The evolution of the office market: how the demand for flexibility is changing the landscape
The rise of flexible office solutions, or ‘flex space’, is one of the most notable trends of recent years. What impact has it had on the office market? And what is the suite of options available to occupiers as demand returns?
7 minutes to read
In a recent episode of Commercial Conversations, we discussed these ideas with James Nicholson, a Partner in our London Office Agency team and a Director of Yours; Toby Pritchard-Davies, a Partner in our London Office Leasing team; Amanda Lim, Partner and Head of our Flexible Offices Solutions team; and Jack Tomlin, a Partner in our London Tenant Representation team.
What is driving the demand for flexible office solutions? And what is it about flexible office space that is really appealing to businesses right now?
James Nicholson: For the past 20 years, businesses have been operating in a time of real uncertainty. Whether it's political, economic, technological disruption or digital transformation, the only thing that’s certain about today's business environment is that change is part of the furniture. So, as a business leader, you need an adaptable business strategy, and you need an adaptable real estate strategy that's going to match that.
Put that into the context of real estate and look at the way conventional leasing has panned out over those years. Yes, we've seen some shorter lease terms, but broadly, the model has been the same until we saw the arrival of flexible office solutions. It's not just about their short-term nature, it's also the fact that these were fitted, which meant that it is extremely convenient to take the space. You could get in quickly, you could be operational in a short amount of time and they were serviced, too. It’s really hassle-free, and everything's looked after for you, all in a CapEx-light, simple, one monthly transaction or monthly fee.
Jack, from your perspective, what kind of messaging are you hearing from your clients who are starting to think about going back to the office full time?
Jack Tomlin: In terms of the occupiers that we're speaking to, time horizons are getting shorter, and occupiers are demanding more flexibility. There's less uncertainty around headcount, and there's less uncertainty around future working practices.
A lot of occupiers that we're working with have been through the process of a conventional lease in the past, and they've had to do a cumbersome license for alterations or they've had to deal with dilapidations at the end of the lease. Now, the idea of actually just ditching all of that and having a pretty flexible license agreement that sits on two or three pages is quite an attractive proposition.
I've certainly spoken to individuals who don't really have the time or the inclination to choose the colour of their carpet or choose what door handles they want in their kitchen area. They just want to see it and buy it, there and then.
Pre-Covid, the idea of somebody running out of a lease term and having to work from home for a few months was just so unpalatable and incomprehensible, but now businesses are not as afraid of doing that because they've been doing it for eighteen months. And that's allowing people to be a little bit more cavalier about their real estate time horizons and decision making.
Amanda, you're on the receiving end of this demand for flexibility. In your experience, what type of businesses are looking at flexible space at the moment?
Amanda Lim: It's safe to say that all types of businesses are looking at flexible space. We've had global law firms, insurance companies, and private equity firms (who typically have had to have their own private space or private floor) now considering a flexible workspace, because working from home partially is no longer feared.
So, a lot of them are looking for temporary space whilst they scout out their longer-term requirements, such as how much space to take or how long to take it for. I wouldn't say it's a permanent solution for all, but for most, it's a more viable solution for the short-term.
Fast-growth tech companies are still the most common occupiers looking for flexible office space. Purely based on the flexibility they'd get, not just on the lease term but on the ability to scale or decrease in size should there be a need to, in addition to the ability to change the layout, and simply view a space, move in, plug in their laptops and be ready to go. They just haven't got the capacity to think about door handle colours or carpet colours, as Jack said. They just want to focus on their business plans.
Toby, we've heard a bit about the demand side, and that seems to have gone hand in hand with the emergence of quite a few different serviced and co-working operators. How have the landlords reacted to that growth?
Toby Pritchard-Davies: In the last eighteen months, there's been a significant level of uncertainty in the office market, and that has created a real resurgence of the serviced co-working operators. Landlords have reacted accordingly.
They’ve offered increased flexibility in the form of earlier break dates. They've sped up the legal process by offering short-form leases. They’ve removed barriers such as wayleaves by partnering with third-party providers so that connectivity is instant, and an occupier can plug in as soon as they get there.
Obviously, the biggest reaction we've seen is the move to delivering speculative Category B space, (one category below the highest quality office space fit out). But what's interesting is that it actually comes in a variety of different formats now. Solutions range from partially fitted – such as just a kitchenette, a breakout area and a couple of meeting rooms – to your fully bespoke, ready to go, plug and play office.
But what we've now also seen is a further evolution, with landlords actually taking a slight residential approach. They’re creating a show suite and then giving occupiers the ability to select a variety of finishes so that they can then create their own bespoke unit which is deliverable on another floor within a set timeframe.
In turn, this has meant a move into the managed office market, with some landlords like British Land offering Storey or Landsec delivering their new service Customised. Clearly, there are landlords that don't have the ability to do that, nor do they have the appetite to want to set up their own separate business that offers that function. So, they're partnering with third-party providers like Yours, which James runs, which allows them to tap into that part of the market and expose their buildings to a larger occupier base.
James, how did the managed office space model emerge, and what is the target market of that kind of product?
James Nicholson: It is very much an evolution of things that have happened over time. On the one hand, you had the conventional office to start with, then in came the serviced office operators offering that flexibility, then landlords responded (as Toby has said) by starting to deliver more Category A class or Category B products.
Serviced office operators also recognised that there was a demand for larger spaces, and so they started to offer enterprise solutions. And really, the managed solution opportunity sits right in the middle of all of those and offers the best of both worlds. It’s simple, flexible, easy to transact on like a serviced office, but it gives people the ability to tailor their space, make it their own, and run it under their own brand – rather than sitting under the umbrella of an operator. And all of that’s done for you; it’s a fully serviced, fully managed option.
The target market is people who are outgrowing serviced offices and are looking for their own space, or it’s a corporate who's now saying, 'In the context of the environment, I need a bit more flexibility in my portfolio. I don't want to go all the way and have my teams in a serviced office, but I need something that provides that easy-access, flexible solution without us having to go and procure it all ourselves.’
These insights were first discussed in an episode of Commercial Conversations: ‘The Evolution of the Office Market’. Watch the on-demand version to get the full picture.