Ingleton Wood's new London home
The multi-disciplinary property and construction consultancy have relocated, creating a showcase office that provides a flexible and collaborative workspace for staff.
There is a modest body of evidence that all is not entirely well. Already this spring Regus-owned IWG revealed a profits fall and plans to close some of its UK offices.
Earlier, in February 2019, the Regus subsidiary running the 71,000 sq ft business centre at Heathrow Stockley Park applied for voluntary liquidation after it emerged it had not paid any rent since the start of October 2018.
And it’s not just Regus/IWG with some serious thinking to do. WeWork, the barnstorming poster-child of the coworking revolution, suffered a sudden jolt of financial reality in January 2019 when Japanese funder, Softbank, decided to slash its investment. According to the Financial Times, the value of the investment plunged from $16 billion in late 2018 to $2 billion.
Meanwhile, a flood of new entrants to the coworking and flex-space market has left everyone wondering how they can compete for customers in such a crowded market. This reporter discovered how deep the crisis was on a mid-week morning in Manchester: one coworking operator had taken to leafletting passers-by to drum up business.
Birmingham is probably the best place to measure the market. That is because growth in serviced and flexible floorspace has been rapid but, so far, without the turbo-charged effect of a WeWork presence. WeWork is understood to be close to taking three new hubs in the city, including 96,000 sq ft at Brindleyplace, with further outlets at Snowhill and Paradise Circus.
Is Birmingham excited? Well, er, not very. Charles Toogood is Birmingham-based National Head of Offices at agency, Avison Young, and he says the mood is fairly cool.
‘The city is probably less excited than Manchester or London,’ he says. ‘Maybe that is because we have more professional occupiers, who don’t much use coworking, and Manchester and London have more creatives and media, who do?’
Charles says a wave of acquisitions and new openings by serviced and flexible office operators have gripped the city. But once WeWork has landed, and The Office Group has chosen a spot, he reckons that market will be saturated. ‘There isn’t scope for much more. The atmosphere is already very competitive, the longer-established centres will have to invest and upgrade to compete, and they will drop out of the market if they don’t. Whilst the question for the newcomers is how they weather a period of over-supply of flexible floorspace.
‘The challenge in Birmingham will be how to make it pay if they are charging up to £400 per desk per month, but have to pay rents of £30 per sq ft. It is difficult to see how they square that.’
As if that wasn’t bad enough, traditional landlords are now getting in on the flexible workspace act – and unlike the WeWorks of this world, they do not have the same financial pressure to balance leasehold rent and flexible monthly charge.
Meanwhile, a flood of new entrants to the coworking and flex-space market has left everyone wondering how they can compete for customers in such a crowded market
‘Bruntwood have launched their Made & Managed brand. Legal & General have launched their Capsule brand. They can do this very cost-effectively because there is no middle man. The landlords have woken up to this,’ says Charles.
Andrew Berry is Associate in the office agency team at Cushman & Wakefield. He says that, whilst occupier appetite for flexible workspace shows no sign of drying up, the supply-side market could have peaked.
‘It’s either a peak or a plateau, but either way I doubt there is scope for more new entrants to this market,’ he says.
‘This is a changing market – we’re probably at the top of the property cycle – and this means entrants to the serviced sector are joining at the highest prices. At the same time as they are paying top prices, occupiers want value for money along with amenities and coworking options. The outcome is that landlords are responding to this interest in serviced and flexible space, and that means less space for flexible office providers.’
Andrew says that the coworking revolution has largely done its job, because flexible is the new normal in the office leasing market. And if you can get flexible directly from your landlord, why go to the middleman of a flexible office provider?
‘You can look at the numbers and say total serviced office occupation will rise in cities like Birmingham from around 7% of floorspace to as much as 20% of floorspace, but at the same time we’re seeing a change in everyone’s mentality and the boundaries between flexible and normal floorspace are blurring all the time,’ Andrew says.
He also predicts a backlash against the sometimes confusing pricing structures of the flexible operators. ‘There are pitfalls to serviced office,’ he warns darkly.
This is a changing market – we’re probably at the top of the property cycle – and this means entrants to the serviced sector are joining at the highest prices
So we have reached Peak Flex? Hugo Denee is Managing Director of Squarstone Growth, who have a £225 million UK office portfolio, which they are hoping to grow by another £100 million in the next 18-24 months. Recent acquisitions include the brutalist Mountbatten House, Basingstoke, due for a £20 million conversion into a 160,000 sq ft office hub.
Hugo says the secondary office market is indeed changing thanks to serviced and flexible workspace, but that landlords of all stripes (not just serviced office operators) will benefit.
‘Everything is shaped by the emergence of WeWork, who forced landlords to put more amenity into their office buildings, and by the desire of tenants to make their offices as exciting and interesting as possible to attract and retain staff. How places look really matters these days,’ he says.
‘But there are problems with the flexible operators. For instance, we have our Manchester office in a WeWork hub and it looks cool on the outside, but inside it is really awkward. We have a small windowless box and, whilst the free beer is great, do you really want your office to smell like a student hall of residence?’
The solution is short leases in well-designed office buildings, marketed by Squarestone as the ideal solution for any business that feels it has very slightly out-grown the flex-space offer of WeWork and its imitators.
‘Flexible offices is a lovely solution for some businesses, but it soon gets expensive. So we offer all the things flexible workspace offers, from cafes, breakout zones, nice furniture, booths, really good cycling hubs so you can store and fix bikes and change and shower without having to do it all in the disabled toilet…that’s what we offer,’ says Hugo.
Maybe this adds up to The End of Flex. Or maybe it just means the property market has learned its lesson from WeWork and the office market will settle down? As the UK economy faces increased risk of a slow down in 2019 and 2020, and flexible operators find their business model tested to destruction, we will soon find out.
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