The Mouse That Roared: Why The Manchester Serviced Office Sector Isn't What It Seems
Manchester has the largest serviced office market outside London with 188 city centre outlets, and growth of 17%, according to new data from Instant Group.
So is there scope for more? Or has the market pigged-out on serviced floorspace? Worse, could under-financed operators, picky landlords and cost-conscious tenants mean that the growth of the Manchester serviced office market grinds to a halt in 2019?
The arrival of WeWork and a host of noisy rivals has proved — if anyone doubted it — that Manchester is the coworking capital of the North. New data from Instant Group shows that city centre has 188 serviced office centres, a full 35% more than its nearest regional rival (Birmingham, with 123). And whilst London is streets ahead as a serviced-working city (1,224 centres), Manchester's growth rate is twice as fast (17%).
Yet dig a little deeper into the data and the picture begins to get more complicated: whilst WeWork grab the headlines, they are not grabbing a lot of the occupancy. Instant Group figures show they fail to reach 1% of the U.K. market — Bruntwood easily outpace them, claiming 1% of the entire national serviced scene. In London, WeWork's hipster heartland, they scrape just 2% of the market.
So who is making the Manchester market hum, and what threats do they face if they want its growth to continue?
Manchester's serviced office sector is as long as a piece of string: the number you reach depends what you count as serviced office space, and what you don't. Estimates of its contrtibution to take-up vary: GVA putting it at around 12% in 2017, whilst Lambert Smith Hampton Offices Director Andrew Gardiner prefers 10%.
“The serviced office sector accounts for about 3% of the city centre market by floorspace, but it grows if you include the grey market of landlords who are prepared to offer flexible deals on all kinds of basis from a single desk, to a month’s license, to three months, to a year … and lots of landlords have gone down that route,” Gardiner said.
“There’s scope for more — say it grows from 3% to 5% — but that’s still a small proportion of the market. Where we may see the growth, though, is in that grey market of flexible deals. There’s some truth in the idea that all landlords in Manchester are serviced office operators to some extent or another.”
Operators Need To Get Real
Serviced operators are queuing up to enter the Manchester market. Savills’ director Richard Lowe said he has a list of 12 current requirements, each 15K to 50K SF, so a potential pipeline of more than 400K SF. The difficulty is their expectations — of the city and of its landlords — may not be entirely realistic.
“It’s all a bit frustrating,” he said. “They come up from London, it’s the natural place to expand out of the capital because of the tech scene, but they only want to talk to landlords about turnover-based rents or management agreements. And that is something most landlords in Manchester will not do because the serviced operators are basically startups.”
“Some landlords like the idea — they like the mix of different tenures in a single building — but many more will not talk on terms the serviced operators want and why should they, because the traditional occupational market is good.”
Worse, some potential new flexible space entrants have surprisingly inflexible ideas about city geography. “There are several who say they want 40K SF in the Northern Quarter. You try to explain that this does not exist but …” Lowe said. “The fact is that some of this demand will have to leak into other locations,” he said, with Ancoats top of the list. In the meantime some potential new entrants to the city stay in self-imposed exile waiting for Northern Quarter floorspace that will never, ever, appear.
The same sense of frustration comes from Bruntwood, whose Manchester-based serviced office business is 15 years old and still growing. Today they operate around 100K SF of serviced space in Manchester, aiming to double that within 24 to 36 months. Ultimately the aim is that about 10% to 15% of their 6M SF nationwide portfolio will be serviced floorspace.
“I get the feeling — it’s just my view — that new entrants are coming to Manchester without really understanding what occupiers want,” Bruntwood Sales Director Andrew Butterworth said. His view is that some beanbags and an espresso machine do not a serviced office make.
“They don’t get that this is hard work, you have to really know your clients and what they want. You don’t just open up shop and expect them to come. This is really competitive, it’s a challenge, you need a proper sustainable events programme, a sustainable approach to wellness, you need cutting edge design because clients expect that to help them recruit and retain staff. It’s constant work. Not everyone can do that,” Butterworth said.
Users Learn To Think Ahead
Whilst operators are coming to terms with the Manchester vibe, existing landlords are getting their act together. Mark Bott is the new director of serviced offices at Colliers, having joined from Instant Group. He said that if Manchester’s experience mirrors London’s a landlord fight-back is on its way.
“In London we say landlords compete directly with serviced office brands, by offering their own hybrid, coworking or flexible floorspace, on a variety of traditional and flexible leases. They are trying to undercut,” Bott said.
“The serviced office brands have forced a huge shift in the market, particularly as they pushed away from that blue-carpets-and-white-walls thing into something more design and community focused. And now the landlords are trying to catch up.”
Unsurprisingly, Bruntwood are in enthusiastic agreement. "The difficulty people like WeWork face is what happens when their tenants get bigger?" Butterworth said. "We can offer them all kinds of space on all kinds of terms. The customer can grow with us. Can serviced office operators really do that?"
Serviced office users are increasingly asking themselves this kind of question.
“We’ve got an interesting six-12 months ahead for some of the coworking and serviced operators,” Savills’ Richard Lowe said of the new entrants to Manchester. “They’ve enjoyed high take-up, and up to 90% occupancy, but on the back of introductory deals and discounted desk rates. What happens when the desk rates go up?”
The Instant Group data suggests that — for now — this isn’t a problem. Manchester’s average desk rate was £287 in 2017, down just 2%: stability in a sector where desk rate growth fluctuates between +36% (Brighton) and -20% (Milton Keynes).
Even so, Lowe expects trouble. “I think we’ll see some users back out of serviced office space when the introductory offers come to an end,” he said.
Watch The Little Mice
Perhaps the lesson of this small and potentially turbulent sector is that the real growth opportunity lies not in the crowded city centre market, but in out of town locations. Here growth will be driven not by brand-conscious hipsters in city centre apartments, but by entrepreneurial mums and dads who want good value coworking, and a parking space, ideally somewhere close to home and the school run.
Such is the daydream of Bury-based Thrive, who have just launched a Farnworth serviced office centre as they grow a 50K SF business into a 200K SF business in six short months. Locations in their expansion pipeline include Burnley, Blackburn, Cheadle, Accrington, Blackpool, Widnes and Stockton-on-Tees.
“The offer is that we’re 50% cheaper than Regus, 75% cheaper than WeWork, and at the same time our one-person offer is about 150 SF, not the 70 SF you get in the big brands. We’re better value for people who don’t need the commute into town, and would like a parking space, and if you want a coworking membership-style offer, we can do that too,” Thrive Operations Director Matthew Settle said.
The 37-suite Farnworth base will open this autumn after a £500K fit-out, complete with break-out areas and on-site gym.
So the lessons? “There are two key trends in our market data," Instant Group Managing Director John Duckworth said. "They are the continued diversification of the flexible workspace offer from a growing number of operators and the large increase in corporate demand for flexible options."
“Both trends are part of a growing awareness from companies that there is more choice in the market and they are becoming much more demanding about securing different types of space that fit their specific business requirements. This is rewarding the smaller, more nimble operators that can tailor their space to more specific client needs or those that are big enough to run larger spaces that can satisfy the 20-plus and 50-plus desk requirements that are dominating the market.”
The lesson, then, is to watch the busy little small-town mice: the future is theirs.