Standard Life Investments

The inexorable rise of flexible offices

August 2017

Real InSite provides our views on topics affecting global real estate markets. In the latest monthly article, we highlight the increasing popularity of flexible offices and the implications for traditional office space providers.

For more Real Estate articles, check out our Analysis of Real Estate issues.

The inexorable rise of flexible offices

Flexible offices are nothing new. The first serviced offices date back to the 1970s, operated by Australian company Servcorp for example. Meanwhile, flexible office operator Regus (now part of the International Workplace Group) has been around since the late 1980s and currently has 3,000 workplaces in 106 countries.

Although the concept has been around for a while, the flexible office sector has only recently gained sizeable traction and accelerated momentum. New concepts, such as co-working space and virtual offices, have changed the perception of flexible offices from dated, cramped and expensive to contemporary and modern working environments that can also facilitate networking opportunities.

An increasingly important element of the office mix

Globally, the flexible office sector has grown by 21% over the past five years and forecasts suggest this growth is likely to continue. In Central London, for example, flexible office providers have let close to three million square feet of space over the last three years (2014 to 2016). This equates to nearly 9% of total Central London office take-up each year. At Standard Life Investments, we are seeing increasing evidence of demand for flexible office space in our own property portfolios, recently letting space to US flexible office provider WeWork.

What is driving demand?

Different forces are interacting to drive demand for flexible offices. Chief among these is the quantum leap in technology that enable the modern workforce to work anywhere at any time, accessing their company networks in a timely, secure and robust manner. Coupled with this is the rise of the Millennials generation (those born between 1980 and 2000), which is rapidly becoming the largest segment of the workforce (75% by 2025). This generation’s expectations are completely different to their predecessors, as they:

  • want to work flexibly and in an agile manner
  • are comfortable working away from the office and sharing desks
  • want to use informal social spaces, such as in-house coffee bars and breakout areas, to collaborate and share ideas.

Millennials are also much more likely to start their own businesses or work in smaller organisations, accelerating demand for flexible workspace.

Another driving force is the way that larger organisations work, with many now setting up project teams to respond quickly to the rapid changes happening in their external environment. These project groups will typically spend significant time collaborating with external providers: consultants, contractors and smaller companies. Therefore, they need flexible space.

How should traditional office space providers respond?

For traditional office space providers, flexible office working brings both threats and opportunities. Flexible office providers can drive down rents and increase pressure for shorter lease lengths, as there is less need for employers moving to a flexible model to sign up to long leases. On the other hand, flexible office providers are also significant occupiers of space and can attract additional tenants.

One thing is clear: demand for flexible office space is unlikely to abate. Therefore, traditional office space providers need to consider a strategy that takes advantage of this growing part of the market. In doing so, they must decide what proportion of their portfolio to dedicate to new practices and consider whether they have the skills and experience required to operate in this space. For those who do not, an external partner may be an option. Either way, now is the time for traditional operators to embrace a flexible future.