As recession bites and cost cutting becomes likely, former HR director Lucinda Pullinger discusses the rise of flexible office space and the opportunity it provides to businesses with some difficult decisions to make.
With the world’s richest man Elon Musk enforcing sweeping cuts at Twitter, Mark Zuckerberg announcing 11,000 redundancies at Meta and Amazon freezing much of its hiring, the tech employment boom of the past five years may be petering out.
Goldman Sachs, Morgan Stanley and Credit Suisse have been making redundancies in the financial services sector, and the public sector is braced for job cuts in the wake of chancellor Jeremy Hunt’s need to balance tax rises and spending cuts to fill the UK’s financial black hole.
With many workplaces still way below pre-pandemic occupancy, one of the biggest questions in boardrooms is “what is our plan for our office space?”
Our data shows that the answer in the UK is to switch to serviced office space or short term (sub five year) leases. As well as buying time in the short term as inflation rises, interest rates grow and the war in Ukraine rumbles on, more importantly, this approach gives companies the agility they need in the longer term even after the world economy finds a new equilibrium.
Big and small companies from across the business spectrum are shifting towards flex. In the UK there is now demand for 180,000 flexible office desks compared with a supply of 100,000 desks. Supply of new space is not expanding at anywhere near the rate needed to keep up with new customer demand.
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The flexible workspace industry is at a crossroads. Demand has continued to outpace supply growth for the past 18 months and in many cities vacancy rates are now extremely low.
Unless we see significant new and quality flexible workspace available in the coming year, the market is in danger of reaching saturation. A good problem to have some would say, but not ideal when we are seeing record levels of interest from occupiers.
Flex makes sense for start-ups that would previously have had to commit to an onerous long lease as one of their biggest early costs. At the same time, big corporates are becoming more interested in flex offices with the average transaction size 44% bigger than pre-pandemic levels.
Demand for flex offices across the UK is up 22% year-on-year, and the City of London has seen demand rise by 23% this year. But Manchester and Leeds are showing the strongest performance with demand for flex space up 31% and 44% compared with pre-pandemic levels.
To emphasise: this is not compared with the bleak Covid years of 2020 and 2021, but with what seems like a different world in 2019 when hybrid and home working were what happened when a broadband engineer was coming or the washing machine had broken down.
There has also been an increase in the rates paid for serviced office desks across Central London – up 14% in Camden, 12% in Southwark, 11% in the City of London and 5% in the West End. What is clear is that agility and flexibility have become a primary objective for UK plc.
Visit any city centre and enter a multi-let building and you will see increasingly yawning gaps in the tenant roster. This isn’t surprising when some very average office buildings do little or nothing to persuade people to return to the time and expense of the daily commute.
Flex office owners, however, who work hard to maintain occupancy with a more transient population, are now filling their boots through amenities like collaboration spaces, gyms, meditation rooms and cafés which only the very best office developers provide.
All the costs for these spaces are covered in all-in flex rents, whereas we calculate that most companies are only aware of 85% of the costs of occupying an office, often under-estimating the cost of office operational staff, insurance and professional and legal fees.
Economic crises from the early 2000s dot com crash to the global financial crisis saw companies under pressure to cut costs, looking first at headcount, then at tech, then at their property costs.
It was so hard to escape long real estate leases that cutting space was the toughest option to take. But with leases having got shorter over the past decade, property has now leaped ahead of people and tech as the option to reduce costs.
Why, after all, destroy your human and intellectual capital when you don’t need to, by making people redundant? Or risk reducing competitiveness by scaling back investment in technology?
The easier answer now is to let leases expire or for growing companies to retain or cut their office space and top up with flex. Especially as big players like LandSec and British Land have helped flexible offices to become more mainstream by launching their own brands in this arena.
This explains the stellar year that the UK flex market has enjoyed. Flexibility and agility are now key components of workspace strategies, creating fresh options for businesses when managing their costs base.
As economic uncertainty grows and the pace of change in our world unlikely to ever slow, expect to see the flex sector continue to grow at the same time.
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