The rise of co-working is creating structural change in the office industry. This is threatening some landlords' model of institutional leasing on inflexible terms, but is provoking a response from others who are embracing this change.
The rise of co-working, exemplified by entities such as WeWork, is creating structural change in the office industry.
This has been dominated in the UK by, but not limited to, London. Research by Coldwell Banker Richard Ellis (CBRE) has found that flexible office providers (a catch-all term combining co-working and more established serviced office operators) drove almost 20% of leasing volumes over the last year compared to an average of 4% over the previous 10. This activity has been correlated closely with a decline in the leasing of smaller units from the established market. Going forward, there is an expectation that a greater proportion of larger, more corporate, deals will be served by flexible operators, further changing the market function.
In this context institutional landlords risk being perceived as the ‘old guard’; preferring all dealings with occupiers to be arms-length via intermediaries, and only offering long leases on rigid terms. And customer service? That’s for other industries, surely…
Whilst there are a range of views on the prospects for WeWork as a business, there is no doubt they are responding to a desire for greater flexibility, a curated atmosphere and customer service. This is pushing landlords to reconsider how they service voids and provide flexibility. Responses to the broader shift have varied substantially from doing nothing to launching competing co-working spaces at scale. Within these two bookends, there are a variety of options, including a greater acceptance of leasing space to flexible operators via traditional models; or quasi-managed solutions which involve embracing the income risks of co-working (high churn, short-term leases, uncertain voids) but outsourcing the intensive management operations, with a shared upside.
There may be no single 'right answer'. Approaches are determined by each company’s risk tolerance and the wishes of their investors. However, what has become clear to us is that a significant proportion of occupiers have been tempted into flexible office provision by the speed and ease of the leasing process offered; not necessarily by the fit-out, shared experience and lively environment on which many providers brand themselves.
At LGIM Real Assets we manage around £4.3 billion of office property across the UK and keep a very close eye on the risks to, and opportunities for, this capital. Indeed we are looking at offering prospective occupiers speed and flexibility in taking space, while retaining the benefits of leasing from a well-respected and established institutional owner and having control over the accommodation and design. This would be aimed at reducing the friction of the leasing process as much as possible. More details on this will be released in due course.
We are also well aware that in the era of social media, heightened demand for customer service differentiation, wearable tech and health consciousness, occupiers are far more aware of their environment than ever before and are more prepared to publically criticise those providers who get it wrong, whether in the physical provision of the space or the service levels running it.
Indeed, RealService Ltd, a consultancy, quotes survey results showing that four in five occupiers in a co-working space say their landlord (the operator) is responsive. This compares with one in five within traditional offices. Giving customers what they want has never been more important and the industry cannot hide behind intermediaries and inflexible leasing structures any longer.
This is a good thing and was long overdue before co-working came on the scene so aggressively. Giving traditional operators a nudge in the right direction should encourage greater performance differentiation based on service and efficiency - and opportunities for those who embrace it. Thank you, WeWork.