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Flexible offices are a standout asset class for investors in the commercial property market

By Simon Eastlake, Managing Director, Office Space in Town

For investors, finding value in the global commercial real estate market has been challenging. Earlier this month the IMF expressed its concern about the state of the sector, with the organisation expressing particular concern about the US commercial real estate market, which has seen prices fall some 11% since the Federal Reserve start to raise interest rates in the Spring of 2022. However, helping to lighten the gloom is the flexible office sector. It is the one area of the market which, underpinned by strong fundamentals and favourable workspace and lifestyle trends, looks set to offer investors the performance and returns that they require.

Exceptional market growth

Globally, the North American flexible office market holds the dominant position in the sector. The adoption of flexible office arrangements in the U.S., especially in major cities such as Manhattan and San Francisco, is driven by changing working styles, which has led to exceptional market growth.

Government backing and promotion of flexible workspaces in Asian countries, exemplified by initiatives in Sydney and Japan, are pivotal factors driving the Asia pacific region growth.

In Europe, according to top property agent Savills, the UK market is pre-eminent with flexible offices accounting for approaching 14% of total office space in the City, followed by Prague (8%), Amsterdam (6%) and Madrid (5%).  These figures are only likely to increase. CBRE’s latest European Flex Office Market Update, covering the second half of last year, revealed that sentiment towards the use of flex continues to be very positive. 

As part of the research for the report, CBRE’s clients were asked what percentage of their real estate portfolio is in flex today and where do they envisage it in two years’ time. The response demonstrated that there is strong ‘momentum building towards flex as it becomes an increasingly important element of occupancy strategy. The proportion reporting less than 10% allocation is forecast to drop from 63% currently to under half over the next two years. This number has come down from 82% last year, indicating that despite legacy license obligations and other operational challenges, the predictions made last year are coming to be realised more quickly than forecast.’

Favourable long-terms trends 

Underpinning the growth of flexible offices are a number of long-term trends, reflecting fundamental societal and workplace trends. Certainly, flexible offices provide a solution to the changing needs of the modern workforce. With the rise of remote work and the gig economy, more and more professionals are seeking flexible work arrangements. Traditional office spaces often come with long-term licenses and fixed costs, which can be burdensome for businesses that require flexibility. Flexible offices, on the other hand, offer short-term licenses and the ability to easily scale up or down as needed. By investing in flexible offices, institutional investors can tap into the growing demand for flexible workspaces and cater to the evolving needs of the workforce.

Flexible offices also provide an opportunity for diversification. Institutional investors are constantly seeking ways to diversify their portfolios and reduce risk. Investing in flexible offices allows them to diversify their real estate holdings beyond traditional office spaces and residential properties.  This diversification helps institutional investors mitigate risk by spreading their investments across different sectors and locations.

Furthermore, flexible offices offer attractive returns on investment. The demand for flexible workspaces has been steadily increasing, as a result, rental rates for flexible offices have been rising, providing an opportunity for investors to generate attractive rental income. Additionally, flexible office operators often provide a range of services and amenities to their tenants, such as high-speed internet, meeting rooms, and networking events. These additional services can command higher rental rates and increase the overall profitability of the investment. With the right management and marketing strategies, institutional investors can enjoy a healthy return on their investment in flexible offices.

In addition to financial returns, investing in flexible offices also offers the potential for long-term capital appreciation. As the demand for flexible workspaces continues to grow, the value of these properties is likely to increase over time. Institutional investors can benefit from capital appreciation by holding onto their investments and selling them at a later date when the market conditions are favourable. This potential for capital appreciation further enhances the attractiveness of investing in flexible offices for institutional investors.

Lastly, investing in flexible offices aligns with the growing focus on sustainability and corporate social responsibility. Many flexible office operators prioritise sustainability by implementing eco-friendly practices and using energy-efficient technologies. This commitment to sustainability can attract environmentally conscious tenants and businesses. By investing in flexible offices, institutional investors can contribute to the development of sustainable work environments and promote responsible business practices.

UK market excellent illustration

The rise of the UK flex marker is an excellent illustration of the global trends supporting the sector.  In contrast to the wider UK office market, flex operators have seen a huge uptake in occupancy and desk rate growth, with the average price per private desk in the UK H1 2023 up 15% on the first half of 2022, surpassing the pre-Covid desk price by 30%. UK enquiries are up 12% YoY, which is an increase of 173% on pre-Covid levels. The majority of take-up has been in Central London, accounting for 82% of take-up in 2023, with 15% of take-up occurring in the regional cities and 3% in the Greater London and Southeast office market.

The demand for flexible office space and requirements for new sites from operators have risen in parallel. Currently, there are 14 flexible operators looking to inhabit space greater than 20,000 sq ft across the UK. The length of UK office licenses has now fallen to the lowest levels on record, coupled with vacancy rates reaching a decade high as the shift to hybrid working embeds itself in the workforce. 

At OSiT, we have been well-positioned to take advantage of the favourable sector trends. Last year our revenue increased by 7%, with occupancy rates across our London portfolio averaging 93% and fees at their highest level since the pandemic. Our average desk rate across buildings is currently £771 – in comparison to London’s average commercial space desk rate of £500. The average length of stay across our portfolio has increased to over 41 months, which compares favourably to 34 in the traditional commercial property lease market. Given this backdrop we are also looking to acquire further buildings in London in 2024.

In conclusion, flexible offices are a good investment for institutional investors due to their ability to meet the changing needs of the workforce, provide diversification opportunities, offer attractive returns on investment, and foster innovation and collaboration. Moreover, investing in flexible offices aligns with the growing focus on sustainability and corporate social responsibility. As the demand for flexible workspaces continues to rise, institutional investors have the opportunity to tap into this growing market and benefit from the potential financial and non-financial returns that flexible offices offer.

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