The Instant Group looks ahead to 2018

John Duckworth, MD of UK & EMEA at The Instant Group, comments on what 2018 has in store for the flexible office sector:

Looking back at 2017

“Over the last 12 months we have seen a significant number of high profile deals in the serviced office market fuelled by acquisitions and investments by some of the most successful operators which have really driven the industry forward.

“2017 saw Blackstone purchasing The Office Group and SoftBank increased its investment stake in WeWork, allowing them both the opportunity to expand into new markets and grow their market share. The flexible market is becoming much more mainstream and thanks to higher yield opportunities the alternatives sector is becoming much more attractive to investors.”

What can we expect for 2018?

“Landlords and occupiers will be looking at how to challenge the traditional methods of office space procurement. Business agility will be the new normal and, as a principle, the ability to remain agile will underpin all spend commitments made by corporates. Business planning horizons will shorten and reach a level where the demand for flex becomes mainstream within a portfolio.

“Consequently 2018 will bring an acceleration of change within the office sector. Traditional elements of the property industry will be challenged by this shift in customer demand. The sector will be forced to recognise that industries that give customers what they want, tend to be the ones that thrive and succeed.”

Legislation – changes to accounting rules

“This growth in the industry will be accelerated further by the looming IFRS accounting rules due to come into play in 2019 which will mean that from 2019, property leases will have to appear on balance sheets. This change in legislation is pushing companies into looking for ever more creative ways of holding space, spanning from one year flex contracts, through to longer leasehold and freehold ownership.

“The way that organisations approach property ownership is changing already and therefore landlords and developers are having to adapt accordingly to offer transparency through their product offering. This is already having huge implications for the commercial property market, and those who don’t adapt will struggle.”

Productivity: Government support for the sector

“It is no secret that the UK has big issues from a productivity perspective and we are lagging behind our international counterparts in a big way. Philip Hammond alluded to this in the Autumn Budget when he announced significant focus and funding to boost productivity through the targeting of worker efficiency.

“Our research has shown that the way that companies use and occupy space can significantly increase productivity amongst staff. Being agile and precise about your business’ space requirements at different times in the business cycle will contribute to greater efficiencies and, ultimately, productivity.

“The Mayor’s advisors have read this market well and in Sadiq Khans recent white paper on infrastructure he recognises that the provision of flexible workspace goes hand in hand with the growth of SMEs and fostering entrepreneurialism. To this end he recommends that developers make provision for this type of space in commercial developments and this is a very encouraging step in the right direction.

“The flexible workspace industry has seen annual double-digit growth for the past five years without overt political support. At a time of significant economic uncertainty, and with the ongoing spectre of business rates threatening many firms and a dire need to encourage productivity in the market, co-working space offers firms this agility and value.”

Supply and demand: changing customer habits

“Disruption has been prevalent in many of our client’s sectors. The forces of change are breeding an appetite for increased agility. Digital connectivity, Artificial Intelligence, the growth of SMEs and the rise of the Millennial is transforming the notion of work and the nature of the workplace. This shift will completely change the profile of talent available and there are a number of firms already embracing this change, including Amazon, Spotify, Microsoft, Uber, and IBM.

“We don’t often talk about our ‘customer base’ in the property sector, certainly not in the way we see it in other industries. However, this customer-centric ethic will be essential in fostering increased growth in the market. The whole industry is underpinned by customers signing up to a community or workspace membership agreement and if the product is not fit for purpose, there are plenty of alternatives that well-informed small business owners and freelancers can consider.

“Landlords and developers have started adapting and providing choice within their portfolios, more commonly known as ‘Space as a Service’. Long term lease contracts will always have their place. As will so-called trophy buildings which will continue to underpin the valuation of a portfolio. However, these assets need to adapt in order to navigate the next 20 years. Why have these under a conventional lease when it can be procured in a much more efficient manner?

“Offering a space with shorter terms and making it more bespoke is ultimately going to cost less and give higher yields. The focus on provision of improved amenities by operators is an example of this shifting demand. WeWork and The Office Group have been very clever with this approach and other operators will follow suit.”

Final thoughts

“As the reality of a looming post Brexit British economy begins to evolve, 2018 will see an acceleration around various flexible related indicators. This is likely to include more capital investment in the sector either through operator acquisitions and/or consolidations or via asset based investment by developers and landlords. We are also going to see an acceleration of supply in the provision and variety of flexible space across the UK driven by burgeoning business demand for more agile space.

“Demand acceleration within corporates for flexible space is driven by changing strategies around corporate workspace occupancy. This increase is due to a range of factors including uncertain business planning horizons; looming 2019 IFRS accounting standards; changing corporate cultures around workspace and talent that support more agile occupancy models; increasing evidence and support around agility being a major contributor to productivity improvements.”