Fully-fitted solutions are increasingly being recognised as a valuable tool to boost letting prospects. However, a wide variety of models and complexities exist that require careful consideration and expert advice, for both occupiers and landlords.

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A STARTING DEFINITION

In the simplest terms, fully-fitted space sees the landlord commit the finance and take responsibility for providing the office fit-out on behalf of the tenant. Lease lengths on fitted space tend to range from as little as two years to five years, and are hence well-suited to smaller occupiers, with rental levels typically sitting between serviced offices and conventional unfitted offers.

Transactions involving fitted space are mostly seen at the smaller end of the market (i.e. sub 3,000 sq ft), but there is no limit to the potential size, in theory. Indeed, there are increasing instances of larger deals involving fitted space, including some above 10,000 sq ft. While the extent of the fit-out can vary widely, fitted space typically resembles traditional fit-outs, coming ready-equipped with kitchen, furniture, elements of IT (typically AV in meeting rooms) and all the design touches upon commencement of the lease.

Fully-fitted suite at Catella APAM’s One Colmore Row. LSH is the instructed leasing agent. 

A TEMPTING PROSPECT

The rationale for an occupier to seek fitted space is clear. With finance costs and build costs remaining elevated, fitted space sees the initial capital expenditure shift to the landlord. And, with many occupiers still uncertain over their long-term space needs due to shifting working patterns, consolidation, M&A activity and economic uncertainty, fitted space is a relatively hassle-free approach to secure good quality workspace.

Given the greater speed at which fitted space can potentially be occupied, it removes a key barrier to entry associated with non-fitted space, with limited project management helping to save time and effort, especially if the tenant lacks experience and is perhaps ‘moving up’ from serviced offices.

WHAT’S IN IT FOR THE LANDLORD?

While the initial financial cost burden of delivering fitted space sits with the landlord, there are a range of potential benefits associated with providing them:

• Marketability - In a market offering a plethora of conventional ‘white box’ Cat A options, a fully fitted offer can help an asset to stand out from the crowd. High-quality design-led fit-outs present far better aesthetically, allowing occupiers to get a feel for the end product. It can also serve as an effective strategy to compensate for a building’s less desirable features, such as odd-shaped floorplate configurations, lack of building amenity or off-pitch location.
• Lettability - In addition to the marketing benefits, ready-fitted options are typically quicker to let than unfitted options, meaning lower void risks. This is because they can easily cater for urgent requirements, offering a useful alternative to serviced offices. Anecdotal evidence for the Birmingham market shows that average void periods for fitted space are currently around half that of conventional Cat A space, while voids are also reduced for Cat A space in other parts of the building.
• Rental premium - The landlord will necessarily charge a premium over conventional Cat A product, allowing the landlord to recoup much of the cost associated with fit-out over the duration of the lease. This premium is typically around 15% to 25% but can be as much as 50%, varying according to the prevailing strength of demand and the level and type of competing supply.
• Limited incentives - Providing a fitted solution can eliminate or significantly reduce the need to offer rent free incentive packages, typically down to 50% or below market incentives on Cat A space. The effective savings generated from zero / minimal incentives can also be used to support the financing of the fit-out.

SPECULATIVE VS TURNKEY

A key point of difference is whether the fitted space is speculatively provided, often as a final part of a building’s wider renovation, or left as a Cat A ‘blank canvas’, from which a tailored turnkey solution can be worked out. The latter approach naturally carries less risk for the landlord and provides tenants with a degree of choice over fit-out design, albeit the timescales to occupation move back into line with conventional Cat A leases.

With tailored fitted solutions, the landlord may provide one suite/one floor of fitted space to attract viewings and serve as a ‘show suite’ to assist with the marketing of more tailored fitted space elsewhere in the building. One common approach is to speculatively undertake a fit-out one suite at a time, with works on each new fit-out following lease up
of the previous one.

ROLLING INTO THE REGIONS

Being a relatively new and evolving concept, at least compared with five years ago, the extent of fitted supply and transactional activity varies widely across the UK. London undoubtedly blazed a trail for this type of product, with fitted suites in some of the capital’s key districts dominating small-scale supply. 

While the UK’s other key centres are playing catch-up, the fitted space market is steadily gaining traction. At the end of Q3, the market with the highest supply of fitted space was Manchester, with ready-fitted space amounting to 91,200 sq ft across 40 options, followed by Bristol, with 75,800 sq ft across 15 options.

Given ready-fitted supply can serve as a showsuite for turnkey deals, take-up of fully-fitted space can be more significant in scale. Over the year to Q3, Birmingham city centre has been the most active regional market for fullyfitted deals, amounting to 93,500 sq ft across 22 transactions.

Even if landlord-delivered fitted space is yet to really show itself in many of the regional markets, the demand evidently exist for this type of solution. In Belfast, for example, 2024 to date has brought 44,700 sq ft of transactions in high quality ‘grey’ space. This is proof than fitted options do have a key role to play in attracting occupier demand but, for now, there is a plentiful supply of grey space to work off. 

KEY CONSIDERATIONS

On face value, the adoption of fitted space looks like a ‘no-brainer’ for landlords of certain buildings. That said, there are a host of considerations and complexities that need be navigated for optimal results. With a wealth of experience of advising both occupiers and landlords in this rapidly evolving part of the market, LSH has developed a ‘considerations toolkit’ for the procurement of fitted space, briefly outlined below, all of which should be carefully negotiated:

• Conditions for fitted space – It should not be seen as the preserve of the struggling building, nor should it be overly constrained by size, but there are clear circumstances which lend themselves specifically to the delivery of fully-fitted space, such as suite size/configuration, overall building void etc.
• Pricing – The relationship between fully fitted and Cat A quoting rents must be carefully considered, as premiums (per sq ft and %) vary between markets. The type of space (Cat A/fully-fitted) with greatest demand needs to set the tone for the other.
• Every deal is different - Each deal is bespoke, with many negotiable factors such as dilapidations/reinstatement obligations playing their part in the negotiation. While we are seeing a convergence in trends it vital that occupiers and landlords clarify the position in the lease terms, negotiated effectively through the instructed agent. The paperwork is often complex compared with a serviced office agreement, and can create an additional barrier without reasoned advice.
• Beware overly bespoke - A fit-out may be perfectly suited for the incoming occupier, but landlords should consider how appealing it might be after the lease has expired. Landlords should ‘design-in’ adaptability to the fit-out, making future renovations more sustainable, both financially and environmentally.

GENIE OUT OF THE BOTTLE

Though it is still early days, there are clear advantages associated with providing fullyfitted offices. This particularly applies to the smaller end of the market and / or secondary buildings, where a shift to fitted offices may prove crucial to enhancing value. The fully-fitted market is evolving rapidly, with each new deal having the potential to shape the market, while locally specific nuances reflect different market dynamics and landlord attitudes.

It may be true that the arrival of fully-fitted offices has emerged from structural changes to demand, uncertainty and economic challenges. However, the genie is out of the bottle and, as more occupiers see what fitted space can offer, and as landlords become more comfortable offering it, its continuing growth appears guaranteed. This is an exciting time of change for the market, and LSH is at the forefront of advising on the risks and opportunities.

Download the Regional Office Market Report 2024 here →