CONTINUING THE EVOLUTION OF FLEXIBLE WORKING

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1 CONTINUING THE EVOLUTION OF FLEXIBLE WORKING A Cushman & Wakefield Publication 2015 THE OFFICE AS TRANSFORMING THE WAY WE WORK, SHOP AND LIVE cushmanwakefield.com

2 CONTENTS Introduction 5-6 Major influences on office flexibility 7-10 Evolution of the office as a service Property market trends Size of market 18 Occupancy rates 20 Letting trends 21 Quality of space 25 Average unit size 25 Rental values 26 Where next? 27 Landlord attitudes 27 Outlook 30 Contacts CUSHMAN & WAKEFIELD 4

3 INTRODUCTION Work is no longer about repetitive process but increasingly about connection, interaction and collaboration. The workplace of 15 years ago was primarily driven by cost; the workplace of today is much more focused on the human aspects of work. The idea of having a separate work life and personal life is diminishing and what this means is that our expectations of work are, and will be, different in the future. New behaviours are emerging and collaboration will be the very essence of being located in an office. The traditional office space model is being challenged as organisations seek greater flexibility and an environment that allows them to rethink their approach to their future office needs. One way the office market is responding to this challenge is via the serviced office market. Like most businesses, due to ongoing changes in technology, demographics, working practices and market conditions, the serviced office sector has, and continues to evolve into a competitive alternative for a wide spectrum of organisations. This report considers the importance of the sector to the Central London office market and how it is evolving into the concept of the office as a service. 5 CUSHMAN & WAKEFIELD 6

4 MAJOR INFLUENCES ON OFFICE FLEXIBILITY CHANGING NATURE OF WORK GENERATION Y RISE OF THE INDEPENDENT ECONOMY The office as a service more conventionally known as the serviced office sector has seen phenomenal growth in terms of the number of centres and the office floorspace it occupies in Central London. Its expansion has been fuelled by a number of trends that are permanently changing the way that office space is utilised. The changing nature of work is not a new trend we ve been there before with the move from cellular office to open plan for example, but the speed and direction of change is gathering pace as the influence to new technology takes hold. The integration of technology into the workplace means that work can now be undertaken across a wide variety of locations and the working environment is in a state of flux. There is an increasing recognition that work is really a series of activities, some of which are better suited to being housed in an office building and others that are more suited to different locations. 7 CUSHMAN & WAKEFIELD 8

5 The changing dynamics of the workforce is also a major influence on how we work today and in the future. It is well documented that the attitudes of generation Y and their expectations of the workplace are leading to a change in the corporate mind-set. Workers want significantly more flexibility in working hours and locations, with many workers viewing work and life as being interwoven. Interestingly, studies have shown that this generation of employee not only thrives in highly collaborative workplaces, but is now making this a key requirement in selecting where to work. The sharing economy is also a key characteristic for this generation and this runs right through into how they want to work. As Generation Y become a larger part of the workforce, their influence will be much greater. As such this is manifesting itself in a shift from the traditional to more flexible collaborative workplaces as companies seek to incorporate the values of this generation. The micro economy is a hugely important segment of the London economy that has now established its own identity. The recent economic downturn saw more people setting up on their own, partly as businesses hired workers on a contract rather than a permanent basis, but this was complemented by a revolution in the start-up economy, with increasing numbers, typically but not exclusively young people, wanting the freedom to work outside the traditional 9-5 routine and to challenge traditional business practices. 4.6 MILLION PEOPLE IN THE UK, OR 15% OF THE WORKFORCE, ARE NOW SELF-EMPLOYED THE HIGHEST NUMBER SINCE RECORDS BEGAN. IN LONDON 740,000 PEOPLE ARE SELF-EMPLOYED WHICH IS MORE THAN 1 IN 8 OF THE WORKFORCE MICRO BUSINESSES HAVE INCREASED FROM 73,600 TO JUST UNDER 94, % SMALL BUSINESSES HAVE INCREASED TO REACH 9,500 ESTABLISHMENTS. +21% 9 CUSHMAN & WAKEFIELD 10

6 EVOLUTION OF THE OFFICE AS The serviced office sector has changed and evolved into a wide and sophisticated range of flexible office solutions. The modern day descendants of the traditional serviced office centres continue to play a major part; once the domain of smaller start-ups they are now increasingly seen as an essential resource for larger established businesses and corporates looking to scale up quickly, either for project work or for overflow space. TRADITIONAL SERVICED OFFICES Fully fitted furnished space, in segregated offices-typically conventional office space Allocated space Occupied on a license One fixed charge for the duration of the licence covering all operating costs usually on a cost per desk basis CO-WORKING SPACE Club membership charged annually Typically open plan-informal setting Ad hoc and short term space Price per workspace-hourly/daily/monthly Shared space-not allocated Provision of events/mentoring/business support 10-20% space allocated to social space 11 CUSHMAN & WAKEFIELD 12

7 However right at the cutting edge there is something very special going on; where the worlds of offices, interior design and hospitality are colliding in the sharing economy. More commonly referred to as co-working space, the term catching on in the US that best refers to this sector is OaaS Office as a Service. You need to look at offices as a service in the same way as software as a service: hardly anyone buys servers anymore, they use cloud computing The traditional hallway-heavy serviced office proposition is under fire and being disrupted by cutting edge co-working environments. Property is the next sector coming into the hospitality industry Offices need to be places where you can relax as well as work because you ll probably be spending more time in them than your parents did Second Home But even the term co-working doesn t really encapsulate everything on offer in the market today flexibility is being provided by cutting edge co-working (e.g. We Work), business lounge (e.g. The Clubhouse) and members club (e.g. Second Home) environments.* Add into the mix accelerators and incubators London has 36 programmes currently running (12 incubators and 24 accelerators) and it s easy to see why the OaaS idea is a more appropriate concept. C&W believe that the OaaS encapsulates the direction of not only of co-working operators but also the future evolution of the more mature serviced office companies as they move towards a more hospitality driven environment. Duncan Logan Rocket Space Many struggle to see what the difference between co-working and a traditional serviced office environment really is. Small start-ups or satellite operations taking space on flexible arrangements is as far as the similarity goes. Whilst the service office model has been enduring, it tends to be linear in the benefits it brings to the space provider and the customer. Co-working adds a different dimension to the traditional serviced offices with its emphasis on greater flexibility, business support, collaboration and social events. Typically their business tends to distinguish itself in the type of buildings that they are located in post-industrial conversions that are attractive to the start-up community. Co-working spaces started expanding in the mid-2000s, in response to the changing economy as workers turned to freelancing or started their own businesses instead of joining established companies, but have really made their mark on London over the last four to five years. Cushman & Wakefield Co-working resulted from a shift in the expectations of work and has evolved into a response for flexible spaces but in a community of like-minded people. Freelancers and entrepreneurs no longer face an isolating life working in their own home or coffee shop but they can now come together to share space, network and collaborate in an affordable independent environment, with the advantages of a traditional office. For start-ups and SMEs, many who are faced with uncertain growth and cash flow expectations, flexibility is a key attraction for housing themselves in co-working space rather than sign up to a long term lease. OaaS, whether traditional or coworking space, allows occupiers the flexibility to move in or out, to expand or contract at short notice, unlike traditional office leases. Charlie Green. The Office Group Co-working space is concentrated in large urban areas where the cost of real estate can be high but where there are a large number of start-ups who have located there for the positive effects of knowledge spillover, clustering, and access to capital. The needs of the customer base is reflected in the location of co-working space, usually situated in emerging areas of London and also increasingly in the design of the space. Co-working spaces, such as Second Home in Hanbury Street, are paying increasing attention to the physical environment to create the right working space for its users and the majority, although not all, typically target specific sectors, which helps facilitate greater interaction and cross pollination of services. *(in its widest sense the term co-working will be used throughout 13 the report to refer to the range of office environments ) CUSHMAN & WAKEFIELD 14

8 Analysis of the target sectors stated on promotional material shows that there is a significant focus on the start-up sector, with particular focus on creative and technology sectors in OaaS. Unsurprisingly we are beginning to see the traditional serviced office providers updating their offerings to ensure they are keeping up, particularly as established and well-funded US competitors continue to enter the London market determined to take market share. We have seen Workspace launch their Club Workspace offer, which provides a network of creative co-working business clubs; and the Office Group evolve the design and concept of their offer, including holding networking events, workshops and social evenings aka co-working, while Regus has entered a partnership with British Land to launch third place business hubs in the UK. For many of the traditional operators, this often involves providing co-working space within a larger more traditional serviced office space, which can then be used to accommodate companies who out-grow co-working space. We re trying to get away from Serviced Offices and break it down to just providing great offices, with a range of services that are there only if you need them In short, end users are getting something which makes them want to stay; lifestyle locations that are more aligned to member s clubs for business with a carefully curated client base and events calendar to provide an environment for business opportunities to flourish. Co-Working and collaboration are going to be the fastest trends in growth over the next few years Salimi Khemka We want people to be happier at work Aldenton, Second Home. It could be argued that OaaS operators are at the forefront of the commercial real estate sector. The ability of many of their clients to exit at short notice creates risks but it also creates the need to be nimble to stay competitive. We have seen this throughout the recession, as serviced offices primarily were seen to be a solution for landlords as they struggled to let space, and now this reinvention is taking place in an environment where agility and flexibility are likely to become increasingly important drivers of corporate real estate requirements. Unlike many other shared office companies, we re selling the culture and community as well as the physical space We Work As companies increase in terms of size, it is widely held that innovation and creativity decrease. Many larger companies are examining their business models in a bid to encourage creativity by providing a more unstructured and less centrally controlled environment than their traditional business. The OaaS offers a way for companies to relax their structure and provide a way to remain fluid and flexible and are expected to a strategic tool where employees come together on a short term basis, to inspire and innovate in an environment outside the usual corporate constraints. The Office Group 15 CUSHMAN & WAKEFIELD 16

9 PROPERTY MARKET TRENDS SIZE OF MARKET Central London has one of the largest and most mature OaaS markets across the world. Instant Offices estimate that at the end of 2014, there were some 2,300 centres across the UK of which London had a market share of 12%. The growth in the number of London centres has increased by over 10% during Of this, it is estimated that the co-working segment of the sector stands at around 154 centres in the UK of which more than half are located in London. In fact, according to deskmags latest co-working survey, the number of co-working operations in London has now surpassed New York. Central London office stock. Traditional serviced office operators, not surprisingly, dominate accounting for more than 80% of floorspace. The City has the largest volume of space occupied by OaaS operators (28% of total serviced office floorspace), followed by the West End (25% of total serviced office floorspace). However, in terms of actual number of OaaS operators, the West End has more operators than the City, and C&W estimate that the average unit occupied in the West End is just 14,000 sq ft compared to 22,000 sq ft in the City. C&W estimate that OaaS currently occupy around 8.8 million sq ft of space across Central London. This equates to just over 3% of the 2,300 CENTRES ACROSS THE UK IN % LONDON S MARKET SHARE. OAAS CURRENTLY OCCUPY 8.8 MILLION SQ FT IN CENTRAL LONDON. 3% OF CENTRAL LONDON OFFICE STOCK. 3 NEW CO-WORKING SPACES OPENED DAILY IN 2014 GLOBALLY. 17 CUSHMAN & WAKEFIELD 18

10 STOCK OF OAAS BY LOCATION MAIN OPERATORS SHARE OF MARKET HACKNEY KING S EMERGING WEST END CROSS 340,000 sq ft EMERGING CITY 775,000 sq ft OPERATOR TOTAL SQ FT OPERATED IN CENTRAL LONDON % OF SERVICED OFFICE STOCK CONTROLLED BY OPERATOR PADDINGTON KNIGHTSBRIDGE EUSTON & MARYLEBONE NORTH OF OXFORD STREET WEST END 2.00 msf MAYFAIR & ST. JAMES S SOHO & COVENT GARDEN MIDTOWN msf CLERKENWELL & SHOREDITCH CITY CORE msf ALDGATE & WHITECHAPEL STRATFORD EAST LONDON 330,000 sq ft CANARY WHARF & DOCKLANDS Workspace Group Plc (includes Club Workspace) 1,478,656 17% Regus Limited 1,053,851 12% MWB Business Exchange (part of Regus) 806,173 9% HAMMERSMITH KENSINGTON VICTORIA SOUTHBANK 1.05msf Avanta Business Centres Limited (part of Regus) 609,007 7% WEST END FRINGE 401,000 sq ft London Executive Offices 492,257 6% The Office Group 455,826 5% i2 Offices 405,568 5% NUMBER OF ENTITIES BY BROAD OaaS SECTOR & LOCATION We Work 342,210 3% Business Environment Group 234,340 3% Landmark Business Centres 136,682 2% Office Space in Town 127,294 1% Orega 104,072 1% *Data as at June 2015 West End Fringe East London Emerging West End Southbank Midtown Emerging City Accelerator Space Co-working Serviced offices The provision of flexible business space is a crucial pillar for any successful economy Justin Urqhar-Stewart (co-founder of Seven Investment Management) City West End OCCUPANCY RATES OaaS cannot operate at full capacity, otherwise their business model would breakdown and they would be unable to achieve flexibility of operations. According to the BCA, by operating at between 80-90% of full capacity allows OaaS operators to accommodate the dynamic nature of new and growing companies as well as downsizing companies. It is estimated that Central London OaaS have an average occupancy level of 86%, which C&W estimate to equal around 1.6 milllion sq ft of space available for churning occupiers. However, anecdotal evidence points to many co-working spaces being fully occupied and with waiting lists of companies wanting to work in that space. 19 CUSHMAN & WAKEFIELD 20

11 LETTING TRENDS OVER THE LAST 10 YEARS, A TOTAL OF JUST UNDER 5.0 MILLION SQ FT OF SPACE HAS BEEN LET TO OAAS OPERATORS AND OF THIS SPACE AROUND 610,000 SQ FT WAS LET TO CO-WORKING FACILITIES. Leasing volumes to both traditional and co-working facilities have been on an upward trend since 2009, with co-working space only emerging as an entity around this time. Leasing volumes to the OaaS sector increased by 85% between 2013 and 2014, far surpassing the growth recorded in the wider office leasing market. The growth of co-working brands is also quite evident. Back in 2009, co-working space accounted for just 5% of all OaaS lettings but by 2014 this had increased to more than 20% of OaaS activity in Central London. TAKE-UP BY MAIN OPERATOR OPERATOR SPACE LEASED H1 GROWTH IN FLOORSPACE H1 i2 Offices 405, % Avanta Business Centres Limited 358,489 59% Office Group (The) 388,474 85% We Work 342, % London Executive Offices 183,980 37% Regus Limited 183,890 17% Workspace Group Plc 241,618 16% MWB Business Exchange 156,640 19% Instant Offices Limited 129, % Office Space in Town 127, % Orega 104, % TAKE-UP BY BROAD OaaS SECTOR As the OaaS sector has evolved it has become an increasingly important part of the Central London office occupier base. Between 2005 and 2011, it accounted for a very even 4% of all lettings in the market but over the last few years this has been steadily climbing to reach 11% in To put this into perspective, this was on a par with leasing activity to the banking sector and was more active than each of the public sector, retail & leisure and insurance sectors. Traditional serviced office operators have focused on the core office markets, with 60% of floorspace and almost half of all units leased by the traditional serviced office operators located in the core markets of the City and West End, while Midtown and Southbank have also both been popular destinations accounting for a further 20% of floorspace This trend is continuing into 2015, with almost 500,000 sq ft leased in the first half of the year, which equates to around 9% of total transactions. 500,000 SQ FT LEASED IN THE FIRST HALF OF 2015, WHICH EQUATES TO AROUND 9% OF TOTAL TRANSACTIONS H1 21 Serviced offices Co-working CUSHMAN & WAKEFIELD 22

12 The Emerging City has the largest concentration of co-working floorpsace, with more than a quarter of all floorspace located in this area, with Southbank just behind. However, the difference in numbers really shows the dominance of the Emerging City, with more than half of the coworking facilities located in this area. It serves to highlight the difference in the average size of coworking centre between the Emerging City and Southbank; the latter home to We Work s first centre of 40,400 sq ft in London. The Emerging City includes Clerkenwell, Shoreditch and Hackney which are, of course, home to clusters of digital, technology and creative businesses and who are target demand for many of these co-working operators. The arrival of the larger US co-working brands, who are seeking space in the more traditional parts of Central London, attracted by the availability of larger spaces and the proximity to a wider customer base, has resulted in the volume of space in the City that is classed as co- working increasing sharply in recent months and overtaking areas such as Southbank and Midtown in terms of sq ft. Nevertheless, the explosion in take-up seen during this cycle has been driven by the more traditional serviced office operators. Providers, such as i2, Avanta, Regus and the like, compete in terms of portfolios of signature must have addresses and optional business support services. C&W estimate that 11 companies have leased more than 100,000 sq ft since the downturn in 2009 and, of these, all but one are traditional serviced office operators. We Work is the fastest growing co-working operator in London, leasing 342,000 sq ft to date. It is hot on the acquisition trail in London adding the City and Soho to its first UK operation in Southbank, the latter which had an 80% take up at launch. 23 CUSHMAN & WAKEFIELD 24

13 QUALITY OF SPACE RENTAL VALUES The provision of OaaS space is diverse across Central London and there is a range of varying quality space on offer which satisfies the needs of a wide range of occupiers. Analysing take-up of space over the last 10 years shows that there is a fairly even divide between Grade A and Grade B space let to OaaS, accounting for 56% and 44% of space respectively. The trend to lease Grade A space is very much focused on the traditional areas of Central London, such as the City Core, Midtown and Core West End where arguably there is more Grade A space available than in the emerging areas of the capital. It is no surprise that the proportion of Grade A to Grade B space in the Emerging City stands at 22%/78%, while in comparison the City Core and Midtown s equivalent ratios are both 64%/36%. These letting trends are also governed by the nature of who it is anticipated will be occupying the space and the image/brand of the operators themselves. In every year from 2005, with the exception of 2014, co-working space was more likely to lease Grade B space with just a third of all space being Grade A in 2014 this figure stood at 81% as the larger US co-working operators moved into the market. What is evident that these new kids on the block are really placing emphasis on providing cutting edge design and, along with their larger unit requirements, this focus is leading to the demand for newer space, which allows for a more efficient internal layout. TAKE-UP BY GRADE OF BUILDING 78% City 22% Grade A 36% AVERAGE UNIT SIZE There are just 24 OaaS units in excess of 50,000 sq ft in Central London the largest being We Works most recent 160,000 sq ft acquisition at Moor Place. The average OaaS unit size leased over the last 10 years was just over 15,000 sq ft, with traditional serviced offices at 18,000 sq ft and co-working at 7,500 sq ft. Interestingly, the average size for operators leasing Grade A space was similar for both traditional serviced offices and co-working space at around 21,500 sq ft, with the major variance being for leases in Grade B space, with average unit sizes leased of 15,000 sq ft and 4,000 sq ft respectively. 64% Emerging City Grade B The average rent paid for Grade A space, by OaaS operators, over the last five years, has been just under 50 per sq ft. Reflecting the general growth in rents in the market, the average Grade A rent paid increased from just over 33 per sq ft back in 2010 to just under 55 per sq ft during In 2014, the average rent paid for Grade B space by OaaS operators was around 30 per sq ft a figure that has been relatively stable over the last five years. Considering the average Grade A rent paid by the subsectors in each year, the rental differential between co-working space and serviced office space has increased year on year from a few AVERAGE UNIT SIZE BY AREA/TYPE ( H1) percentage points to a 25% premium paid by serviced offices by This has been driven by the higher rents that the traditional serviced office operators have paid in the West End, while co-working operators tend to be located in the relatively lower cost areas. This gap widens, when all types of space leased is taken into consideration, reinforcing the trend for co-working operators to lease lower cost space compared to traditional serviced office operators the average rent paid by serviced office operators was 40% above that paid by co-working companies, at average rents of 42 per sq ft and 30 per sq ft respectively. City East London Emerging City Emerging West end Midtown Southbank West End West End Fringe Traditional Serviced offices Co-working 25 CUSHMAN & WAKEFIELD 26

14 WHERE NEXT? Central London dominates the offer of OaaS but there is also a shift in areas that the operators are considering, in recognition that new, more cost effective, areas are emerging as start-up destinations and supported by the secular trend for people to work closer to home. The OaaS sector has already embraced areas such as Brixton, Camberwell and Wimbledon and this trend is likely to gather pace as Central London office rental values increase over the next few years. Regus has just announced that it will open up to 30 new centres in outer London, joining operators such as Citibase, Clubworkspace and Bizspace as well as numerous independent and community led co-working spaces. The short term nature of the occupier base and the impact of the turnover of occupiers on OaaS operator s income stream has been a concern to landlords, particularly in the event of a downturn, but the sector would argue that this is exactly when occupiers seek greater flexibility from their real estate. According to research undertaken by the BCA over 30% of customers stay in centres for over 2 years which suggests a reasonably consistent customer base, with the median stay between 7-12 months. There is evidence in the market that some investors are beginning to see OaaS as a separate asset class now that there is a greater understanding of the sector s business models and associated valuations. LANDLORD ATTITUDES Where London s most prominent landlords have previously shied away from the sector, the scale of take up simply cannot be ignored. The changing landlord sentiment is abetted by the willingness of many serviced office operators to provide their landlord s with not only conventional lease structures, but importantly stronger and better established covenants as opposed to ring-fenced SPV s which can disappear quickly if the venture does not go to plan. Nevertheless, many of the newer OaaS brands have short trading histories and some landlords remain wary of their covenant strength. We Work for example has been in operation for just 4 years but was valued at close to $5billion at the end of 2014, in comparison Regus has a market capitalisation of about $2.8 billion. If I showed you their [We Work] cash-flow statement, you would not compare it to a real-estate company... You d compare it to a brand or tech company maybe Chipotle or Uber. Henry Ellenbogen, a portfolio manager at T. Rowe Price. 27 CUSHMAN & WAKEFIELD 28

15 It has long been acknowledged by landlords that leasing a couple of floors in a 100,000+ sq ft building to a OaaS operator provides important flexible overflow and project space to incumbent tenants. This remains the case with recent examples setting up within London s newest towers Servcorp in the Leadenhall Building, Landmark Plc in 110 Bishopsgate and the Offices Group in the Shard. However, this has now developed to a situation where landlords are selecting the OaaS brand extremely carefully. The right OaaS brand can enhance or re-position a building s profile and brand, with the additional upside potential of tribe attraction from conventional lease occupiers who want to mix and associate with the OaaS brand, its clients and its client s guests. This is best demonstrated by Blackstone s 63,000 sq ft letting at the Adelphi to NeueHouse a major coup for Blackstone to secure the London debut of New York s coolest OaaS brand and particularly clever in view of the comprehensive refurbishment and pipeline of a further 190,000 sq ft of office space in the Adelphi over the next 12 months. With the concern that start-ups are likely to be priced out of the Central London office market, we are starting to see a number of enlightened developers allocating part of their schemes to preserve this segment of the business community. Derwent s White Collar Factory is a good example, with 10,000 sq ft currently planned to be set aside for start-ups/flexible office space in 3 Old Street Yard. Derwent and others, such as Delancey, are likely to opt for third parties to operate the space on their behalf as it is management/resource intensive but there are some developers, such as GPE at 148 Old Street, who are making noises about undertaking OaaS themselves. We are also seeing some local authorities using planning policies to try to maintain affordable work space within their area. Hackney council has drawn up a list of experienced workspace providers not only to help Hackney s growing number of entrepreneurs and small businesses find appropriate and affordable premises but to make it available to developers to assist them in forming partnerships with workspace providers early in the planning and design of new development schemes. HACKNEY COUNCIL HAS DRAWN UP A LIST OF EXPERIENCED WORKSPACE PROVIDERS NOT ONLY TO HELP HACKNEY S GROWING NUMBER OF ENTREPRENEURS AND SMALL BUSINESSES FIND APPROPRIATE AND AFFORDABLE PREMISES BUT TO MAKE IT AVAILABLE TO DEVELOPERS OUTLOOK The strength in this sector certainly reinforces the generally strong market outlook but still concerns are voiced as to the sustainability of some of these flexible office space businesses should market conditions change and occupiers edge backwards to a mind-set of certainty over flexibility. However as we see it, what is happening is the result of an occupier revolution rather than a short-term response to recession. In particular we believe that the rise of the OaaS sector represents a fundamental shift in occupier sentiment and occupational strategy. The growth of the sector has been largely in response to changing demographics, technology and the knock on impact on expectations of work and these trends will continue to exert a major influence on the adoption of collaboration and shared workspaces in the future. The concept of OaaS will continue to gain traction and demand is expected to grow. In part this growth is due to expectations of increasing numbers of start-ups, particularly but not exclusively focused on the tech and knowledge sector, but demand is expected to come from a wider range of corporate occupiers in conventional office space that may opt for a different approach. Despite the high cost of commercial and residential property in Central London, startup companies continue to flock to this creative cluster and are anticipated to do so for the foreseeable future. In addition, as increasing numbers of larger companies recognise that there are benefits from outsourcing the office, where workers come together to interact and you only pay for the space that you use, the OaaS becomes a more acceptable, and indeed normal, concept. As a result, while the tech and start-up community will be a key source of demand, a wider range of business sectors will be targeted as the OaaS model evolves further. It is important for the long term security and growth of the sector for it to diversify its sector base. Location will remain critical to success and will be determined by the target sector of the OaaS operator. The traditional serviced office operators will continue to focus on core areas, and will be joined by the US co-working brands but the new wave of co-location space will, mindful of their customer base, continue to focus their real estate requirements in the non-core parts of Central London. 29 CUSHMAN & WAKEFIELD 30

16 It is imperative that the sector remains true to its origins if it is to continue to flourish as an alternative option. As co-working spaces increase in size and upgrade the quality of their space, there is a danger that their original identity is erased and without that sense of community, co-working becomes indistinguishable from the more established serviced office offering. Increasing rents and falling vacancy may curb the profitability of OaaS operators and may lead to new locations emerging. This may limit growth in Central London but will provide opportunities for expansion outside the core, especially in areas with good transportation links, where costs are lower. The concern is that many of the entrepreneurs and start-ups will not be able to afford to be located in the Central London, effectively removing a core part of the demand. Developers are recognising the need to preserve the culture of emerging areas of central London for the future success of their schemes, and landlords will to start to respond to the concept of scalable office space and the provision of space for smaller occupiers. We will see the more enlightened developer enter into JVs with the right operator. Looking further ahead, the planning system will start to demand an element of affordable office provision in future schemes much like affordable housing, with Hackney council leading the way with their supplementary planning guidelines which sets out proportions of floorspace that must be suitable for SME s. There will always be a need for permanent office space and the OaaS offer offers a complementary offer to the traditional office market, which is less flexible in terms of its lease terms, facilities etc in response to changing occupier needs. Conventional offices are also evolving to meet the needs of changing businesses, encouraged perhaps by the success of design led OaaS space, with the increasing provision of amenities within the building and focus on public realm for example in a bid to attract an increasingly empowered workforce. Looking forward, the need for a wide range of flexible offers will be instrumental for the continued growth of the OaaS sector. There is a place for both mature and cutting edge operators; especially if the sector is to appeal to a wide range of business sectors, with a range of both price points and specifications. In future providing staff with an agile working environment and sense of community will be elevated alongside the need for flexibility and picking the right OaaS brand will be equally important to both occupier and landlord alike. As OaaS disrupts the office market, with more people spending more time in the office, further in the future we may see some operators turn their attention to residential space. In the US there is evidence of some companies living and working together in one unit, which reduces overheads and allows the workforce to share ideas at all times. We Work is delving into residential in the US under the We Live brand, collaborating with a NY residential developer (Vornado) to convert a Washington office building into a residential unit for skilled younger workers but they are combining it with co-working space. With rising residential costs in London another constraint to growth of SMEs, the OaaS may provide a solution. Already The Collective has one residential unit and Second Home have stated that they may consider residential as a complementary facility. 31 CUSHMAN & WAKEFIELD 32

17 CONTACTS Elaine Rossall Partner, Head of London Markets Research Andy Tyler Partner, Head of West End Office Leasing Andrew Parker Partner, Head of City Office Leasing Ben Cullen Partner, Head of Occupier Representation Juliette Morgan Partner, C&W Tech Global Lead London Cushman & Wakefield, LLP Portman Square London W1A 3BG Connect with