The flexible office sector goes in 2021 carrying a lot of uncertainty having arrived into 2020 full of momentum following on from a 2019 that saw occupier trends begin to shift towards flexible offices and a number of new operators and workspace solutions emerging in the market.
As with all business sectors, nobody could have foreseen a global pandemic this year and this has affected all business sectors, not just commercial real estate. This has had a ripple effect on commercial real estate in that it has impacted the businesses that occupy the space, which has resulted in a negative impact across almost all commercial property sectors (barring logistics and industrial). The very characteristics that attracted businesses to the flexible office sector started to become the sector’s undoing as some occupiers chose to vacate immediately either during or after the first lockdown. In response, operators have been nimble in their reaction and have offered rent-frees in some cases, competitive packages to renew and some operators have even offered the option to ‘pause’ their contract, all of which have combined in a more buoyant level of occupier retention for operators than may have otherwise been expected had they remained passive. That being said, the contrast between contract occupancy and physical occupancy (bums on seats) could not have been any more stark for the most part of the year.
As we head into 2021, it is difficult to see normality resuming overnight. But as talks about a nationwide vaccination rollout take shape, what does 2021 look like for the flexible office sector? Let’s look at some of the key themes expected to shape the market next year.
A surge in demand for flexible Office space expected in mid-late 2021
With uncertainty likely to continue into the beginning of next year, it is likely that demand for flexible office space will remain stagnant during Q1 2021, and will continue until restrictions ease. It is expected that there will be an increase in demand for day passes and meeting room space in Q1 and potentially Q2 2021 as the UK alternates between the different tiered restrictions.
The second half of 2021 is expected to be a record period for the sector as companies flood towards flexible space. There is already an ever increasing number of companies that have not renewed their contracts since the start of the pandemic and are currently working from home, waiting for the right time to come back to the office. In addition, the time lag in occupational leases will start to come to fruition during 2021 as companies come towards the end of their leases, or have the ability to exercise break options. In addition, it is expected that larger corporates will look to incorporate flex into their real estate strategy and we may even begin to see an increase in national and international partnerships forming between operators and multi-national occupiers.
Occupiers are increasingly looking to flexible office space over committing to a new traditional lease and the capital outlay associated such as fit-out costs. Occupiers also value the flexibility of lease terms and the creative solutions operators are now establishing as well as the security of knowing exactly what they are paying under an all-inclusive rent. All of this points towards a greater demand for flexible workspace, which is expected to fully materialise in the latter part of 2021 as business confidence returns.
Suburban locations to remain strong while city centre locations struggle then bounce back in late 2021
The pandemic has impacted flexible workspaces in city centres dramatically with operators experiencing a sizeable amount of availability which has stretched the business models of most operators. Given the period of time that the pandemic has lasted so far, some operators are under ever-increasing pressure to realise income. As a result, it is expected that desk rates in city centre locations will be negatively impacted in the short-term (during H1 2021) as operators strive to compete financially with their competitors in order to secure new occupiers. We may begin to see in the short-term a “race to the bottom” among some operators, some of whom may be willing to let space at almost a break-even rate in the short-term in order to gain security of income. On the other hand, operators that remain confident in their USP and product offering will likely remain firmer on pricing, but more willing to negotiate around other areas of the contract.
If as anticipated, a vaccination programme is rolled out nationally during the spring and we creep back to normal business activity, then expect to see demand for city centre workspace reach record levels in H2 2021.
With more businesses expected to adopt a ‘hub and roam’ strategy that will allow employees to work from wherever best suits them, it is expected that demand for flexible workspace in suburban locations will grow, and given the lack of supply in these areas, it is anticipated that these desk prices will remain buoyant, and may even increase over the year.
The drive for continued flexibility concerning all aspects of the workplace is another trend that has been accelerated as a result of COVID and a number of operators have already adopted some form of on-demand membership model, with more operators likely to follow suit.
There has already been examples of this with WeWork’s on-demand booking pilot proving hugely successful in the States and other operators such as Fora have also started offering more flexible day pass booking packages as they recognise the increased demand for this style of working particularly from freelancers and smaller businesses. Whether this on-demand model remains in the long-term or whether it is a short-term solution during COVID remains to be seen.
Emergence of new workspace products
The opportunity for the flexible office sector to offer a more diverse product range will be driven by a number of different elements in 2021. In previous articles we have mentioned about landlords entering the sector to offer their own version of flexible workspace (such as British Land – Storey, LandSec – MYO etc) and we expect this, along with landlords collaborating with established workspace operators to continue during 2021.
In addition, the new Class E use class means that there are new opportunities for flexible office operators to look to some of the vacant retail space in shopping centres or on the high street. These units are typically strategically located close to public transport links and parking and usually have a plethora of amenities on its doorstep. We expect further variety to come to market as flexible workspace offerings are rolled out into coffee shops, bars or hotels. Starbucks have recently trialled a new concept in Japan which offers reserved booths and meeting rooms. Concepts like this rolled out across suburban locations could prove a short-term fix in easing the supply shortage of flexible workspace in these areas.
Towards the end of 2021, we could also start to see collaboration between residential developers and workspace operators. New residential schemes could be designed to incorporate an element of workspace for residents so that there are clear boundaries between work life and home life, while eliminating daily commuting times.
Collaboration and amenity offering will be key for city centre offices
City Centre offices will see an upturn in demand in H2 2021 but will need to act as a collaborative hub and offer amenities that give people a reason to go back into the office. Being COVID secure will be a pre-requisite. These amenities can include podcast booths, presentation/ screening rooms, wellness facilities, event space, break-out areas, on-site coffee shops, yoga classes, business coaching/mentoring, accelerator programmes, social events, gyms etc.
Wellness and sustainability
At the beginning of the year sustainability and wellness was a huge talking point as there seemed to be a real shift in companies focus on their sustainability credentials. While the early days of the pandemic put a pause on everything, occupiers have an increased awareness of the sustainability credentials of potential workspaces and trend has grown throughout this year. As mentioned in our previous article about “What is the Future for the Office Sector?” we believe that buildings that have an increased focus on sustainability will perform better, with air quality in particular a significant factor. As WiredScore has done with Internet Connectivity, do not be surprised if a company such as AirScore emerges as the go-to barometer for air quality. Air quality within buildings can be improved in a number of ways such as improving the HVAC systems, building design and even through biophilic design.
Flexible workspace operators will also start to incorporate more wellness facilities within their buildings such as gyms, meditation rooms and even business and emotional support advisors.