Why the rapid rise of trendy co-working offices in London is ‘something to beware of’

The Swiss RE building, known as the Gherkin, is pictured from a nearby office block in the City of London April 7, 2010.

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The Swiss RE building, known as the Gherkin, is pictured from a nearby office block in the City of London April 7, 2010.
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Reuters / Luke MacGregor

    The cumulative take-up of flexible space operators has expanded rapidly to nearly 8 million square feet. Operators “have been accumulating a lot of space, they’re all in expansion, and … they’re not cycle-tested,” said CBRE’s Kevin McCauley.

LONDON – The rapid take-up of office space by flexible operators is “something to beware of,” because its relative novelty means it not cycle-tested, according to Kevin McCauley, head of London research at commercial property firm CBRE.

Speaking at a CBRE event in London on Tuesday, he said: “[Flexible operators] been accumulating a lot of space, they’re all in expansion, and … they’re not cycle-tested.”

That, he said, is “something really to beware of, because we’ve been through this previously. I would argue that the economy and the market has changed, but again, the model is yet to be tested.”

In practice, that means the business model flexible operators use – which typically involves signing a long-term lease on a building and sub-letting component parts of it on much shorter leases – could prove risky in a cyclical downturn, which many analysts believe London is heading towards.

The rise and rise of flexible workspace

“Flexible workspace” might sound like a millenial-friendly buzz phrase, but it is fundamentally changing the make-up of office markets around the world.

Co-working spaces have popped up in ever-increasing number since the financial crash of 2008, with start-ups drawn to the flexibility and low financial exposure of short-term leases.

London is perhaps the world’s leading city for flexible space, and there are now an estimated 150 co-working offices around the capital, and the chart below shows just how dramatic the impact flexible workspace operators has been on traditional long-term-lease offices:

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CBRE

It shows that total take up of permanent leases of office space under 5,000 square feet (illustrated by the white line) has dropped off sharply, especially in the last twelve months.

Meanwhile, the cumulative take-up of flexible space operators has expanded rapidly to nearly 8 million square feet, although operators have pulled back somewhat since 2016 in response to a slowdown in demand.