Fact Check: Coworking Is Not Killing The Small Office Leasing Market

Contrary to what might seem logical, the flexible office sector is not killing the traditional market for small office leasing transactions. But it is radically changing it.

Across London in 2018 to date, sub 5K SF transactions represented 78% of the total deals by number, according to new data from Colliers International. This figure is up from 69% in 2015 and represents the third year in succession that the figure has risen, as tech startups and scale-ups continue to grow and focus their activity on the London market.

In fact, 57% of all London office leasing deals by number were for spaces of 2.5K SF or smaller.

Because smaller companies are increasingly demanding more flexibility, average lease lengths are dropping, and will fall to five and a half years by the end of the year, Colliers said.

Colliers said this growth in demand for smaller units flies in the face of anecdotal evidence that the flexible office market in London, which grew by 19% in 2015, 12% in 2016 and close to 20% in 2017, is draining the conventional office market of "new blood".

“We are seeing demand for flexible office space under 5K approaching an all-time high,” Colliers Director and Head of London Office Occupier Advisory Stuart Melrose said. “Many startups and scale-ups will have dipped their toes in the serviced offices water, only to decide that conventional office space offers more concrete branding opportunities and sends a more sophisticated message to potential clients.
 
“We are witnessing a structural change in the occupation of office space which is being driven by the appetite for shorter lease lengths and demand for flexibility.

 “The appetite for flexible office product is also at an all-time high which is engendering an appropriate response from conventional landlords, many of whom are currently on a charm offensive that it is here to stay. This is set to create a yet more conducive environment for smaller occupiers in terms of availability of product and occupational flexibility.”

While it is good news that the market for smaller occupiers is rich and varied, falling lease lengths could be bad news for developers.

“While a hub of activity is great news for existing stock, this downward pressure on lease lengths could prove problematic for prime new development stock for which landlords/developers typically require minimum 10-year commitments, and could be a contributing factor to the dearth of new development in the City core,” Colliers Director of Research and Forecasting Guy Grantham said.