The Rise in Flexible Office Space in Europe

According to a report published by JLL, since 2014 the market for flexible office space more than doubled, with the total amount of flexible space in the top 20 largest flex markets globally growing by 30%-equivalent to around 1 million square metres.

Driven by a sea of change in the way we work, it’s estimated that office space will account for 30% of some corporate portfolios by 2030.

An evolving way of working 
The way in which we work has changed. Rapid advances in technology and cloud-based systems have meant that employees no longer have to be at a specific physical location to carry out typical office tasks.

The explosion in the gig economy is also driving a demand for office space that offers more flexible terms. With 1 in 7 people now being self-employed in the EU, founders are looking for space that fits with their start-up, collaborative culture, but benefits from access to all the tech that you would expect including high speed, reliable Wi-Fi.

And it’s not just start-ups. Corporates are also realising the need to attract and retain talent through offering spaces where people want to work – and with a rising millennial and even Gen Z workforce, traditional office environments may not always prove popular.

Demand for flexible space
According to the JLL report, Europe’s stock of flexible space is set to grown by an average of 25% – 30% per year over the next five years. However, while pure-co-working brands have seen an increase in popularity, many of the operators that initially marketed themselves as co-working companies have since adapted their approach for a corporate audience, offering a mixture of tenures for both co-working spaces and more traditional private offices.

Complimenting traditional models 
JLL estimates that flexible space will account for 30% of some portfolios by 2030. However, it’s not a model that suits all. Barriers to adoption include concerns around security, confidentiality and costs.

Brand dilution and the potential impact on company culture is also of concern – if a workforce is dispersed, will this negatively impact on the ability to re-enforce values across an organisation?

For some businesses, it’s clear that fully flexible spaces will not work, which is leading the adoption of the hybrid model mentioned above which can incorporate both ‘co-working spaces’ alongside the more traditional serviced office offering.

What does this mean for investors?
For many organisations, the ability to accurately predict the real estate needs of their business in the longer term means that they are seeking a range of office spaces solutions to meet with varying needs.

For those who invest the rise of flex space is likely to lead to a decline in average lease lengths, particularly in traditionally “long-lease” markets such as the UK.

The JLL report points out “Limited exposure to flexible space has not had a noticeable impact on yields. Indeed, developers and investors may benefit from diversification and the operator’s ability to energise communal spaces. Lack of tenant track record and underlying tenancy risk, however, typically increases an asset’s perceived income risk profile. Buildings where flexible space represents greater than 50% of Rentable Building Area (RBA) have so far traded at a discount. Recent deals on the continent have shown a decreasing yield differential, although the current cycle and the absence of quality investment product will have to be taken into account”.

While the rise in demand for flexible space offers an opportunity, it would be unwise to overlook the traditional market, as Grade A traditional assets in popular locations are still very much at the forefront of office demand in Europe. Therefore, investors should seek to ensure that any commercial portfolio is diverse enough to weather any workplace trend.  

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