- Four flexible workspace experts discuss whether we can expect a slowdown in UK flexible space growth.
- They explain why Brexit poses an immediate threat for flexible workspace operators.
- Yet, they expect that within the next 20 years, flexible space will represent up to 10-15% of the London office market.
Is there a coworking bubble forming in the UK and if so, how should flexible workspace operators prepare for it?
The industry’s rocketing growth can only last so long. Sooner or later, be it an economic event or a political one such as Brexit, or a natural turn in the tide, that growth must slow down.
In the UK, continued growth in Central London – the largest flexible workspace market in the world – is under close scrutiny as the UK buckles up for Brexit. So far, flexible space has fared well since the referendum in June 2016. But as the official EU departure in March 2019 draws near, questions are being raised as to the sustainability of flexible workspace and how it will impact London, as well as regional cities.
Can we expect a slowdown in flexible workspace growth? If so, where does this leave smaller independent operators? What can they do to protect their portfolios?
Ahead of a panel debate discussing this topic at GCUC UK in London this month, Allwork.Space posed these questions to four experts operating within the UK flexible workspace sector:
- Mark Bott – Head of Serviced Offices, Colliers
- Jonathan Price, FCSI – investment management consultant for the flexible workspace industry
- Mat Oakley – Head of European Commercial Research, Savills
- Freddie Ward – Associate at Workthere
First, let’s clarify the classic warning signs of a ‘bubble’.
“A bubble is where prices of an asset class rise to levels which are unsustainable, because they vastly exceed the present or future inherent value of the asset,” explained Jonathan Price.
“The classic warning signs are where everyone, including the inexperienced, rush to get involved in the asset class, believing that the values can only rise. This behaviour is normally accompanied by breathless positive media coverage.”
From an industry perspective, Price believes coworking isn’t yet showing any signs of a bubble in the UK. “You might say that the market has got ahead of itself a little in that specific sub sector, but that is a comment about coworking, not about flexible workspace in general.”
Mat Oakley, Head of European Commercial Research at Savills, commented: “Saying ‘a bubble’ usually implies imminent bursting, but we don’t believe that is the case for the UK workspace-as-a-service (WaaS) sector.”
Oakley, who will be moderating a panel on this topic at GCUC UK on 25th September, acknowledged that the London market has been through a dramatic growth phase in recent years “and there is no doubt that this rate of growth will not be sustained”. However, there is clearly demand for this type of space and “the strong, existing and emerging providers of WaaS will continue to thrive.”
“As is always the case with a period of exponential growth some concepts and operators will find they are wrong for the market or have come to it too late. In the short term we do expect some pressure on occupancy and rates, but definitely no bursting of any bubbles!”
As for potential threats, Oakley added that the risks to this sector are no different to those facing traditional landlords.
“An economic slowdown or recession would affect demand and achievable rates, which would put pressure on operator’s margins,” he said.
Brexit Threatens Workspace Values
Taking this point further, Jonathan Price believes that the immediate threat to the industry is Brexit. “
If the UK does exit the EU in March 2019 in a hard Brexit manner, there will be a 2-3 year recession that will cause problems for the flexible office sector like everybody else,” he said, adding that those operators that are poorly capitalised won’t have the resources to continue.
In the event of operators going out of business, values will also fall, which would put increasing pressure on pricing of workspace.
Faced with Brexit, Price added that the best option is to support a second referendum to try and prevent Brexit. But other than that, “there is little that operators can do except to avoid excessive debt, and be prepared to reduce licence fees substantially next year to maintain occupancy.”
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Looking further ahead however, the picture is more positive.
“In the longer term the flexible space industry will keep growing, as this is a structural shift,” added Price. “I do not see this stopping until flexible space is at least 25% of total office space.”
Landlords: A Threat or an Opportunity?
On the whole, interest from commercial property landlords in flexible space is considered an opportunity for flexible space operators — providing they are open to partnership opportunities.
More than that, operators should be actively seeking them out, says Mark Bott, Head of Serviced Offices at Colliers:
“Operators should be seeking some kind of formal relationship to mitigate the risk of landlords potentially developing their own flexible space solutions,” he said, citing British Land, Landsec, and the Crown Estate, which are already doing this.
“They’re seeing flexible space operators generating good revenue. They also see operators capturing businesses in their earlier stages and growing with them; landlords want to attract those same small, high-growth companies and help them grow within their own buildings.
“That’s a challenge for serviced office operators.
“But it’s an opportunity as well, as not every landlord wants to run their own flexible space,” Bott added, citing the White Collar Factory as one successful example — the result of a partnership between The Office Group and Derwent.
“Outsourcing to an experienced flexible workspace operator can help to create a fantastic coworking community within their building. It can work extremely well for both parties, as it enables serviced office companies to help their clients scale up, and corporates can also use the shared space as overflow.”
Price concurred, noting that most landlords will not wish to undertake the “labour intensive work” of developing a flexible workspace themselves, and will be more likely to subcontract it out to established operators.
However, operators should walk into any partnership with caution and keep their own interests in mind, notes Workthere’s Freddie Ward. While a partnership may help to protect flexible space operators from the risk of events beyond their control, such as a recession, there may also be lower reward from an operator’s point of view.
“In terms of competition, long-term, landlords may be more likely to develop their own brands in order to “provide complete control over the asset and offering.”
Should operators seek to own their own buildings to protect themselves from risk?
“Past cycles have shown us that the biggest risk to a flexible space provider is when their occupancy and income falls, but their rental liability does not. Owning your own building reduces some of this risk — but by no means all,” added Ward.
Looking Ahead: The Big Picture
As competition intensifies and the market grows, can we expect consolidation? And what do the next 5-10 years hold for flexible workspace?
“Yes, consolidation could certainly happen,” added Ward. “Previously, Regus acquired a range of independent operators to quickly gain market share in locations where it traditionally had a low presence.
As trends change, the focus could shift to larger operators acquiring smaller brands who specialise in particular sectors and have a strong reputation and brand equity.” As examples, Ward cites IWG and Spaces, BE Offices and Headspace, and i2 offices and Landmark.
For Bott, future growth relies partly on supply, which is limited in some areas: “There is still huge demand for flexible space and in Central London, some operators are coming head to head on the same buildings. There is a lack of supply in some areas, particularly as we’re still seeing expansion plans emerging for major players.
“This is happening in regional cities too, especially Manchester and Birmingham — they have strong economies and there’s a lot of demand from SMEs as well as corporates.”
Looking ahead, Bott notes that occupiers now understand the value of flexible space and why it’s needed, which is continuing to fuel demand. “It’s not going away,” he added. “Around 5% of the London office market is flexible, and we expect this to double, potentially triple, within the next 20 years.”
Dig deeper into the UK coworking industry at GCUC UK, which takes place in London on 25th and 26th September 2018. Find out more and get your ticket here: uk.gcuc.co