Room for growth? The rise of the flexible office space market

The puzzling combination of the UK’s robust economic growth and the looming spectre of significant political uncertainty means that UK companies find themselves at a crossroads – is it time to gear up for growth and expansion or to ‘wait and see’, and risk the chance of the competition stealing a march in the meantime.

One of the most significant risks attached to a growth decision is the commitment to new office space, requiring lengthy lease commitments and up-front capital investment. The increasing presence of flexible workspace providers offering ‘Workspace as a Service’ is making the choice easier. The development of the flexible office market in recent years means that the solutions are varied – whether it’s a bare brick co-working space promoting start-up collaboration in East London, like those from AIM-listed WorkSpace, or a 1,000-plus workspace international office from a global provider like IWG plc (formerly Regus).

Changing attitudes to office space

Growth in the sector has been driven by a fundamental change in working practices. In many industries, particularly those that are tech-enabled, the widespread use of the Cloud and advancements in mobile technology, as well as a refocus on employee well-being to attract talent, means organisational structures are changing and employers are placing increasing value on flexibility without the loss of the collaboration that creativity thrives on. The emergence of the ‘gig economy’ also means that an increasing proportion of the UK workforce is self-employed, with flexible offices a viable alternative to the bedroom as they increasingly offer basic business services such as IT connectivity and mail services.<

As a result, demand for flexible workspace has been outstripping supply across the UK with like-for-like occupancy rates at an all-time high, with WorkSpace reaching occupancy rates of 90%+ across its portfolio in 2016, and workstation cost rates growing at double-digit rates in most regions of the UK.

Consolidation

This benign demand environment has allowed the flexible office market to flourish. In an industry where supply has consistently been the constraining factor, consolidation of office space has emerged as a viable corporate growth strategy, even in the face of competition from Private Equity investors looking for a share of the spoils.

In 2016 The Boutique Workplace Company added success story Ventia to its portfolio, adding over 2,500 workspaces to its footprint in the process, and in 2015 Bridges Ventures acquired the Evans Easyspace portfolio, an office space-self storage hybrid operator catering for SMEs, from Regus for £84m. Regus itself has also recently been reported to have turned down an offer from a Private Equity investor valuing the group at over £3bn.

The likes of US-based WeWork have also made bold organic moves in to London due to the city’s status as a leading location for tech start-ups, even turning to direct investment in to some of its most worthy users. WeWork raised $300m from Softbank in March 2017, valuing it at over $17bn.

Too good to be true?

The question is, as a relative young industry, how would flexible offices fare during another recession? Fortunately the omens are good. Throughout the last recession the industry continued to grow, with estimates generally converging on a 20% per annum growth rate in available space. This is indicative of the fundamental value placed on flexibility by users during times of uncertainty, and it is unlikely that UK corporates have reached the optimum level of protection that flexibility provides within their property portfolios. In addition, premium City-based flexible office provider London Executive Offices – backed by Queensgate Investments – announced a positive post-Brexit spike in demand, which bodes well for the future.

Ultimately the increased quality and availability of flexible office space, coupled with an improving knowledge of its virtues, is leading to a fundamental structural shift in the way companies procure office space, and the outlook is brighter than ever for those that have capitalised on the trend early.