London’s Flex Market Looks To Life Beyond WeWork
Founder Adam Neumann might want to buy WeWork back, but London’s flex office market is still dusting itself down after the beleaguered coworking giant reached agreements to cut a number of its London locations amid the financial crisis enveloping its global operations.
However, the flex office industry that blossomed following WeWork’s disruptive arrival remains alive and kicking, and demand for flexible offices remains robust. Even as the biggest player in the industry was heading for bankruptcy, the average price of a flexible office desk in London was rising, according to data from Savills.
“If we look at the positive impact of WeWork, then it changed tenant expectations of what is possible. You don’t have to work for Google to be in a cool office,” Landsec Director of Flex Office Natasha Morris said. “The negative is that the recent contraction has perhaps reinforced some entrenched landlord views of the flex office sector, especially those who have been burnt before. But in reality, the market is in a very different place.”
Indeed, not all flex offices are built the same, and location, transport links and asset quality look likely to prove decisive, as does how landlords take forward flex office arrangements. As is the case in the traditional office sector, the best can expect to do well, while the rest will have to work a lot harder.
Cal Lee, head of Savills' flex office consultancy, Workthere, pointed to robust occupancy in London from its surveys and said pricing in London was up overall, with the best space performing particularly well. In London, average prices stand at £787 per desk, a 16% increase year-on-year and up 30% compared to 2019, according to Workthere data.
“Ultimately, there was a bit of a shortage of flex, certainly in the West End,” he said. “And that is driving up prices at that top end of the market. So far this year, the market prices are remaining more flat, more stable. It is more competitive. So it's fair mirror, really, of what we're seeing on the larger market, where buildings in good locations are doing well while there on the fringe or older buildings are more challenged. Generally, they have struggled.”
Late last year, Knight Frank polled 25 major flexible office landlords and operators, including Landsec, British Land, Great Portland Estates, The Office Group, Uncommon, Landmark, Argyll, The Boutique Workplace Company and Beaumont. In all, 84% had expanded their London portfolios in 2023 and 96% planned to grow their footprints in 2024, with two-thirds targeting locations in the West End and 16% eyeing the City.
However, those offering flexible space can expect pickier occupiers who have become more knowledgeable about their options and want to ditch fads for more collaborative spaces, according to Knight Frank UK Head of Flexible Offices Amanda Lim.
“Occupiers are a lot more aware about their options,” Lim said. “Beer taps, pingpong tables and loud music in reception might have been cool and new, but currently, people going back to an office want more collaborative workplaces. They want spaces that have lots of different options, whether making a Teams call or liaising over a project. So I think newer spaces and older ones being refurbished will change because Covid has changed work drastically.”
She said the occupant market remains heavily impacted by the pandemic, despite Knight Frank’s research indicating that occupancy across most portfolios is above pre-2020 levels.
“Many companies are still using flexible office space to allow for changed work patterns — for example, taking a 10-person office for a 20-headcount business — and using additional coworking spaces on overflow days,” Lim said.
While some landlords have been burned by the contraction of WeWork, most have returned to market, leasing to new operators, offering space under their own flexible brands or signing management partnerships. The chosen routes to delivery often depend on whether the asset is a long hold or there is a divestment plan, Lee said.
“After what happened with WeWork, landlords understand that a lease from an operator might not be as secure compared with management agreements,” he said. “And then they have more control about the delivery of the space and the type of contract they enter into.
“But ultimately, the challenge comes down to valuation. It depends what type of landlord they are and what plans they have. They're still very much in the early education phase of understanding what management [agreement] means for value. We need more agreements to give investors confidence.”
The market is in a second wave, after WeWork, in terms of what a serviced offer could be, Lee said. Landlords that are going to be traders have to think about who the operating partner is because when they exit, they need that operating partner to stay in place.
Stepping Into The Void
Major landlord Landsec recently announced the expansion of its flexible office business, Myo, with space in King's Cross and at Lucent, Piccadilly Lights.
Landsec's Morris said that companies are not looking for flex offices to solve an immediate problem. Instead, they are using flexible space for strategic reasons. Some professional services companies are retaining their main offices but opening flexible offices nearer to key clients.
She said the company is looking at further opportunities, with some of its offices running at full capacity.
“The traditional office markets of Mayfair and the City remain in high demand, but we’re seeing King's Cross becoming really strong, and we are now in a position where office space at St. Paul’s in the heart of the City is cheaper than at King's Cross,” Morris said. “The South Bank is another hot spot, but it’s not only location. Tenant requirements have become very granular.”
“Landlords have seen flex as part of the ecosystem. They've seen that you need to be able to provide flexible space to incumbent tenants,” Lim said. “Most of the major landlords are creating their own offer or partnering with a provider on a management agreement. It’s not the traditional, old-school, ‘Here's a 20-year lease. Take the space, and we want nothing to do with your tenants.’”
Lim highlighted King's Cross for Big Pharma and health tech, Waterloo and the South Bank, and the area around Liverpool Street Station as hot spots because companies used to working from home are opting to simplify journeys to the office.
“Right now, even a short walk from a station or a tube ride might put some tenants off,” Lim said. “So I don’t think the market value for desks is changing, but it’s moving around. For example, Farringdon five years ago was a more cost-effective location, but with the Elizabeth Line and all the new development, the price has gone up a little.”
On average, The Instant Group saw transacted rates remain stable in 2023 across the UK, with a slight increase in London compared to 2022.
But not every part of the London market fared the same, with coworking spaces in particular under pressure and seeing rates decline.
“But there is huge variation in the market,” Instant Group Head of Research and Insight James Rankin said. “For instance, in King's Cross, The Instant Group achieved rates closer to £950, while in Midtown and the City core, they remained in line or slightly above the wider City average.”
Premium spaces continue to perform the strongest, with rates among premium providers reaching £1,170 per desk per month in certain areas of the City.
“Landlords remain cautious regarding service-led space, but the majority are seeing demand grow,” Rankin added. “The ability to understand the risk-and-reward dynamics within the industry still remains a challenge, but with increasing data becoming available, this challenge is being overcome.”
Workthere's Lee said the WeWork scenario has yet to fully play out, which means there could be more adjustments to come.
“There's also going be a bit more consolidation over the course of the year,” he said. “There's more of the fallout to happen from WeWork. So we'll have to face up to some of that at some point.”
“But as ever, challenges for one are opportunities for others, and I suspect there are a lot of midlevel players who are desperate to seize that opportunity. Prime spaces look secure. The question mark is about some of that budget space.”
