OneEleven’s decision to review its UK plans could be a sign of things to come. The way flexible office providers are expanding has all the hallmarks of a frantic land grab.
In the past couple of months alone, Property Week has reported on half a dozen WeWork letting deals for well over 0.5m sq ft across the UK and it is far from the only company that has joined the flexible working gold rush.
Big-name developers like British Land (Storey) and Landsec (Myo) have piled in alongside specialist operators like Knotel. Even in central London where WeWork has been most active in the UK, the co-working giant accounts for only 18% of the total number of letting deals by flexible office providers since 2013, according to Savills.
For many of these firms, the desire to win market share appears to trump any concerns about profitability. Earlier this year, a survey of UK co-working operators found that just 40% were profitable and, looking at the way the market is moving, it’s hard to see that statistic improving any time soon.
The sheer volume of new space being created is putting downward pressure on pricing. Last year, the average monthly desk rate in London fell by 4%, driven by a 17% jump in supply, data from The Instant Group shows.
This is a clear sign that while demand is increasing as more companies from SMEs to large corporates up their use of flexible space, it is not increasing fast enough to keep up with supply. If operators carry on expanding at the current rate then their profitability will be squeezed even further and some will be forced to retreat.
All too easily, the flexible office sector could go the way of the casual dining market, where many operators have paid the price for pursuing over-ambitious growth in the boom years. It is in nobody’s interests to see companies fail and be forced to lay off staff as they have done in the restaurant trade.
One of the only other sectors to see a boom on anything like the scale of flexible offices is proptech. On Wednesday, proptech venture capital firm Fifth Wall raised a mammoth $503m (£404m) for its latest fund. The list of investors reads like a who’s who of real estate, featuring agency firms such as CBRE and Cushman & Wakefield, as well as big-name fund managers and developers.
The positive spin on this is that it demonstrates how determined the industry is to embrace technology. The negative read is that in their eagerness not to be left behind, they are fuelling a tech bubble that is destined to burst.
There is already a slew of proptech firms trying to do much the same thing in the provision of market data and property management services.
Some will succeed but most will fail – and as with the flexible office operators, it won’t necessarily be the ones you expect.