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    The rise of flexible office space and what it means for real estate investors

    Posted by Paula Thompson on 23 October 2018

    HubSpot-Paula

    It is a well-recognised and frequently discussed fact that real estate has become so much more than bricks and mortar. End users of real estate now expect more from their space; they expect a service. We have previously noted the rise of this trend in the residential space and to a lesser extent in the retail sector. As I will highlight in this post, it seems that the traditional office has not escaped either. 

    Flexible or ‘agile’ office space is a phrase that, while new to many, is uttered so frequently now that it has quickly become embedded within the real estate vernacular. And although Regus has long dominated the serviced office sector, relatively new entrants to the market, such as WeWork, ServCorp and Fora, have made terminology such as ‘co-working’, ‘incubator/accelerator’ and ‘enterprise solutions’ popular.

    Increasing flexibility on a global scale

     

    In line with the changing economic and political climate, flexible space operators have capitalised on the growth in demand from new occupiers. More traditional occupiers are also snapping up space at a phenomenal rate, with larger corporates examining the need to balance a traditional office environment with flexible ‘touch-down’ space.

    Recent research from Cushman & Wakefield reveals that, in central London alone, flexible space operators took over 21% of the office space let in 2017, leading to a total occupation of 10.7 million sq ft of space, which equates to approximately 4% of total London office stock. Strikingly, the research further tells us that WeWork now has the largest volume of space commitments in the UK after the Government.

    And this growth is by no means limited to the UK. On the continent, Dublin expects to see 230,000 sq ft of flexible office space delivered this year, while Amsterdam saw flexible office providers account for 7% of total take-up in 2017. In Berlin, WeWork have huge expansion plans of up to 100,000 sq m.

    Across the pond, the flexible space sector in the US nearly tripled as a percentage of total office leasing activity between 2015 and 2017. Meanwhile in Asia, expansion is occurring rapidly, supported by US$3bn raised by Asia-Pacific flexible space operators between 2015 and August 2018 (with 2018 already outperforming 2017).

    In today’s highly digitalised world, where more and more workers have become freelancers and self-employed, start-ups and SMEs are increasing in number, and Millennials seem destined to change the way we work forever, the demand for flexible work space has rocketed. Indeed, Condeco’s 2018 report on The Modern Workplace observes a growth in flexible working as well as a corresponding increase in open plan workspaces, hot-desking, hoteling and flex space.

    In the US, 52% of staff now work flexibly at least some of the time. Not only does the practice of flexible and/or remote working afford more autonomy to employees, it also saves costs for the employer, who ultimately requires less space in which to house employees. Another cost consideration comes in the form of the IFRS 16, which allows tenants to exclude leases (or licences) less than 12 months in duration, thus there is no requirement for lessees to capitalise the rental liability in their financial statements. 

    Recognising the investment opportunities

    Faced with all of these numbers, institutional investors are being forced to take note and examine their allocation strategies. While traditionally these investors may have been nervous about the sector (the covenants of the operators are yet to be seriously tested and the multi-let nature of the sector is less appealing to institutionals), the time has come to reassess. Indeed, many institutional investors are now entering the market wholeheartedly; for example, British Land’s establishment of Storey. The Crown Estate and LandSec were also both rumoured to be considering launching their own flexible space brands earlier this year. 

    For the opportunistic investor, opportunities to acquire an existing operator abound, with over 7,600 flexible space operators recorded worldwide last year. Some have already acquired stakes in the more well-known operators, such as Blackstone’s acquisition of a majority stake in The Office Group and Brockton Capital’s acquisition of an interest in Fora.   

    Many of our clients recognise the need to view the flexible office sector with fresh eyes – to recognise the risks, yes, but also to see the value that exposure to the sector might bring to a more traditional building/portfolio. The addition of flexible space could in fact enhance the brand position and profile of an asset, and may lead to tribe attraction for other potential lessees. Many may seek greater covenant protections, but ultimately the sector will be considered, whereas previously it may have been discounted.

    All roads point to a bright future for flexible office space. C&W predicts that the sector will achieve market share approaching 10% in the next ten years across the UK, while JLL asserts that the US market could grow to 30% by 2030. In the words of CBRE, “[l]andlords and investors must not stand idly by as occupiers demand greater flexibility and the growth of flexible space reshapes office demand.” It seems clear that the flexible office sector is here to stay. Our clients are certainly watching this space.

    Paula Thompson is a director with First Names Group and part of our international real estate team. Paula specialises in structuring for the acquisition, development and holding of commercial real estate across a wide variety of property classes.

    This article has been issued by First Names Management Limited on behalf of certain companies that form part of First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting, tax or investment advice.

    The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.

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