Office Space: A buyers' guide

There’s a new look to Liverpool these days as the city smartens itself up to become the European City of Culture.

It’s more than a cosmetic change. New media and IT companies are flourishing, transforming the local economy and creating demand for offi ce space.

A typical example of this new breed of entrepreneurs is the media company Rippleffect.com, which provides web design, hosting and e-commerce strategies to blue-chip clients. A year ago, MD Ben Hatton realised that his existing premises were too small to house the expanding business, so he embarked on the search for new office space. It’s a decision that every successful entrepreneur faces, and it can have a profound effect on the growth of your business.

The right premises can boost staff morale and make your business easier and more productive to run. Get it wrong and you can be locked into expensive overheads that drag down your operations.

A decade ago renting office space simply meant taking out a lease, but the rental market has got a lot more complex today, with the growth of serviced and managed offi ce accommodation. This sector, which rents out fully or part-serviced workstations on short-term contracts, is still relatively small – estimates vary from 1-5% of the total commercial property market – but it is expanding fast, creating more options for small and growing businesses. So how do you fi nd your way around the market to get the offi ces you want at the right price?

LOCATION LOCATION LOCATION

The first steps are up to you. It’s a much overworked observation, but in the property market location is absolutely crucial. Get this wrong and the only way to correct the mistake is to move again.

Be clear about where you want your new offi ce to be and why – city centre or out-of-town business park – and how it will work with your business strategy. Even if you’ve done this a few times already, start from scratch because your circumstances may well have changed suffi ciently.

Do you need to be near to customers or suppliers or is most of your business now conducted over the phone or internet? In addition, can you get synergy by locating in a cluster of other companies in the same sector? Once you know where you want to be and what you can afford, you can start looking for the building that will best fi t the nature of your business.

FINDING A PROPERTY

Doing it yourself is an option (as Ben Hatton proves in the case study overleaf), but most business leaders call in the professionals. For bigger deals – over 2,000sq ft and leases of over a year – you should certainly consider appointing a commercial agent to act for you.

“Acquiring a lease is not like buying a house,” says Chris Mulcahy, partner and head of offi ce agency at commercial property consultants King Sturge. “The best terms need to be obtained. Commercial agents add value by their expertise in the commercial property market and by bringing in building consultancy and project management skills. Most of them are also chartered surveyors, qualified to check the specifications of new buildings to make sure they can accommodate your plans.”

Anyone can call themselves a surveyor, so insist on dealing only with members of the Royal Institution of Chartered Surveyors, if only because all RICS members carry professional indemnity insurance, so you can sue if things go wrong.

Property lawyers are also needed to help you secure a watertight lease agreement. Another option worth exploring is to approach move management consultants who handle the logistics of the move and the hunt for a location. Like commercial agents, they charge commission for acting as an intermediary between the letting agent and yourself.

But even the experts say there is no substitute for personal experience. “If you have the time, visit the area yourself to get a feel for it and talk to other occupiers,” advises David Jackson, MD of Sheffi eld chartered surveyors Fernie Greaves. “You’ll be surprised what you find out. You will also be able see for yourself what parking and transport links are like in the location. Visit the property in the afternoon – if it gets too much sun, it may be hard to ventilate and you could end up with a ‘sick building’ on your hands.”

DOING THE MATHS

Cost is vital. Know your maximum – fix it and stick to it. If clients don’t come to your offi ces very often and a lot of your work is web-based you may not need top-of-the-range offi ces. In less fashionable areas, the landlord may be pleased to see you and you can drive a harder bargain.

It’s a more straightforward business to shop around for serviced offi ce accommodation, where renting offi ce space in a business centre can be almost as simple as booking a hotel room. Contracts or licences are short-term and can usually be terminated at a month’s notice.

The main providers – Regus, MWB, MLS, Executive Offices – offer predictable levels of service. And www. instant-offices.com amalgamates serviced offi ce availability in the small and mid-size sector, representing a great place to start searching. In addition, there are also a host of niche players.

When eOffice founder and CEO Pier Paolo Mucelli started up four years ago he felt there was a need for business centres with a more contemporary design which could offer small creative companies all the advantages of openness. “New economy small and mid-size businesses have to be involved in a whole range of activities and it may help their business if there are, for example, accountants working from the same building. By providing this mix our centres create an environment in which different types of businesses can succeed.”

It’s a more expensive option than leasing in the long term, but it offers a flexible ‘easy in, easy out’ service to small businesses in a hurry or bigger firms who want office accommodation in a particular location for the duration of a contract. To keep costs down select only the services you need.

THE STATE OF THE MARKET

Demand for big out-of-town developments has slackened in some areas, yet overall demand for offi ce space is at a two-year high. Hotspots include the West End and City of London, where prime space sells at roughly £90 and £60 per square foot. Areas such as Manchester and Reading tend to be closer to the £20-30 per square foot mark. But it’s a hard market to predict. Unlike the one-way bet of house prices, the value of commercial property is more volatile and prices fall as well as rise. That said, estate agents remain upbeat about recent developments.

“We are in a very strong market, particularly in London and the South East,” says Piers Nickalls, head of regional offi ce for Savills. “The serviced offi ce sector is very robust, with falling vacancy rates and workstation rentals rising to £750 a month. A spate of acquisitions by Regus, MLS and MWB are also a sign of new confidence in the sector.

“Leasing, however, is more complex. The price of rental space isn’t simply determined by the supply of new or refurbished office accommodation landlords bring on to the market. A lot of leasing is done by existing tenants with too much space sub-letting to smaller tenants.” Securing a bargain Nickalls says the dotcom crash of 2001 left a lot of fi rms with space on their hands and this is only now being eroded. In hot areas like the City and West End of London, rents may be at a premium, but there are still bargains to be had elsewhere. The trick is to scrutinise each element of the deal:

Leasing: Taking out a lease is normally cheaper in the long term than opting for serviced accommodation and it gives you more control over the offi ce environment. Leases typically have agreements of between three and 25 years and can offer long-term stability. However, some leases are infl exible, tying you in to the whole of the pre-agreed period. Study this before signing the contract. If you are committing to a long lease, try to negotiate a low initial rent or a rent-free period at the beginning. Also check the following: are you able to assign the lease to someone else? Is the user clause suitable for your business? And is there a break clause and what do you get for your service charge?

Rent reviews and break clauses: Rent reviews are normally included in the agreement. They usually occur every three or fi ve years and enable the landlord to increase the rent by either a fi xed or index-linked amount. They also give you the opportunity to challenge the amount you are paying.

A break clause may also be negotiated as part of the lease terms. This allows you to assess whether you want to continue renting without having to wait until the term of the lease expires. This may be operable on specifi c dates – anniversaries of the term start date, for example – or at any time on requisite notice. Check the provisions carefully; one day out and you may be committed to pay for the duration of the lease. A tenant should look for a break conditional solely upon payment of the basic rent.

Service charges: Your financial commitments when renting include rent and business rates, a deposit (usually three or six months’ rent), stamp duty, fitting-out costs, utility bills and a service charge. Check exactly what is included in the charge for shared services like maintenance, security, heating and cleaning.

Similarly, the charges can mount up, so make sure the terms are spelled out clearly in the lease agreement. A commercial agent can undertake to find out whether any major refurbishments of your building are due and if so who will bear the cost. Tenants on short leases can sometimes negotiate to get the charge capped, so they don’t end up paying for renovations that will never benefi t them. You can also negotiate with some landlords to share some of the fitting-out costs.

Insurance: Business leases are typically of the ‘Full Repair and Insure’ (FRI) type, which means you as the tenant take on repair and maintenance obligations and insurance costs for the premises. It is important to be clear who insures what. If the landlord insures, will the tenant be noted on the policy?

If the property is damaged by an insured risk, is the landlord obliged to rebuild it and what happens if it cannot be rebuilt? Is the rent suspended until the property is useable? The tenant will usually be required to insure his own trade equipment and insure against public and employer’s liability.

Ending the rental: On the face of it, the lease will state a clear end date. However, commercial tenants can benefit from the Landlord and Tenant Act 1954, which provides the right to ask the landlord for a new lease when their old one expires, on substantially the same terms.

But in a rapidly changing economy tenants are tending to move away from longer rental periods. Leases of 25 years used to be standard, but not any more. More than two-thirds of the UK’s top 100 companies want flexible leases, according to the FraserCRE annual review of corporate occupiers, with three to five years being the most favoured term.

If the tenant carries out alterations at the property, the lease may require these to be taken out at the end of the term; the cost of this “reinstatement” will fall to the tenant and should be budgeted for. Make sure you get the landlord’s written permission for alterations and take a photographic record of the condition of the property before you proceed.

David Jackson, of Fernie Greaves, who represents both landlords and tenants, offers this fi nal word of advice. “Renting a building is rather like a boxing match but without the Marquis of Queensbury Rules. When the bell goes, remember to protect yourself at all times.”