Businesses are developing very quickly in the UK and around the world; the shapes of businesses in the world are changing and evolving very quickly.
In this assignment we will try to find out long-term and short-term solutions to the problem of oversupply in the office market.
Before we can propose the solutions we need to understand how the problem has evolved and the differences between the traditional and modern needs of businesses that resulted from the change in businesses themselves.
Traditional definition of office:
Office is the physical place from which a company performs its functions.
Why firms need an office?
Traditional criteria in choosing the location of the office:
In the past, choosing the location of an office was related to many factors, I would mention the most important of them here:
Legal relationship between the landlord and the company:
The legal relationship between the office owner and the company that occupies the office is usually defined in the lease.
What is the lease?
GE Capital definition of the lease is that: “Lease is a legal agreement between the property owner and tenant stipulates the conditions under which the tenant may possess the real estate for a specified period”.
Normally, the lease is a long-term relationship between the two parties; this long-term relationship involves financial commitment from the property occupier.
Who can afford the lease?
The above definition means that the property occupier is traditionally an established business with stable or growing client base and sales in order to meet the financial obligations of entering into the lease.
Lease is the most expensive item after the cost of labour.
Why small businesses usually fail?
Most small businesses have cash flow problems resulting from their obligations to pay their employees, landlords and creditors.
Small businesses usually do not have stable cash inflow while they have increasing cash outflow.
Long term lease or business rents contribute to the dilemma of the small businesses by not giving them contractual flexibility when signing their lease agreement.
Main text:
What has been changed?
Businesses themselves are in constant change in the world, when businesses change all the functions that are related to them change too such as offices, labour, and markets.
Economic factors:
I will mention below the most important factors that have change businesses and in turn changed the demand for offices:
All the above factors have helped in the drop in the demand for offices in the big cities such as London and New York.
There is a clear imbalance in the property markets in many capital cities and especially in London.
The problem determination:
Residential properties are getting very expensive and many people are buying them in order to make capital gains on them while the revenues from commercial offices are getting less attractive.
Office suppliers are taking huge space in order to build offices that are left empty or partially used.
There are many vacant office spaces in London.
The reasons for this problem is the fact that office suppliers did not pay attention to the changes to businesses needs in the UK.
Office suppliers are still providing inflexible offices for established large and medium businesses and not for small businesses and entrepreneurs.
Proposed solutions:
There are long-term and short-term solutions to the problem of office oversupply.
We will demonstrate below the importance of each one of them in meeting the changing business needs.
We cannot apply long-term solutions straight away because of the nature of the property market.
Property building is a long-term process; we cannot change the whole on going building work all of a sudden; that’s why we need to differentiate between long-term and short-term solutions.
Short-term solutions:
Virtual offices do not only reduce the costs of establishing small and entrepreneurial businesses but also can be used by many entrepreneurs and reduce the required size of land that is necessary to build offices.
Corporate hotels provide fully flexible accommodation in offices that are equipped with the latest communication technologies.
Long Term:
Changing land use:
As we have already pointed out, prices of residential properties are going up constantly and there is a housing crisis in London and major cities of the World (New York, Honk Kong).
The solution to this problem may be in redistributing the land between offices and residential areas.
As we have already seen from the above analysis, there is an over-supply of offices in the UK and many other parts of the World as a result of changing business needs.
Companies that need to get offices in the cities are mostly small companies that are looking to grow.
Large businesses are making use of the technological advancements that have happened in the last fifty years in order to move to bigger buildings outside the city.
Large businesses find it more cost efficient to move to bigger buildings outside the city, the fixed costs of these companies will drop substantially plus the cost of labour outside major cities will be much less than average.
Large businesses make use of video-conferencing and intranet, information technology in contacting other parts of their business or their suppliers and customers.
Offices providers should build more large offices outside the city in order to meet the requirements of large businesses.
The change in land use includes giving less land to parking in office buildings in the city:
The pollution caused by cars are a major cause of climate change, the UK government in its white paper took the responsibility for reducing CO2 emissions, this includes reducing the number of cars used in the city and encouraging using renewable resources as a fuel for cars.
The government had imposed the congestion charge as a way to reduce traffic in the city and encourage people using public transportation.
This entails building offices with fewer parking spaces than usual.
There is enough land to strike a balance between the residential property market and the commercial property market.
Commercial properties have to be more concentrated on a limited size of land; building skyscrapers and building more small and medium offices for small companies and entrepreneurs could do this.
The rest of the land has to be redistributed to residential properties in order to build more houses and lower the prices of residential properties.
New York Experience:
New York has a fantastic experience in the offices markets; New York started building skyscrapers a hundred years ago as a way of hosting thousands of small and medium companies that are trying to make success.
The prices of land in New York are not as expensive as the prices of land in London but even though New York businessmen found that building skyscrapers will make the cost of having an office cheaper and this will give New York businesses in a better position compared to their London counterparts.
New York has used short-term leases and flexible office space as a way to utilise the empty space that the city had.
Not only those, but also the prices of New York residential property are cheaper than the residential property of London.
Price competition in New York is a way of solving office market oversupply.
Hong Kong Experience:
Hong Kong is the major player in Asia; this city has witnessed very impressive economic growth rates in the last century.
We will try to find out how the offices providers have responded to the increasing demand of offices in that city.
Hong Kong has responded to office oversupply by creating the elastic buildings, which could give small businesses the chance to move to bigger or smaller offices as soon as the size of their business expands or shrinks.
Honk Kong encourages elastic buildings because they encourage investors to invest their money in Honk Kong.
Honk Kong is an emerging market and international investors want to enter and exit the market as required, the elastic building has given them the flexibility in exiting and entering the market and dropped the requirement of capital investment in leases in order to establish a presence in that city.
The elastic building helped to solve the problems of office oversupply and undersupply.
The city of Hong Kong has introduced corporate housing which is a fully furnished apartment equipped with information technology in order to give the businessman the chance of working from home without hiring an office and wasting time travelling from one area to another.
The corporate housing has created an ideal housing for businessmen who came to Hong Kong in order to explore the possibilities of establishing business their.
Corporate housing is a major competitor to business hotels, corporate houses have created a very flexible office space, and this has helped in solving the problem of office oversupply.
The city of Hong Kong is full of skyscrapers in order to maximise the number of offices built on every square meter of the land.
Conclusion:
This research has looked at the office market oversupply from economic viewpoint as well as building viewpoint.
Introducing flexibility in the contractual relationship between the landlords and the hiring companies and taking into consideration the environmental concerns in building offices can find solutions to office market oversupply.
The solution is a mix between changing contractual relationships and building types.
The lease has to be flexible in order to fit the requirements of small businesses.
Short-term solutions include being aware of the environmental concerns; building environmentally friendly offices can be used as a competitive advantage in order to market these offices.
This environmental competitive advantage can be used in increasing demand for offices and making more profit by reducing the costs of heating and building the property.
It is very important as well to build more offices outside the major cities in order to meet the needs of large businesses.
Office market supply depends on the general economic activity, there is no solution to office market oversupply or undersupply but there are some tools that may help reduce the cyclical effects of the economic activity on the office market.
Reference:
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