Getting to grips with the irresistible rise of flexible workspace
As the real estate industry reels from the rapid expansion of the flexible workspace market, what are the factors really driving growth? John Williams of The Instant Group draws on the latest research to explain how consumerisation is changing the game
Change in commercial real estate is being driven by wider socio-economic trends, many of which have already significantly impacted other areas of business. In many ways, real estate feels like the last cab of the rank as it has been highly resistant to change, slow to adopt technology and relatively immutable.
Consumer behaviour has changed radically in the past decade, with the advent of digital technology facilitating a shift in expectation around the delivery and consumption of goods and services. This ‘consumerisation’ has re-focused on meeting client expectations, enabling more choice, creating a consumer that is used to making data-led decisions based on large-scale aggregator models – in short, the consumer is used to getting what they want, when they want it, at the right price.
‘Flexibility is now one of the most valued attributes in job roles for the under-35s…’
The digitisation of society has facilitated choice – choice around holidays, travel, hotels consumer goods and other consumables. This is now impacting B2B markets as the transparency of choice offered by Google – which scans billions of web pages every day for the latest information – has radically changed the way we view markets. Younger generations, in particular, have become more used to making data-informed decisions and having access to large data-sets, which they are comfortably manipulating and basing their decisions upon.
The digital world also offers unparalleled connectivity in society in a way previously unimagined by older generations. Younger workers are innately comfortable working remotely, utilising closed-loop social media channels such as Skype or WhatsApp to find work, collaborate and research. But even for workers of all ages the perception of the workplace has shifted radically in a relatively period of time – the bonds that have bound us to the office have been broken and with video technology set to improve even further with the launch of 5G technology, the reasons to be present in a set physical location weaken even further.
A more recent consumer trend, in part borne out by the above, is the slow move away from the global cities and a shift in perception of urban living. Faced with a lack of affordable housing and high transport costs, the ease of connectivity is leading many workers to question their location of work. Remote working has always seemed a poor second in terms of professional advancement, but flexibility is now one of the most valued attributes in job roles for the under-35s. They want to choose when and where they work, and the 9-5 routine is beginning to look increasingly anachronistic.
The consumerised workplace
These changes in the consumer mindset are now mirrored in the business world, as corporates pursue more agile options mimicking the flexibility demanded by their workforce. Business planning cycles are now shorter, in recognition of the innovation and speed of change being driven to a large degree by digitisation. Established companies risk losing out to more agile start-ups if they do not consistently evolve their business model and seek out change. There are now black holes in a number of sectors where decades-old business brands are buried as their model folded in on itself.
Increasingly CEOs are planning for a recession with a sharp uptick seen in this thinking in the current year. In line with this, there was a 16 per cent decrease in confidence about their own companies’ performances going forward according to the latest PWC CEO survey.
Interestingly a new Gartner study shows that as markets are expected to get tougher, the focus of CEOs is reverting to simple growth targets from a priority perspective. Both workforce and corporate structure changes, while seen as important, have seen a decrease in mentions within this piece of research. When challenged about how they would achieve growth in tough markets, the number one response from this audience was to mention expansion into new markets (both from a product but also a location point of view).
Not fit for purpose
With this context in mind, it is no surprise that the expectations of occupiers of office space have changed – the way in which clients utilise space has shifted thanks to the introduction of technology, outsourcing, results-based working and greater autonomy.
This now means that for the majority of individuals the traditional office is no longer fit for purpose. In a recent research piece by HTS the most important activities as seen by an occupier were often those that were also the least supported; it is therefore no surprise that 70 per cent of individuals working in office space say they feel ‘uninspired’.
Stimulus for flexible workspace
This mismatch between supply of space and client expectations has certainly helped stimulate the flexible workspace industry, which aims to better cater to the changing requirements of occupiers and businesses. A recent workspace utilisation survey found that not only are 40 per cent of desks in traditional offices unoccupied, but the majority of individuals are in quiet spaces or meetings. The open plan offices that have been created to help maximise space and reduce cost are still being underutilised, and this is leading to individuals working from home or working remotely from secondary locations in increasing frequency.
‘If 40 per cent of desks are unoccupied in the traditional office, where do people work when they are not there?’
The majority of businesses and decision-makers are aware of the limitations of their space and are willing to pay more to help achieve both a more productive environment and better staff engagement. The study found that 59 per cent of occupiers agreed they would be willing to pay at least 10 per cent over Grade A prime rents for high-amenity ‘service agreement’ space.
Flexibility continues to grow in importance to business decision-making as shown in the vast change between respondents’ thoughts in 2018 and 2019. While cost and location remain the most important factors, flexibility has become the third most important factor overtaking building design or layout for the first time. While just 8 per cent of respondents showed flexible space as their number one option, 45 per cent indicated that the benefits it provides outweigh the costs and expect their use of flexible space to increase in the next three years.
Adapting under pressure
Market supply has been slow to adapt to the market forces but the pressure to change has finally made the conventional workspace market begin to adapt. This has manifested itself predominantly in an improved focus on the client, initial forays into pooling data, and increasing the amount of choice available to the client base. But the flex workspace sector is still driving much of this change. And the conventional agents are still left conflicted in their market response to changes in demand.
The rise in coworking and flexible workspace has been well documented – not least by our own data – but the increase in supply remains constant at 25 to 30 per cent each year. Our own predictions set out the growth in this area, but we estimate that flex workspace will increase in provision from 5 per cent of the total market to 35 per cent by 2025. This would be a logical projection based on the past growth trends in supply and demand over the past decade.
The biggest trend in the commercial real estate market of the past decade is also one of the most misunderstood. The industry can barely agree on what to call coworking, flexible workspace or space as a service. It has also failed to grasp where it is growing and why.
Flexible workspace is, at its root cause, a change in the very dynamics of the office leasing market. While still representing only a single per cent proportion of the total office sector, its influence is spreading as is its geographical reach. While the markets of London, New York City and the Bay Area are among the world’s largest, they do not represent the fastest growing, not by a long shot.
‘The industry has also failed to grasp where it is growing, and why…’
Some of the industry debate around flexible workspace, and what it means for the future, has focused too much on technology or on WeWork. While undoubtedly influential, the industry’s one true unicorn, WeWork, is a symptom of the cause and technology is simply an enabler of progress. No, the one thing that all the market reports and predictions agree on is that the growth in flexible workspace is being driven by customer choice; an alternative to the lease model that has dominated since its inception.
Now that the genie is out of the bottle, we are witnessing a surge in market choice, with more providers offering a greater variety of workspace choices both in the type of space available but also how it is procured. In response to this, lease terms are coming down, landlords are mobilising in their efforts to reflect changing customer demand and marker supply is adapting at pace.
Instant’s latest market report contains more forecasts and other information on flexible workspace here.