London is a flexible workspace pioneer where new concepts and models are often tested before being applied elsewhere. Understanding the type of space on offer, its impact on broader occupational demand and the landlord response therefore has lessons for all European markets.
Flexible workspaces – variously called co-working, serviced or shared offices – are a major feature of London’s office market. In 2017 they accounted for 20% of take-up compared to less than 1% in 2008. Some 4% of office space in London is now occupied by flexible workspaces, the highest proportion globally.
Flexible workspace take-up in London 1996 – September 2017
London has become a test-bed for flexible models which are then adapted and applied to other markets. Therefore what happens in London today is a bell-weather for what could happen in major European office markets tomorrow.
A varied offering
WeWork has been leading the charge in London, committing to or occupying 204,400sqm (2.2 million sq ft) ranging from single floors to entire buildings. They aspire to double their footprint in 2018 and will become London’s largest private office occupier. The sector is diverse though with a range of providers focusing on different niches, whether that is workspace themed around certain sectors or modelled on a serviced-orientated hotel.
Multiple factors drive growth
Traditionally flexible workspaces lacked choice, offering a basic and expensive short-term solution. As a result they were used as satellite offices, overflow space or a temporary option whilst occupiers found a permanent home.
That has changed as costs have reduced and demand for shorter leases has grown. Online platforms have increased the speed and ease of flexible workspace transactions. Strong employment growth in small enterprises has fuelled demand for small tenancies available for an all-inclusive fee without a long contract. This is an area that was previously under-served by landlords.
Societal changes have fuelled the sector too. Talent is increasingly footloose and able to work from anywhere. Modern offices must work hard to attract talent and enable its productivity. Offices need to be user-focused, amenity rich and engaging places that give employees choice about how and where they work. In response flexible workspaces have developed a strong experience-led environment.
The future outlook
The extent of demand for more flexible workspace is uncertain. Growth will require large corporates to embrace the model. It will also depend on the staying power of their existing occupier base in market downturns which has not yet been tested. It is unclear whether, in a less tenant-favourable market, landlords would have been as willing to allow an as yet unproven business model to occupy so much space. Whatever happens though, flexible workspace and its impact on the expectations of occupiers is here to stay.
For investors this means that the ability of offices to attract and retain occupiers in the future will be more closely related to amenity and user experience. An element of flexible workspace within buildings could be view advantageously in securing occupier diversity and providing choice rather than as a covenant risk. If landlords elect to operate these workspaces themselves, there are income creation opportunities.
This article was originally published in the latest Swiss Life Insights publication which is available here.
Senior Analyst - Investment Strategy and Risk