Flex Office Companies Have Bought Into The Suburban Renaissance — But Will Tenants Join Them?
Flexible office operators are big believers that over the next five years, growth in suburban hubs will be the biggest change in their sector. It remains to be seen, however, if tenants will follow them to the burbs.
A new report from Workthere, the flexible office consultancy of Savills, found that 17% of the 100 global operators it surveyed said that a growth in suburban hubs would be the biggest change in the sector over the next five years. In North America the proportion who cited this as the biggest change was 24%, in the UK, 16%.
The other big changes predicted were a growth in management agreements, cited globally by 17% of respondents; the ability to book space online through a platform, cited by 16%; and the repurposing of retail assets into flexible offices, cited by 13%.
“The operators have definitely bought into the opportunity, the big question is to what extent it will happen,” Workthere Global head Cal Lee said.
For operators, the appeal of growing in the suburbs is clear, Lee said. It diversifies portfolios away from the current concentration in city centres, and the growing willingness of landlords to enter into management agreements rather than leases means they can access buildings in these markets without taking on long-term liabilities.
Tenants are telling them that they want to give their workers greater choice to work near home in more suburban locations, Lee said — the much vaunted hub-and-spoke model. But the sector is still in that experimental period where there is uncertainty about the extent to which words are being matched with actions. A Bisnow survey of 1,200 commercial real estate professionals found only 17.4% are interested in working from a suburban outpost, while 56.2% of respondents said they would prefer to go into a central hub office.
Global flex office operator IWG recently produced its own research that said that in a survey of 501 executives from FTSE 100 and FTSE 250 companies, 49% said they were considering setting up offices nearer to where staff live, and three times more said they would be adopting a hub-and-spoke model than said they would be returning to the norm of five-days-a-week in a central office.
But few companies have publicly pushed the button on taking flex office space in suburban locations — so far.
“We think it will happen, but the question is, will it happen to the extent that operators believe,” Lee said. “Some companies have said they will go fully remote, some have said they are going back to the office, but the reality is that most companies will be somewhere in between. We are seeing companies take a team of maybe 40 people, give them all a license with an operator and the option to work remotely and then analyse the data to see if they roll it out on a wider basis or decide it hasn’t worked.”
Lee said there would be something of a first mover advantage in cities like London, where offices have traditionally been clustered in the city centre. The suburban markets where office stock is available might have the demand from occupiers to locate perhaps two or three flex office companies, but if five or more flex office sites spring up, oversupply could become an issue.
In the U.S., even though a greater proportion of the survey respondents said they thought growth in the suburbs would be the main change in the sector, new enquiries to lease space show operators are still focused more on city centres than is the case in the UK, Workthere said. The fact that many U.S. cities are already polycentric, without a single dominant CBD, perhaps explains this, the company said.
Among the other big changes, Lee said that management agreements are here to stay, but the fact that office supply by far outweighs demand makes now a particularly good time for operators to strike this kind of deal with landlords. Landlords are increasingly keen on them as they are becoming aware that in the next few years they will probably have to offer flexible office space themselves.
“There is also the question of to what extent management agreements impact valuations of flexible office space,” Lee said. “More transaction data will be required to underwrite this, which is currently the missing piece.”
The conversion of retail space into flexible offices is already well underway, with Industrious having taken over defunct department store space in the U.S, and in the UK, Unibail-Rodamco-Westfield has won planning consent to turn a department store at its Westfield Stratford site into coworking space.
For now the trend is likely to remain centred on malls and shopping centres, rather than individual high street or main street retail units, albeit IWG has said it wants to put in place a program to take over some of these smaller shops.
“We’re seeing quite a lot of repurposing, where retail in shopping centres is being converted to leisure use, but 20K-30K SF will be given over to flexible offices,” Lee said. “To make repurposing high street units work you need to have the scale of an IWG, to have the membership base that might live nearby. But there will be lots of interesting opportunities in that quasi coffee shop/workspace sector.”