Evolution or Revolution of the Serviced Office Market?
The serviced/flexible office market in the UK has continued to grow at a fast pace in 2019. Flexible leasing has become an intrinsic part of the range of leasing options for tenants, regardless of size, sector or even location. However, during the summer months the corporate turmoil of WeWork threatened to derail the operations of the largest provider and subsequently placed scrutiny on a market that was already viewed by some with scepticism. Weathering the storm in 2019 the market continues to evolve, but what can we expect from 2020.
Coverage has become king for a good number of providers, keeping one eye on the jewel in the crown (London), with the other on regional expansion. However, as quickly as the market for flexible space has grown, so too has the competitive landscape, putting pressure on existing business models and future plans. As we discussed in our predictions report in 2019, the number of firms offering flexible solutions would increase further with landlords/developers launching their own products. This appears to have only further fuelled the appetite of providers. In London alone 17% of office take-up in 2019 was by operators. Just one rung behind the total leased by the financial sector.
The number of market players continues to increase but whilst that improves the choice for tenants, the pressure on the viability of each centre increases. In 2019, several centres closed in London and around the UK. Whilst not prevalent on a large scale, it does suggest operators will pay close attention to occupancy within each of their centres. This is not to say that we will not see any new entrants, we are certain that many more will launch, especially in the nascent regional city markets.
However, in the face of such stiff competition we do expect to see an element of consolidation amongst the providers. One such casualty in 2019 was Central Working, who went into administration. What was once a success story and despite a market that is experiencing high demand, it struggled to make some of its centres profitable. Whilst whole businesses failing are hopefully few and far between, it is more likely that in order to gain a little more coverage, we shall see providers acquire portfolios of centres.
The closure of centres through financial difficulties do prompt questions surrounding occupier protection. The agreements are in place between operator and tenant, yet the uncertainty arises when that operator is unable to fulfil its obligations. It is seen that the ultimate landlord could take on a duty of care. Landlords may consider taking on centres in their buildings, however, on balance most will recognise the complexity of the challenge and as a result leave it to the market to deliver. Whilst this has not happened, landlords will be sure to have made contingency plans, especially those with WeWork in their properties.
Expanding the range of flexible leasing solutions on offer to tenants will gain traction in 2020. Whilst coworking, fixed desk and managed spaces continue to form the backbone of provision, we expect to see several differentials between providers. These could include the length of terms (both long and short), greater agility across portfolio, advantageous rental incentives or more bespoke packages for different companies. We also expect some providers to go niche with their centres and products by targeting clients by size. Navigating the various products that currently exist and potentially be launched, will prove interesting for both tenants we represent and our leasing team.
What is clear is that differentiation will be an important platform for providers in 2020. In some cases, reinventing propositions with greater emphasis on value and service. The tenant / customer will be centre to any offering, in a crowded market, businesses can vote with their feet and the market has enough other options!