As WeWork seeks to renegotiate its global portfolio leases, Paul Anglo, head of flexible office solutions, and Josh Arnold, office research, share five lessons for the future of flex space.
WeWork is reportedly seeking to renegotiate leases across its global portfolio. While there is still a lot we don’t know about how that process might pan out for their UK or London locations, we can already make some definitive statements about the future.
WeWork’s rise to become one of the UK’s largest private sector office occupiers and its subsequent retrenchment raises important questions for property investors.
Has the flexible working model been found to carry flaws? What impact might a less acquisitive WeWork have on London vacancy rates? And how might the sector develop now that one of its biggest names has raised doubts about its ability to continue trading?
WeWork is reportedly seeking to renegotiate leases across its portfolio spanning 781 locations in 39 countries. There’s still a lot we don’t know about how that process might pan out. However, we can already make some definitive statements about the future – particularly what this suggests about how demand for offices is changing, which post-pandemic work trends are proving stickiest, and what the flexible office sector will look like five years from now. We think they can be summarised into five themes:
Demand will continue to outstrip the supply of grade A buildings
No landlord wants an empty building, but WeWork’s portfolio is almost entirely spread across prime, grade A, city centre buildings of the sort modern occupiers are competing for in this ESG and post-Covid environment.
Prime rents in the West End, where the trend is most pronounced, surged 11.5% in the past twelve months, suggesting there is a deep pool of demand for well-located buildings with strong ESG credentials. In the event that WeWork ceases to trade, which according to the company is still only a possibility, there may be a temporary uptick in Central London vacancy, but it will be small - from 8.7% to 9.5%, according to Bisnow analysis of Costar figures. If WeWork does opt to vacate leases, we expect new occupiers to step in relatively quickly.
Flexible workspace is still a growth market
Today’s version of flexible working is still in its infancy. In fact, WeWork cited increased competition in the flexible space sector when it warned investors that it had doubts over its future.
That’s showing up in the take-up figures. Flexible workspace occupiers took 194,000 square feet of space across Central London in the first half of 2023, up by more than half compared to the three-year average. Take up in the third quarter looks even better – totalling over 250,000 square feet as of mid-September. That represents the largest quarterly take-up since mid-2019, led by deals from Industrious, Spaces, Runway East and Orega.
Operators also continue to look beyond London for expansion within undersupplied markets. Orega recently secured 30.5k sq ft near Birmingham Airport, following 22.5k sq ft in Newcastle in July and a 5k sq ft expansion in Aberdeen. Cubo has been similarly active in the last six months, opening three sites totalling 43,000 sq ft across Edinburgh, Birmingham and Manchester, while Re-Defined accounted for the largest Q2 2023 office deal in Birmingham.
That’s not to say the sector doesn’t face challenges. The demand for best in class, amenity rich buildings, with strong ESG credentials means that spaces which opened only 5-6 years ago, now seem dated in comparison to the most recent openings. However, there’s little doubt that the flexible workspace sector is still in growth mode.
The demand for flexibility is permanent
The trends that underpinned the rise of WeWork haven’t diminished. Indeed, demand for space that supports flexible workstyles is accelerating.
While it’s true that companies are utilising flexible workspace as they adjust to the post-pandemic world of work, whether via overflow space, satellite offices or fully furnished ‘plug-and-play’ headquarters, we don’t expect demand to wane as the pandemic fades into the rear-view mirror.
Rather, flexibility in every sense now sits at the core of the new world of work. Employees demand it. Companies that offer it have a competitive edge in the war for talent and, according to some studies, a more productive workforce. It’s why many of the country’s largest landlords would welcome the right flex operator into their buildings to include additional amenities for other occupiers, and to provide point of difference. That wasn’t the case only a few years ago.
It’s still all about the right amenities
WeWork has been a leader in the development of modern, amenity-rich office space. It hasn’t always got it right – its decision to stop offering free beer at its North American sites in 2020 made headlines globally, but the company was right about the importance of amenities.
Far from cutting back, amenities are now a central point of competition among operators. Offerings of gyms, bars and wellness programs are proliferating and have proved particularly effective in prompting a more broad-based return to offices.
The challenge for operators lies in ensuring the blend of location and amenity offering is enough to gain an edge without becoming unfeasible.
A more diverse market for flexible workspace is emerging
The flexible workspace sector will look very different in five years. Many of today’s service office operators, for example, will be much larger if they maintain their current growth trajectories – see Orega’s plan to double in size in three years or IWG’s opening of 400 new locations in the first half of 2023 alone, followed by taking on a 55,000 square foot space in Hammersmith in September, previously operated by WeWork.
New entrants will emerge, and their distinct offerings to the various sections of global business will become more tailored.
Developers, too, are becoming an increasingly important part of the picture. Landsec is on track to triple the size of its flexible workspace brand Myo by the end of this year. Meanwhile, GPE is seeking to grow its Flex offering to 41% of its portfolio over the next five years, up from 21% as of May this year.
So, while WeWork might not operate from the same quantum of space across global cities five years from now, there’s little doubt that flexible workspace will become an increasingly common feature in modern office buildings.
This article first appeared in CoStar on Thursday 5th September.
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