Where is the flex market is growing? Is city centre demand really over? Why does everyone love the donut? And are entrepreneurs driving growth? Find answers to these questions and more in this 2022 forecast.
Despite a very difficult two years, many of us within the flexible workspace sector are fundamentally optimistic about its short and long-term prospects. Don’t just take our word for it, our survey of operators shows that 77% of providers are positive about the future.
Firms across the UK and US (and further afield) are adopting hybrid working models that ultimately give the employee more choice. And flex space is a critical component. Enquiries for flexible workspace in the UK have increased by 72% since the start of the pandemic in Q2 2021.
In comparison, the US received a 48% increase of demand into flexible workspaces. Other major economies have also seen increases in demand since the start of the pandemic, such as France (57%) and Germany (111%). It seems like flex is not only here to stay but is a fundamental component for new ways of working.
And, yes, the rapid spread of the Omicron variant has had a disruptive effect in recent months but the last two years have clearly shown us that after each period of lockdown we have also witnessed a significant bounce back effect.
Strength of the UK Market
Despite a 53% drop in web demand at the start of the pandemic, the UK has now seen a 98% increase in traffic from Q2 2020, as business confidence increases due to the uplifting of national restrictions and people returning to the office.
Demand in the UK did recover in 2021 to 16% above 2019 levels. However, enquiries are still down by -9% compared to 2019 (pre-Covid-19), but our forecasts show this recovering by the end of Q1 2022 if stringency of Covid-19 measures ends.
London continues to dominate its share of the market with 21% of all UK enquiries coming from the capital - the same market share as 2020 & 2019.
However, despite the significance of London’s economic attraction, growth has been small compared to other cities such as Bristol (41%), Manchester (28%), and Reading (27%).
Growth Outside of the Capital
Since 2018, Manchester (51%), Bristol (31%) and Newcastle (22%) have seen the biggest increase of enquiries for flexible workspaces, London has seen a -1% decrease. Rates are starting to creep up in premium locations as landlords start to gain confidence in the market, particularly in cities that are seeing recovering demand.
In short, demand for flex space has increased significantly in cities outside of London. As a result, prices have increased in cities such as Edinburgh (+17%), Manchester (+12%), Leeds (+9%), Bristol (+2%), and Birmingham (+62%).
Is this the sign of workers fleeing the Capital or the start of hub and spoke models? It is still too soon to discuss whether the latter is “real” but we have consistently seen deals and market interest in the regions and suburban locations. This trend for using hangout coworking space outside of central city locations seems to be sticking and market supply is beginning to address this demand.
The Donut Effect
Despite London still dominating the flexible market across the UK from a supply perspective, prices have slightly decreased by -6% in the capital. But even in the capital, there is a high variance to these price fluctuations, with some areas showing very robust recovery.
Over the past 12 months, we are starting to see rates in some areas of London pick up, including Kensington [+24%], Euston [+25%] and Bloomsbury [+18%], which have all showed strong rates of recovery as companies initiate their return-to-work strategies.
While rents charged for flexible workspace in many central London locations have fallen, they
have risen in the commuter belt on the outskirts of London. Maidenhead saw the biggest rise, with average rents in 2021 recorded at £414 compared with £296 in 2019 – up 40%. Harlow (27%), St Albans (10%) and Milton Keynes (7%) also enjoyed strong rental growth as occupiers looked to take space outside the capital.
Clearly outside London, demand for flexible workspaces has increased, along with prices. During the pandemic, lots of businesses relocated to the outskirts of London. For some this was temporary; for others the move was permanent. With many staff not wanting to commute into the city during Covid, we saw the pricing drop as operators fought to retain clients and attract new ones.
International Pricing
It is not just London where the prices of flexible office space have reduced as a result of people working from home. Some key major cities have also seen price reductions due to secondary cities gaining a bigger market share from concentrated cities.
Across Europe, Vienna (-15%), London (-6%), Brussels (-5%), and Berlin (-2%) have seen average prices for workstations decrease the past year.
In the US, Dallas (-14%), Chicago (-8%), and New York City (-1%) have all seen prices drop.
Price drops were more significant in South America, where Mexico City (-13%), Bogota (-26%), Lima (-30%), and Buenos Aires (-10%) reduced prices substantially.
In Australia, Melbourne (-14%) and Perth (-25%) have seen reductions in average prices over the past year.
Operators across all markets are offering attractive rates in a bid to attract and retain clients in order to fill their vacant spaces. This presents a unique window of opportunity for clients to acquire high-quality space at competitive prices and businesses who are able to make quick decisions will be the ones to benefit.
Occupancy of Flex Space
It always comes a surprise when we show through our research that occupancy rates across the UK continues to rise, and at 80%, they are the highest level since the start of the pandemic. This far outstrips the figures that are being quoted for “conventional” office space.
At a city level, occupancy rates across key cities are converging towards a more consistent trend, whereas rates varied significantly between cities during the early stages of the pandemic.
Smaller UK cities such as Reading and Bristol currently enjoy some of the highest occupancy rates in the country at 86% and 83%, respectively. When restrictions were at their tightest, occupancy rates in some cities such as Edinburgh fell close to 50%, whereas during Q3 2021 occupancy rates across all key cities analysed were over 80%, a very positive sign for the recovery of the industry.
Globally, occupancy rates vary according to region, as national lockdowns impact employee’s ability to return to the office. However, in the UK, occupancy rates are much higher compared to the US and APAC.
In the US in particular occupancy rates remained mixed, with markets such as San Francisco remaining lower than many would like - a common story across many major US cities.
Our Predictions for Flexible Workspace
Despite the change in working patterns over the past year, demand for office space has not disappeared. Instead, the occupier mindset has changed and both employers and employees alike see flexible workspace as supporting and enhancing the flexible working model.
Flex space will be the key to achieving this balance and, as a result, we fully expect occupancy rates to continue on this upward trajectory over the coming months.
- Flex space in demand - Research highlights that larger companies now identify flexible workspace as a solution in response to the pandemic.
- Larger occupiers demand flex - Increasing interest from larger occupiers is putting pressure on the flexible workspace industry, resulting in a shortage of large spaces. Currently only 15% of available flex space can accommodate requirements for 25+ people.
- Recovery is stronger outside the capital (for now) - Regional office markets have received a faster recovery compared to London. E.g. Orega signed for 30,000 sq ft in Manchester, X+Why signed for space in Birmingham and Cambridge, while Leeds recorded a trio of flex office deals during Q1 2021.
- Average lease lengths are reducing for conventional space - With rising occupier demand for flexible leases, the average lease length to expiry for conventional offices in London has fallen from 10.7 years in 2009 to 7.9 years in 2020 (Savills, 2021).
- The race for quality - In the US we are starting to see larger transactions take place but there is one common theme running through them – quality.
- Boom in entrepreneurialism - People have used the last 18 months to better themselves or develop new opportunities, with new company registrations at a five-year high in the US and the UK. This is expected to create an influx of entrepreneurial activity creating growth for the flexible workspace industry by the end of 2022.
