Cushman & Wakefield’s new report, ‘The UK Flexible Evolution Continues’, reveals positive growth for the UK market despite ongoing political chaos.
The research predicts flexible workspace to account for 5.5% of Central London’s office market by the end of 2019.
Other findings suggest that community is losing importance as occupier profiles continue to shift and grow.
After two years, Cushman and Wakefield has published a new research report about the state of the flexible workspace industry in the UK. Titled “Coworking 2019: The UK Flexible Evolution Continues”, the report looks back on two positive years for the UK office market, despite political headwinds, and it presents a clear trajectory on how the flexible workspace trend has evolved in the country since the end of 2017.
Cushman & Wakefield’s research found that since they publication of their last UK report, “flexible workspace operators have accounted for the largest proportion of take-up in Central London”. Despite the fact that volumes were 20% below 2017 levels, take-up by flexible workspace operators represent 18% of Central London’s take-up. In 2018, for the second consecutive year, flexible workspace operators took up over two million square feet of office space.
This year (2019), the numbers point to increased activity; 2019 has started strongly, with over 1.2 million square feet let to flexible workspace operators in the first half of the year across a total of 40 transactions.
Chusman & Wakefield estimates that “if letting activity progresses at the same rate for the remainder of 2019, flexible workspace take-up could well exceed two million square feet for a third consecutive year.”
Decrease in Transaction Sizes
According to the research report, WeWork is, in large part, to blame for the decrease in average transaction sizes between 2017 and 2018.
WeWork is not only London’s largest office occupier, but it is also one of the most acquisitive operators in the region. Over the past ten years, the coworking giant’s average transaction size was of 68,894 square feet; over the past eighteen months, that number has fallen to 54,374 square feet.
But, it’s not all WeWork’s fault.
“Another reason for the overall decline in average transaction size was new entrants entering the market with a different business model.” One example is Knotel, which only took up 13,103 square feet per transaction in the past eighteen months. It’s a significantly smaller number when compared to other established operators in the market, but it “reflects a different approach to the flexible office market”.
During the first half of this year, the average transaction size stood at 30,227 square feet.
Central London’s Submarkets are Flourishing
Cushman & Wakefield note that “the City Core has been the most active submarket since January 2018, with a total of 27 flexible workspace transactions totalling 691,570 square feet.” The City Core is closely followed by Canary Wharf, a submarket that was boosted by WeWork’s recent deal at 30 Churchill Place which accounted for nearly 290,000 square feet. Midtown, for its part, reported 13 flexible workspace transactions totalling 394,508 square feet.
However, when weighted as a percentage of total office stock, the results are quite different. Fitzrovia takes the lead in this area, as flexible workspace take-up accounted for 7.3% of office stock since January 2018. Paddington, Canary Wharf, and Midtown follow respectively.
In Central London, “the continued leasing activity from flexible workspace operators has increased the overall stock of flexible workspace by 16%, with 12.95 million sq ft in operation at the end of H1 2019.”
To put the above in perspective, the proportion of flexible space compared to Central London’s total office market increased to 4.80%. Bear in mind that Cushman & Wakefield’s previous report in late 2017 had estimated that flexible workspace would account for 5.5% of the Central London office market by 2022.
The above numbers mean that the 5.5% threshold will be reached much earlier than 2022, and it is expected to be reached by the end of this year (2019).
“The flexible workspace sector will account for at least 5.5% of total office stock in Central London by the end of 2019.”
– Cushman & Wakefield, Coworking 2019: The Flexible Evolution Continues
While the UK flexible workspace industry has experienced significant growth over the past eighteen months, this growth has not been uniform across the region. “Some areas have proved more successful at attracting flexible workspace providers than others.”
As it currently stands, Birmingham is leading the pack and it is expected to see an increase in 2019 as a result of WeWork’s large lettings in the area.
Cushman & Wakefield hypothesize that in order for cities to attract flexible workspace operators, they need to provide high volumes of quality grade A space. “Those areas with a tight pipeline of new space will struggle to attract flexible workspace providers.”
Acquiring suitable stock will be a challenge for many operators, “particularly at a time when off-plan pre-lets are removing space from future supply at a growing pace.” On the bright side, markets where large, quality buildings are in the pipeline or could be brought to the pipeline are likely to flourish significantly.
The Changing Dynamics of Landlords
Landlords first started to react to the flexible workspace industry midway through 2017. Since then, the dynamic of landlords simply leasing space to flexible workspace operators has shifted significantly, and today landlords have three additional options, besides leasing space, to enter the flexible workspace playing field:
Partner:landlords can partner with existing flexible workspace operators and enter into revenue sharing agreements.
Buy:landlords can buy existing flexible workspace providers; one notable example includes Blackstone’s majority stake in The Office Group.
Build: landlords can build their own flexible workspace brand from scratch, much like British Land did with Storey.
The emergence of these types of deals represent the continued change in the UK office market and it is a clear indicator that landlords are desperate to offer the same level of flexibility that flexible workspace operators have provided for the past 10+ years in order to meet new occupier demands. The number of landlords actively participating in the industry is expected to grow in the years to come.
While community has been at the core and center of the flexible workspace industry, Cushman & Wakefield has found it is losing importance, especially as occupier profiles continue to shift and grow.
Lastly, while the flexible workspace market has been flourishing over the past 5 years, it is still in its relative infancy and it will continue to grow and diversify in the coming months.