Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
- Research by Instant Offices found that flexible space is leading the way in CRE in the UK.
- Rates across the UK are expected to drop slightly.
- Flexible workspace growth will slow down compared to previous years, but a resurgence in new supply is expected in 2021.
Instant Offices recently published its latest research report “UK Market Summary: Flex Is Leading the Way”, highlighting the fact that, now that the wider commercial real estate industry is taking a more active role in flexible workspace, the “sector will have to become smarter at finding and using big sets of data to assess in detail where this demand [of flexible workspace] is coming from and how it is going to change over time.”
The increased participation of landlords and property owners in the flexible workspace industry will force operators and landlords alike to “aggressively evolve their models to differentiate and specialise”. Property owners, in particular those who specialize in the sub-5,000 square feet lease market, are facing increased pressure to offer the same level of flexibility that flexible space operators offer.
Suggested Reading: The Top 5 Ways CRE Is Crossing into the Coworking Industry
Instant found that “the sub-5000 sq ft lease market is being eroded by the flex market”. Instant also found that there “appears to be a clear correlation between the expansion in flexible space (2015 onwards) and the increase in both vacancy and availability rates of sub 5,000 sq ft offices across the London market.”
However, the shift towards flexible space consumption is also bound to affect the 10,000+ square feet market, especially considering that corporates are increasingly enquiring about space that can accommodate 50+ desks; 22% of all desk enquiries are for 51+ desks according to Instant’s data.
Corporate adoption of flexible space has been a key growth driver for the overall industry, with “recent office take-up data showing that up to 35% of all new stock for the past year has been taken up by flexible space providers or allocated to a landlords’ own flexible solution.”
Flexible workspace operators are already facing competition from progressive landlords that have started to introduce space-as-a-service on a non-lease basis in order to offer increased value to tenants.
Key Takeaways from Instant Group’s UK Market Summary
1. There’s room to grow
“Flexible workspace contributes to a high % of CRE industry news at present thanks to large scale investments and increasing adoption from corporates. This interest has made many outside observers assume that the market makes up a far larger % than is actually the case.”
In fact, while 35% of new stock for the past year was taken up by flexible space operators, the fact remains that the flexible workspace industry accounts for just above 7% of all office stock in the UK. This number is expected to increase to 10% by the end of the year, as the “last 6 months has seen the supply of flexible in the UK increase by 7%.”
But, there’s plenty of room to grow.
2. Rates Will Go down
Instant’s data showed that rates across the UK continued to drop in the last 12 months. According to the research report, there are three key factors in the UK that are contributing to this trend.
The first is that competition for key customers is “creating short term price competition.” The second is that operators are expanding into secondary and tertiary cities, which are lower value locations and which consequently drives down the overall average rate. Last but not least, “larger teams are making up an ever larger proportion of the market take-up, resulting in lower overall rates.”
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Rates are expected to continue to drop slightly as “all three of these factors are not likely to dissipate in the short term.”
3. Private Offices Is Where the Money’s At
“The profile of the types of companies looking for flex solutions is changing and the supply side is having to adapt accordingly” … mostly by providing more private offices for two main reasons.
The first is that the market is asking for it. The second is that “the majority of profit is made not from multi company, mixed use space, but instead from private offices which increasingly make up the greater proportion of flexible space.”
Which leads us to the following finding:
4. Flexible Workspace Locations Are Getting Bigger
In order to cater to the growing space demands from clients, flexible workspace operators are increasing the size of their locations and acquiring ever larger spaces. “To ensure that providers have the highest volume of private spaces and also offer the growing number of services that are required by customers, larger floor plates are needed.”
According to the report, “for the first time 25% of individuals put into flexible spaces by The Instant Group were within teams of 50+. On average the amount of space that these requirements need is well over 3,000 sq ft.”
In fact, Instant’s data shows that for the last year, demand for larger spaces has outperformed the industry average.
5. Flexible Workspaces Need to Move out of the City Center
“The high office rents (and desk rates) of London and overwhelming living costs are seeing firms of all sizes look at alternative locations across the UK, the vast majority of which are currently under-served by flex space providers.”
The report found that the UK’s regional market has been one of the fastest growing in the world over the past 12 months. While there is supply in these markets, it “tends to be focused towards a traditional serviced offering often in or around business parks rather than central, urban locations.”
While demand for flexible space in regional markets continues to grow, supply is dependent on “new stock becoming available or providers of flexible space being willing to invest in locations outside of city centres.” However, flexible space operators are reluctant to invest in these regions as they “are unable to make pricing work in these markets”.
6. Mid-Range Operators Are Leading the Way
Throughout 2019 Instant has seen the “rapid expansion of multi location providers across the UK market after what appeared to be a slight pause in 2018.”
According to the report, there are now 3,094 flexible workspace operators within the UK, a 10.5% increase from the 2,800 recorder in 2018. The interesting element here is that the UK market leaders, including International Workplace Group, The Office Group, and Flexspace have changed very little. On the other hand, mid-range flexible workspace providers, those that operate between 10 and 50 locations, have grown exponentially.
7. Growth Will Slow Down
Although the UK flexible workspace market has “gone from strength-to-strength over the last 12 months” despite political volatility, the rate of expansion is expected to slow compared to previous years.
“There is no doubt that Brexit uncertainty, an economic slow down and a high profile IPO are making investors more cautious than before. These factors combined with limited stock in highly desirable markets, such as Cambridge, are having an impact on growth.”
On the bright side, Instant expects to see a resurgence in new supply from 2021 onwards. But while uncertainty continues to cloud over the UK market, operators are expected to “offer increased incentives for those willing to take on longer agreements, in effect taking away the flexibility offered.”
