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What Does 2018 Have in Store for the Flexible Office Sector?
monday, 8 january, 2018
This year is looking to be just as, if not more, prosperous as flexible workspace continues to become much more mainstream.
In 2017 we saw a significant number of high profile deals in the serviced office market fuelled by acquisition and investments by some of the most successful operators which have really driven the industry forward making it ‘The Year of Flexible Workspace’.
We saw Blackstone purchasing The Office Group for £500 million as well as SoftBank increasing their investment stake in WeWork, allowing them both the opportunity to expand into new markets and grow their market share. Investments like these solidify the growing demand in the industry for a flexible approach to workspace.
This year is looking to be just as, if not more, prosperous as flexible workspace continues to become much more mainstream and thanks to higher yield opportunities, the alternative sector is becoming much more attractive to investors.
This year could be even better…
Landlords and occupiers will be looking at how to challenge the traditional methods of office space procurement having seen large corporates such as IBM and Microsoft trial flexible workspace, further highlighting the requirement and demand for this type of space.
Business agility will be the new normal and, as a principle, the ability to remain agile will underpin all real estate spend commitments made by corporates. Business planning horizons will shorten and reach a level where the demand for flex becomes mainstream within a portfolio.
Consequently this year will bring an acceleration of change within the office sector and traditional elements of the property industry will be challenged by this shift in customer demand. The sector will be forced to recognise that industries that give customers what they want, tend to be the ones that thrive and succeed.
Legislation is changing…
This growth in the industry will be accelerated further by the looming IFRS accounting rules due to come into play in 2019 which will mean that from 2019 property leases will have to appear on balance sheets. This change in legislation will push companies to seek even more creative ways of holding space, spanning from one year flex contracts through to longer leasehold and freehold ownership.
The way that organisations approach property ownership is changing already and therefore landlords and developers are having to adapt accordingly to offer transparency through their product offering.
This is already having a huge implications for the commercial property market, and those who don’t adapt will struggle.
Productivity could be aided by the Government support for the sector.
2017 highlighted the big issues clouding over the UK when it comes to productivity and how we are tailing behind our international counterparts. The Government are ready to address this; in 2017 Philip Hammond announced significant focus and funding to boost productivity through the targeting of worker efficiency.
Instant’s research shows that the way in which companies occupy space can significantly increase productivity amongst staff. Being agile and precise about your business’ space requirements at different times in the business cycle will contribute to greater efficiencies and, ultimately, productivity.
Further support comes from the Mayor of London who, in his recent white paper on infrastructure, clearly recognises that the provision of flexible workspace goes hand in hand with the growth of SMEs and fostering entrepreneurialism.
Sadiq Khan has recommended that developers provide provisions for this type of space in commercial developments.
In the past five years, the flexible workspace industry has seen annual double-digit growth without the political uncertainty we now face in the coming years. We are at a time where there is a lot of political uncertainty – alongside the ongoing spectre of business rates – and the agility and value co-working offers could provide a further boost to the industry.
It’s a customer-centric ethic
The customer really does come first; the customer-centric focus will be essential in fostering increased growth in the market.
As a whole, the industry is underpinned by customers signing up to a community rather than just a space. If one space is not fit for purpose, there are a plethora of alternatives for people to consider.
Operators such as WeWork and The Office Group have been clever to focus on the provision of improved amenities and have most likely set the trend for other operators.
Variety and choice are the new norm
Whilst the long term lease will never cease to exist, and prominent headquarter officeswill continue to underpin the valuation of a portfolio, there is no ignoring the new demands from occupiers.
In order to navigate, and survive the next 10 years, these assets need to adapt to the new norm providing a service which is more efficient and agile.
The appetite for flexibility, agility and utilisation is continuously growing and those that are unable, or unwilling, to accommodate this will struggle. Those who can efficiently outsource in a cost effective way, offering shorter terms and providing a more bespoke space, will be the ultimate winners.
With the reality of Brexit looming, the economy will begin to evolve and this year we are likely to see a huge acceleration around various flex related offerings.
Undoubtedly this will include more capital investment in the sector; through operator acquisitions and/or consolidations via asset based investment by developers and landlords.
We will experience an acceleration of supply in the provision and variety of flexible space across the UK driven by burgeoning business demand for more agile space.
This increase is due to a range of factors including uncertain business planning horizons; looming 2019 IFRS accounting standards; changing corporate cultures around workspace and talent that support more agile occupancy models; increasing evidence and support for improved agility and productivity.
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