional lease versus serviced offices. With a serviced office, only the office space is rentalised whereas with a traditional lease rent is payable on the circulation space and communal areas which can be up to 40% of the overall space.
The annual cost £/ sq ft. with a traditional lease is misleading as there are significant upfront costs to fit-out and furnish the space, which can tie up cash or incur borrowing costs. Longer-term lease liabilities may also be required to be disclosed on the balance sheet, depending on the size of the business.
Serviced offices offer the flexibility to expand or downsize your office space at short notice in response to business needs, which can be important for businesses that have less certainty on their long-term space requirements.
A traditional lease may be more cost-efficient for businesses not looking to grow or reduce headcount over a longer period.
We hope this article provides some useful guidance and tools for better understanding the true cost of your office space and cutting through some of the complexities within the pricing models we see in the serviced office industry.
However, as the Oscar Wilde saying goes, “A cynic is a man who knows the price of everything and the value of nothing”.
In my next blog, we will look into what makes a serviced office value proposition and how to distinguish good from great when it comes to serviced offices.
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