cushman & wakefield - the uk flexible …...source: cushman & wakefield research figure 6:...

THE UK FLEXIBLE EVOLUTION CONTINUESA RESEARCH & INSIGHT REPORT

COWORKING 2019

www.cushmanwakefield.co.uk

CONTENTS

INTRODUCTION 01

CENTRAL LONDON COWORKING STATS 03

REGIONAL CITIES COWORKING STATS 11

COWORKING: LANDLORD REACTION 15

COWORKING: WHAT DO OCCUPIERS WANT? 19

MYTHBUSTERS 21

CONCLUSION & OUTLOOK 23

RESEARCH CONTACT DETAILS 25

Today, we can look back on two generally positive years for the UK office market, despite the political headwinds. This report aims to explore how the flexible workspace trend has evolved since the end of 2017 and looks to the future for what we can expect from a sector that has continued to dominate headlines.

We look at Central London in detail, as well as exploring key regional cities to take stock of how the UK flexible space market is developing.

FIGURE 1: DEFINITIONS

Whilst the term ‘coworking’ might generate the most headlines, there is considerably more depth to the wider flexible workspace market. Below we have set out the basic characteristics of the three types of flexible workspace currently in the market.

Fixed monthly fee for unlimited access on a first come, first served basis

More limited access on a pay as you go basis

Includes internet access, refreshments, meeting rooms (may be chargeable) and a curated calendar of events

Fixed price per desk/per office for an ‘all inclusive’ offer

Includes reception services, internet access, refreshments, meeting rooms (may be chargeable)

Other services may be provided for an additional charge

A hybrid offer for customers who want their own space but don’t want the commitment associated with managing it

The fit-out and other services can be offered by the landlord or third party provider

Our last report, ‘Coworking 2018: Evolving the Flexible Workplace’, was released at a time when confidence in the UK office market was wavering in the wake of the EU referendum, with uncertainty expected to impact occupier and investor sentiment significantly.

INTRODUCTION

COWORKING SERVICED OFFICES MANAGED OFFICES

1 | COWORKING 2019

CENTRAL LONDON COWORKING

Since the publication of our last report in 2018, flexible workspace operators have accounted for the largest proportion of take-up in Central London (18%). This shows how the flexible workspace industry has become a vitally important component of the Central London office market. Whilst 2017 remains the peak year for leasing activity from flexible workspace providers, there has been continued strong take-up including WeWork’s recent 290,000 sq ft acquisition at 30 Churchill Place in Canary Wharf.

Source: Cushman & Wakefield Research

FIGURE 2: CENTRAL LONDON OFFICE TAKE-UP BY SECTOR JANUARY 2018 – JUNE 2019

Flexible Space

Tech

Banking & Finance

Government, Public & Associations

Professional Services

Media

Retail & Leisure

Legal

Manufacturing & Energy

Other

Insurance

18%

16%

15%12%

11%

8%

5%

5%

4%3% 3%

OF TAKE-UP 18%SINCE JANUARY 2018 WAS BY FLEXIBLE SPACE OPERATORS

3 | COWORKING 2019

Take-up by flexible workspace operatorsin 2018 reached over two million sq ft for thesecond consecutive year, although volumeswere 20% below 2017 levels. Despite thisdecline in take-up, there was a greater numberof transactions by flexible workspace operatorsin 2018, meaning that the average transactionsize fell from 39,560 sq ft in 2017 to 26,010sq ft in 2018. 2019 has started strongly, withover 1.2 million sq ft let to flexible workspaceoperators in H1 across 40 transactions. If lettingactivity progresses at the same rate for theremainder of 2019, flexible workspace take-upcould well exceed two million sq ft for a thirdsuccessive year.


FIGURE 3: FLEXIBLE WORKSPACE TAKE-UP IN CENTRAL LONDON 2009 - 2019 H1

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1

2019

Tak

e-up

(sq

ft)

8 D

EA

LS

14 D

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DE

ALS

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ALS

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DE

ALS

BY FLEXIBLE WORKSPACE OPERATORS IN 2018 WAS 20% BELOW VOLUMES SEEN IN 2017

20% TAKE-UP

CUSHMANWAKEFIELD.COM | 4

One reason that the average transaction size fell between 2017 and 2018 was that WeWork, the most acquisitive operator, took an average of 54,374 sq ft per transaction in the last eighteen months, compared to an average of 68,894 sq ft in the last ten years. Another reason for the overall decline in average transaction size was new entrants

entering the market with a different business model, as can be seen in figure 5. Knotel, who had not acquired space when we wrote our previous report, took an average of 13,103 sq ft per transaction in the last eighteen months. This is a significantly smaller space-take than other more established operators but reflects a different approach to the flexible office market.


FIGURE 4: AVERAGE SIZE OF FLEXIBLE WORKSPACE TRANSACTIONS IN CENTRAL LONDON 2009 - 2019 H1

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 H1

Ave

rag

e D

eal S

ize

(sq

ft)

5 | COWORKING 2019


FIGURE 5: FLEXIBLE WORKSPACE OPERATORS AVERAGE DEAL SIZE 2009 - 2019 H1

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

WeWork TOG i2 O�ce Spaces LEO Knotel

Sq

ft

2009-2018 Average Space-Take 2018 & 2019 H1 Average Space-Take

AVERAGE TRANSACTION SIZE FOR FLEXIBLE WORKSPACE OPERATORS IN 2019 H1

30,227SQ FT



FIGURE 6: FLEXIBLE WORKSPACE TAKE-UP IN CENTRAL LONDON BY SUBMARKET BETWEEN JANUARY 2018 - JUNE 2019

0

100,000

200,000

300,000

400,000

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Sq

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As can be seen in figure 6, the City Core has been the most active submarket since January 2018, with a total of 27 flexible workspace transactions totalling 691,570 sq ft taking place. Canary Wharf was boosted by WeWork’s deal at 30 Churchill Place, which accounted for nearly 290,000 sq ft. Midtown was the next most active with 13 flexible workspace transactions totalling 394,508 sq ft.

City Core has been the most active submarket for flexible workspace take-up since January 2018.

7 | COWORKING 2019

FIGURE 7: FLEXIBLE WORKSPACE TAKE-UP IN CENTRAL LONDON BY SUBMARKET (AS A PERCENTAGE OF SUBMARKET STOCK) JANUARY 2018 - JUNE 2019

Fit

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ia

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-20

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1 F

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e-up

as

% o

f S

tock


Figure 7 shows the same take-up data but as a percentage of the total office stock for each submarket. This method shows very different trends, with Fitzrovia attracting significantly better activity than the other submarkets, where flexible workspace take-up accounted for 7.3% of office stock since January 2018. Figure 7 also shows the comparatively strong performance of certain fringe submarkets such as Paddington, Battersea & Nine Elms and White City.

Fitzrovia was the most active submarket for flexible workspace take-up when weighted by total office stock.


The continued leasing activity from flexible workspace operators has increased the overall stock of flexible workspace by 16%, with 12.95 million sq ft in operation at the end of H1 2019. This meant that the proportion of flexible space compared to the total Central London office market increased to 4.80%. This only includes flexible workspace that is currently operating, meaning that operators who have a future pipeline of spaces will increase this proportion further. At the time of writing, the proportion of total stock would increase to at least 5.5% by the end of 2019.

Our previous report, Coworking 2018: The Flexible Workplace Evolves, suggested that flexible workspace would account for 5.5% of the Central London office market by 2022, but it would appear that this threshold will be reached much earlier.

FIGURE 8: FLEXIBLE WORKSPACE AS A PERCENTAGE OF CENTRAL LONDON STOCK

1.51%

2.24%

4.80%

0

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4

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6

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2,000,000

4,000,000

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2007 2012 2019 H1

Per

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e (%

) o

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Sq ft

Total flexible workplace stock Flexible workplaces as a percentage of total stock


9 | COWORKING 2019

THE FLEXIBLE WORKSPACE SECTOR WILL ACCOUNT FOR AT LEAST

IN CENTRAL LONDON BY THE END OF 2019

5.5% OF TOTAL OFFICE STOCK

REGIONAL CITIES COWORKING STATS

Take

-up

(sq

ft)

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2013 2014 2015 2016 2017 2018

Fle

xib

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ork

spac

e as

% o

f Tak

e-up

Birmingham Bristol Cardi� Edinburgh Glasgow

Leeds Manchester Newcastle Flexible Workspaceas % of total take-up

As the flexible workspace market becomes more crowded, where do the opportunities lie?Take-up of traditional office space by flexible workspace providers has grown significantly in the last few years. Almost 800,000 sq ft of new space across the major regional markets was acquired by flexible operators in 2017 and 2018, compared to just 100,000 sq ft in 2016.

This trend is set to continue, driven by an evolution in both working practices and growth sectors across the UK.

In the last five years, high-skilled outsourcing has been the main source of jobs and business growth in the UK regions:

• Back office functions are being outsourced to small, highly skilled and tech-orientated specialists

• Demand for consultants is growing as companies look externally for help to transform their business in a digital world


FIGURE 9: ANNUAL FLEXIBLE WORKSPACE TAKE-UP IN THE REGIONS

11 | COWORKING 2019

Source: NOMIS/Cushman & Wakefield Research

FIGURE 10: MICRO AND SMALL BUSINESS COUNTS IN THE UK

Legal

Computer Programming

Real Estates

Accountancy

General Scientific Activites

Engineering

Computer Consultancy

Consultancy

Business Support Services

1,000 100500 2,000 0

First Second Third The Rest

No. of Businesses

Small (10 to 49)Micro (0 to 9)

Figure 10 shows the change in the number of micro and small businesses in the UK; those functions which would traditionally have been paid for and housed as ancillary operations are no longer being resourced in-house.

However, it is important to note that the growth of flexible working has not been uniform across the UK. Some areas have proved more successful at attracting flexible workspace providers than others.

Birmingham is leading the pack and is likely to see an increase in 2019 as a number of particularly large lettings to WeWork enter the figures.

However, other cities have failed to attract significant commitments from flexible office providers.

So why have some cities attracted a higher proportion of flexible providers than others?

Our research shows that take-up by flexible workspace providers is focused on those areas providing the highest volume of quality grade A space; those areas with a tight pipeline of new space will struggle to attract flexible workspace providers.

The relationship between flexible workspace take-up and supply is shown in Figure 11.


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Flexible market share New/Refurbished vacancy rate

In the short-term, there is likely to be little change to these trends. The development pipeline of speculative office space in the majority of the UK’s cities remains particularly thin.

Acquiring suitable stock will be a challenge, particularly at a time when off-plan pre-lets are removing space from future supply at a growing pace. However, in those markets where large, quality buildings can be brought to market, the flexible offering is likely to flourish.

In those markets with very limited space in the pipeline, there are opportunities for commercial developers to lead the market in delivering speculative schemes to address both an undersupply of traditional space, but also a lack of opportunity for the growth of the flexible sector.


FIGURE 11: FLEXIBLE WORKSPACE MARKET SHARE VS NEW GRADE A VACANCY RATE

13 | COWORKING 2019

NEW FLEXIBLE WORKSPACE ACQUIRED IN REGIONAL CITIES BETWEEN 2017 AND 2018

800,OOOSQ FT


COWORKING: LANDLORD REACTION

In our last report in 2018, we identified landlords reacting to the changes in the flexible workspace landscape; with a shift away from the traditional dynamic of landlords simply leasing space to flexible workspace operators on long leases. At the time, many of these new ventures were still in their relative infancy, but there have been a number of developments since. Landlords have several options if they want to enter the flexible workspace market.

THEY CAN BUILD THEIR OWN FLEXIBLE WORKSPACE PRODUCT FROM SCRATCH

THEY CAN BUY A FLEXIBLE WORKSPACE OPERATOR AND INCORPORATE THE PRODUCT INTO THEIR PORTFOLIO

THEY CAN PARTNER WITH A FLEXIBLE WORKSPACE OPERATOR OR THIRD PARTY UNDER A MANAGEMENT AGREEMENT

THEY CAN LEASE SPACE TO A FLEXIBLE WORKSPACE PROVIDER WITHIN A BUILDING OR THEIR WIDER PORTFOLIO

1

2

3

4

BUY

PARTNER

LEASE

BUILD

15 | COWORKING 2019

LANDLORD FLEX OPERATION

We are trying to create a balance

between flexible space and traditional space

on our estate.

We have let space to a flexible provider in the past, but our focus is on our own

brand now.

Landlord quotes on coworking:


GREAT PORTLAND ESTATES BRITISH LAND

Great Portland Estates are now operating over 100,000 sq ft of coworking or flexible space, accounting for nearly 5% of their portfolio. With over 130,000 sq ft of additional flexible space being appraised, this proportion could rise to over 10%.

British Land have continued to expand their Storey product across Central London, which originally launched in 2017. By the end of 2019, Storey should be operating across 316,000 sq ft. British Land have also launched Storey Club, which will provide additional space for existing Storey members on a completely flexible basis.

HB REAVIS

HB Reavis have now opened their first HubHub location at 20 Farringdon Street, with 34,000 sq ft of flexible space located across four floors. The space targets freelancers, start-up, scale-ups or established companies, and members can take fixed desks or private offices. HubHub offer networking events, business support and access to collaborators, in what they call a ‘grow-working’ approach.

THE CROWN ESTATE

The Crown Estate have also entered the market with their first fully flexible space at One Heddon Street. The new space offers 350 desks with a range of membership options. There is access to shared amenities such as meeting rooms, concierge services and a private roof terrace. One Heddon Street also has a strong focus on the wellbeing of its members, with features like adjustable sit/stand desks and extensive natural light.

LANDSEC

Landsec have launched their flexible offering ‘Myo’, which has opened at 123 Victoria Street in Victoria. Myo offers flexible office space with customisable fit-out for companies of 10-100 people. So far, Landsec have secured two tenants to Myo; MedAccess and The Communication Group.

BLACKSTONE

Blackstone acquired the majority stake in The Office Group, with a view to funding the European expansion. The Office Group has continued to expand within the Central London market and has now also acquired two sites outside of London; in Bristol and Leeds.

17 | COWORKING 2019

These developments represent the continued change in the UK office market, where Landlords are desperate to offer the same level of flexibility as flexible workspace providers; something that occupiers have now come to expect. One challenge is that traditional landlords will struggle to compete on scale with the established flexible operators, however we anticipate the growth of landlord operations to continue.

BROCKTON EVERLAST

Brockton Everlast made a significant investment into Fora, who describe themselves as ‘pro-working.’ Fora are now operating 11 workspaces in Central London.

It is increasingly important to get

growth companies into our portfolio.

We believe that flexible providers shouldn’t be the

dominant occupier in a scheme as it’s

about balance.

Landlord quotes on coworking:


COWORKING: WHAT DO OCCUPIERS WANT?

In this section, we speak to Amy Taylor from our Serviced Office Advisory team, who sheds some light on the evolving needs of flexible workspace occupiers…

Is there sufficient choice for occupiers in the flexible space market?

Yes, there is lots of variety in terms of choice of offering. The availability is there but occupiers need support finding it. There is now an increasing diversity of offering from flexible workspace operators.

How important is the idea of community within a flexible space?

It is becoming less important as the size of occupier using flexible workspace increases. However, for smaller occupiers the benefits of community within a flexible workspace can be invaluable.

What services or amenities do occupiers want that they can’t get at the moment in London or the UK?

None – there is always a solution!

Do you think the needs of a flexible workspace occupier have moved on since our last report at the end of 2017?

The scale of the market has increased. The flexible space market is now competing equally with traditional space.

What is the most important factor for occupiers looking to take flexible space?

This is different for every occupier!

Are operators able to provide the level of amenity that occupiers want?

More so compared to a typical traditional lease. In a serviced office environment, the operator maintains the amenities, whereas in traditional office space the responsibility lies with the tenant.

Do you think that the flexible market shares similarities with the hospitality market?

The flexible market IS the hospitality market. The flexible operator provides everything, much like a hotel – the operator can provide everything the occupier wants. If the occupiers aren’t treated like VIPs, they will go elsewhere.

19 | COWORKING 2019

MYTHBUSTERS

There are a number of misconceptions about flexible workspace that have persisted over the last few years. We would like to take this opportunity to dispel some of them.

Some coworking spaces can indeed be noisy, as can any open plan office for that matter. However, the majority of flexible workspaces provide a mixture of spaces for different activities i.e. soundproofed meeting rooms, breakout areas and ‘pods’ where individuals or small groups can make calls or conduct collaborative work without disturbing those around them.

It’s unlikely that we will see every company opt to locate in a coworking space. Almost inevitably, we will see continued growth in the flexible workspace market, both in London and in regional cities, but there will still be a role for ‘traditional’ offices to play. What is more likely, however, is that traditional landlords will incorporate even greater flexibility into their portfolios, providing some (or hopefully most) of the benefits of flexible workspace to their tenants.

Coworking spaces are too

disruptive and noisy

Isn’t everyone just going to be working in a flexible

workspace in 10 years’ time?

Whilst start-ups and small businesses clearly play a significant role in many flexible workspaces, larger more established corporates have been attracted to take flexible workspace in recent years to take advantage of the direct and indirect benefits. Tech giants such as Facebook, Apple and Amazon have all acquired flexible workspace, but it is not just tech occupiers who are looking to add some flexibility to their portfolio. Banks such as Santander and HSBC, as well as professional services firms like Grant Thornton, have opted to acquire some flexible workspace in addition to their traditional offices. Established companies moving into flexible workspace don’t just get the inherent flexibility of occupation, but also access to a network of freelancers and innovative businesses that create a potentially more dynamic environment for their employees.

Flexible workspace is just

for start-ups/small businesses

21 | COWORKING 2019

It is true that cities are often the most mature flexible workspace markets; this is very much the case with London in the UK. However, we are starting to see flexible operators set up further away from city centres. One example is Accrue Workplaces, who have recently launched a coworking space near Cobham in Surrey, with the simple aim of providing ‘coworking, without the commute.’ By providing the coworking space in a popular commuter hub, they aim to give start-ups, SMEs and professionals the ability to stop travelling into Central London.

This might be the case in small single site coworking spaces, but for the larger operators such as WeWork, the flexibility on offer includes the ability to grow. WeWork’s website says ‘One of the benefits of month-to-month flexibility is that members can add space at any time. Members have priority to mover internally and to new WeWork locations as they open.’

This couldn’t be further from the truth. There will often be some shared characteristics such as the availability of meeting rooms, a community programme or even a user mobile phone app, but the reality is that there is an increasing variety in the flexible options being marketed. Some of the larger operators, such as WeWork or Spaces, may well adopt a certain blueprint for their locations, but each building will have its own unique characteristics. The flexible workspace market has relatively low barriers to entry (particularly in the case of pure coworking) so flex providers must differentiate themselves to remain competitive.

All flexible workspaces are

pretty much the same

Flexible workspaces only work in

big cities

It’s easy to outgrow a

coworking space as a business

expands


The flexible workspace market has continued to grow and diversify over the last eighteen months, with further commitment from operators, occupiers and traditional landlords. It is worth considering that whilst we have witnessed accelerated growth in the last few years, the flexible workspace market in its current guise is still in its relative infancy.

CONCLUSION AND OUTLOOK

Our main conclusions from the report are:

Flexible workspaces will account for at least 5.5% of Central London office stock by the end of 2019, which is three years sooner than our previous report had predicted.

The sector looks set to continue to grow and diversify, with WeWork’s IPO an obvious ‘one to watch.’

Outside Central London, Birmingham and Manchester are anticipated to mature as flexible workspace hotspots, whilst Bristol remains an opportunity for operators.

The general lack of new supply in both the Central London and Regional office markets could prove to be a barrier to continued growth at the rate we have seen in recent years.

The flexible workspace sector will continue to drive change in the UK office sector as the lines between office and hospitality blur further.

23 | COWORKING 2019

CHRISTOPHER DUNNASSOCIATE DIRECTOR

T +44 (0) 20 3296 4119E [email protected]

JESSICA TSANGDATA ANALYST


RESEARCH CONTACT DETAILS

Copyright © 2019 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. CUS42001271

HAYLEY ARMSTRONGSENIOR INSIGHT ANALYST


PATRICK SCANLONHEAD OF UK OFFICES INSIGHT


OUR RESEARCH SERVICESCushman & Wakefield is known the world-over as an industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position. In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, Cushman & Wakefield also provides customized studies to meet specific information needs of owners, occupiers and investors.

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cushman & wakefield - the uk flexible …...source: cushman & wakefield research figure 6:...

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