Last Thursday’s shock profit warning from IWG, formerly Regus, raises some troubling questions.
Is London’s flexible office market not in the rude health it appeared to be in? Are cracks starting to appear in the wider London office market?
When a company with more than 2m sq ft of office space in central London says Brexit has caused a slowdown in office demand and that rents are going to fall as a result, it should be listened to. And it is not the only one in the serviced office market to say that Brexit is having an impact.
However, few are as downbeat about it as IWG’s chief executive Mark Dixon, who has every reason to blame the company’s poor showing in London solely on Brexit. It’s like retailers blaming the weather.
It sounds awfully like a Brexcuse for what would be much harder to admit - a lot of Regus offices are tired and the company’s market share is being eaten into by rivals that are flooding the market with new space that is more appealing to a lot of occupiers.
The sheer volume of new flexible office space is what should be worrying IWG and its rivals, not Brexit. WeWork alone has acquired more than 1m sq ft over the past year. Is there really so much demand that all that space can be filled without rents being affected?
Some occupiers are undoubtedly moving from traditional offices to serviced offices, but the phenomenal pace of WeWork’s expansion is inevitably going to put pressure on the market. It will take time for demand to catch up and it will make life harder for everyone.
As for the wider London office market, there doesn’t appear to be any reason to panic… for now. Yes, take-up of smaller offices has been hit, both by competition from the serviced operators and Brexit. In the first nine months of the year, take-up for offices of less than 5,000 sq ft was down 50%, according to BNP Paribas Real Estate. Meanwhile, lease incentives have increased and rents have edged down a fraction.
But the outlook isn’t as bleak as Dixon suggests. Even in the financial sector, big international businesses continue to make major commitments, such as Deutsche Bank, which signed a pre-let for a new HQ of at least 469,000 sq ft on a 25-year lease in August. Take-up figures also remain strong, and crucially, despite all the new developments completing and occupiers moving out of old buildings, vacancy rates remain low. Indeed, they fell slightly in the third quarter, according to BNP PRE.
One important caveat to all this is that if WeWork starts to struggle to fill all its new space and decides to temper its expansion, it would have a serious knock-on effect on the wider market. In the year to date, serviced offices have accounted for about 15% of take-up and WeWork has accounted for the vast majority of that. The loss of all that demand would be keenly felt.
Property’s Weinstein problem
They all underscore how important it is that we take action to eradicate outdated and unacceptable behaviour. Thanks to everyone who shared their views and stories with us.