Depending on who you ask, London’s office market is either being artificially propped up by flexible office providers or the capital is undergoing an irreversible sea change when it comes to occupier demands.
It is true that serviced offices may have come and gone over the years (see graph, below) but new CBRE figures suggest “flexible London” could now be a permanent fixture as businesses adapt to prolonged insecurity, technological advances and the decline of the traditional institutional lease.
In the first half of 2017, the serviced offices sector accounted for more than 15% of take-up – double the average figure recorded in 2014-16 alone.
Last month, US co-working giant WeWork signed up to take all 140,000 sq ft of the space at Almacantar’s 125 Shaftesbury Avenue and bought its second freehold site in the City.
The big question is how long it will last? Is this a bubble or a permanent structural shift?
Following the money
WeWork’s rapid expansion, while it simultaneously hands out rent-free incentives to prospective London tenants, has certainly prompted unease in some quarters.
Serviced office providers, such as the more established Regus (now IWG), have often been viewed as a tenant of last resort. By capitalising on the arbitrage between their cheaper rent and the fees they charge their own customers, they have gained a reputation for taking away some of the landlord’s value.
The dotcom boom of the early 2000s also led to consolidations, exits and bankruptcies in the serviced office industry. Regus US, for example, entered Chapter 11 bankruptcy and had to be rescued later that same year.
So today there are inevitably similar anxieties. But as one might expect, WeWork’s executive vice president for real estate Patrick Nelson says they are unfounded.
“The proof is in the pudding of the landlords we have done deals with – not just in London but all across the world,” he says.
“Blackstone, Brookfield, GIC, Prudential. This is to do with a continuation of the evolution of the office market.”
And it is that high-profile investor backing that is so telling. Blackstone recently splashed £500m on The Office Group, Carlyle invested £150m into the launch of flexible operator Uncommon, and British Land launched Storey, its own flexible working brand.
There is little doubt that the money is following the trend but does that mean it is here to stay?
Keeping the pace
On one hand there is an argument to suggest that the fact these providers are thriving in London right now comes down to timing and macroeconomic volatility.
Ben Cullen, partner in the London occupier representation team at Cushman & Wakefield, says: “While we are trying to work out what is happening with Brexit, I am confident we will see a much greater increase in these kinds of flexible offices.
“There will always be long-term leases but more and more we are seeing occupiers look at what the alternatives are.”
And while start-ups and smaller companies will inevitably be attracted to shorter-term expansion space, bigger corporates are now starting to use it to evolve their businesses too.
Cullen cites the example of a major US retail client which recently leased 90,000 sq ft of co-working space in central London.
The major players flexing their muscles
IWG (formerly Regus)
Early pioneer of serviced offices, established in 1989. The £2.2bn company operates in 106 countries with more than 2,300 business centres, making it the world’s largest provider of flexible workspace.
Chief executive: Mark Dixon
Central London occupancy: 2.25m sq ft
WeWork
The trendy one. Rumours of an initial public offering in the US have spread on the back of the company handing out incentives to tenants. The company just raised $760m (£590m) in its latest funding round.
Chief executive: Adam Neumann
Central London occupancy: 1.6m sq ft
Workspace
A REIT established in 1987. Focuses on letting offices, industrial and workshop space to small and medium-sized enterprises. Workspace has a co-working brand called Club Workspace.
Chief executive: Jamie Hopkins
Central London occupancy: 1.1m sq ft
The Office Group
WeWork’s key central London rival. Blackstone recently invested £500m in the company, which wants to double its footprint in London following the investment.
Chief executives: Charlie Green and Olly Olsen
Central London occupancy: 800,000 sq ft
London Executive Offices
The high-end alternative to some of the more mainstream providers. Currently up for sale but its owner, Queensgate, is yet to find a buyer. Owns some of its 35 buildings and leases others, most of which are in the West End and City.
Chief executive (Queensgate): Jason Kow
Central London occupancy: 820,000 sq ft
Those claiming uncertainty is always negative also forget the glass half-full interpretation: that businesses are, in fact, newly agile, enabled by technology.
Brandon Weber, co-founder and chief product officer at VTS, points out that business plans today are rarely mapped out across a year, let alone the next five.
“One of the interesting business problems the industry needs to grapple with, and may not be grappling with as proactively as it should be, is the disconnect between the agility of a modern business and property,” he says.
“How quickly they have to make decisions – most companies are literally thinking about their strategy on a quarterly basis, not even an annual basis. The concept of a five-year plan for even the traditional company is crazy.
“The world is going to change. Everything has accelerated, yet the commercial property industry, in terms of the expectations it has for long lease length, has not changed at all.”
Weber adds that one of his property clients in the US is working on the notion that 25% of its property should be flexible space. “It could be on monthly leases or annual. They will charge a premium for it but the IBMs of the world – big clients – need it.”
Nerves v confidence
Back in London, the consensus looks to be moving towards Weber’s way of thinking as jitters about the sustainability of flexible offices are not dissuading landlords.
Almacantar, for example, has recently signed two major office deals with WeWork, and now has more than 400,000 sq ft of offices exposed to the US company’s covenant.
Then there’s Derwent, whose White Collar Factory scheme on Old Street roundabout has long been held up as a cutting-edge example of creative, technology-type space.
It signed The Office Group to three floors in order to give other tenants access to overflow space that will enable businesses to flex, shrink, expand and quickly take on new projects.
Charlie Green, co-founder of The Office Group, which has 34 outlets in London, says: “Technology is changing the need for flexibility, which is paramount for every business.
“Because everything is moving so fast, it is very difficult to accommodate their space needs. If you don’t know what your space needs are going to be in 12 months, how can you sign a 10-year lease?”
Those increasingly ad hoc business plans, driven by disruptive technology, are not going away but there are also other systematic changes taking place.
One is the growth of small businesses: they are naturally nervy about signing long-term leases and simultaneously benefit from being shoulder-to-shoulder with peers and potential collaborators.
According to Kevin McCauley, head of London research at CBRE, the shift in central London is systematic and not down to cyclical fluctuations.
He says the number of small businesses in the UK increased by 17% from 2010-16, equivalent to 431,000 new businesses, and 38% of these were founded in London.
He adds that technology is enabling people to work across multiple locations, while there has been a cultural shift towards collaborative and shared working.
A recent survey by The Office Group showed 38% of its tenants had done business together.
Green says: “The market has shifted towards the user – you used to have offices built by developers and overseen by an investor landlord.
“Tech has educated people that they can get more from their workplace in terms of design and specification, and it doesn’t have to cost them any more.”
Following Blackstone’s £500m seal of approval, The Office Group is on the hunt for distinctive buildings of 50,000-150,000 sq ft in a push to double the company’s size.
As significant macroeconomic shifts such as Brexit threaten to reduce the amount of traditional leasing activity in central London, these new entrants could continue to eat up more of the market.
Landlords will need to be as agile as their occupiers in order to accommodate them. As Green neatly sums it up: “We’re no longer a tenant of last resort.”
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