Space as a service: The rise of flexible working

The rise of flexible working is a trend that has caught the headlines. We explain why the trend is here to stay, what it means for companies and how investors can adapt to the changing nature of the workplace.

Regardless of its fate, WeWork is undoubtedly a symptom of the times. Viewed as a maths problem, the marketplace for offices is a simple equation: match tenants with landlords for an optimum price. A challenge ripe for the tech world – with all its knowledge of network effects – to get its teeth into. Enter aggregator-CUM-landlord, WeWork.

However, the office sector is hugely complicated. It is where companies combine people and capital to create profit; it is also where workers spend an inordinate amount of their time – so making them pleasant environments to hang out in has become a core part of ensuring employee well-being. In terms of delivering an overall service, incumbent providers can clearly learn a thing or two from these new, flexible providers of office space. Yet, more conservative investors and financiers still have much to offer the newcomers in terms of financial acumen and cold hard experience.

It should come as no surprise that the share of space taken by flexible space providers in Europe has risen into double digits in most markets, with UK centres leading the way. In London, in the period since 2010, the year of WeWork’s launch, flexible take-up has risen from a share of around two per cent to around 10-20 per cent today.

Figure 1: Flexible offices take-up
Figure 1: Flexible offices take-up
Source: PMA, Flexible Office Providers: 2019 Update

This development has gone hand-in-hand with the rise of flexible working. CBRE estimates that freelancers already make up 36 per cent of the global workforce, a figure that it expects to rise to more than 50 per cent by 2027.1

Developments in mobile and cloud computing are changing the way workers interact

“In the not-so-distant past, knowledge workers were tightly bound to their offices because that was where their computers and internet connections were. Now, developments in mobile and cloud computing, as well as overall connectivity, are changing the way workers within organisations interact; the nature of the work itself, as well as where and when it will take place is changing fundamentally,” says Vivienne Bolla, Real Assets Research Analyst at Aviva Investors.

Moreover, advances in artificial intelligence and robotics suggest further disruption ahead. Many functions appear susceptible to automation or outsourcing to lower-cost economies. The work that remains is likely to be heavily focused on creativity and collaboration. 

A tenant’s paradise

According to Ben Bourne, Managing Director of Bourne Capital, “the growth of flexible working and offices offer major potential benefits to companies. In particular, these trends offer a much-increased opportunity to align human capital with real estate needs.” In the knowledge economy, access to appropriate human capital, as and when it is needed, is key to success. Real estate is also the most significant overhead for many companies. The tech-enabled rise of flexible working and office space therefore offers companies the opportunity to grow and contract their human capital and real estate inputs based on business needs.

JLL estimates that the share of flexible office space could rise to as high as 30 per cent over the next decade, from five per cent currently

These possibilities weren’t so readily available until recently. Business downswings might see companies hoarding labour and stuck with a real estate footprint that was no longer appropriate. The ability to pay only for labour and real estate as needed would be a major efficiency gain for those companies who are able to manage it. And the quest to do so will be a major operational goal for knowledge-economy companies in coming years. As such, advances in technology can be thought of as unleashing latent demand for flexible working and office solutions. This demand is likely to be sustained in coming years, though it is difficult to say exactly how much more flexible office space will be generated as a result. In what is probably an ambitious prediction, JLL estimates that the share of flexible office space could rise to as high as 30 per cent over the next decade, from five per cent currently.2

Figure 2:  The rise of co-working and flexible space
Figure 2: The rise of co-working and flexible space
Source: JLL, Disruption or Distraction, 2019

Growing demand meets a rapidly-evolving supply side

Though it is difficult to predict the degree to which flexible office solutions will penetrate the market, we can nonetheless say something about how their growth might disrupt office leasing markets. A number of implications come to mind.

Companies will increasingly use a range of options to manage their demand for office space

Companies will increasingly use a range of options to manage their demand for office space – central office, serviced office, co-working and home-working. These patterns can be characterised as “hub-and-spoke” arrangements, with a large share still being allocated to traditional leases but a growing share favouring flexible solutions. The split among these options will depend on a range of factors, especially the nature of the tasks at hand.

They are likely to seek assets that enhance the brand for their headquarter space

Of course, traditional offices retain certain advantages. Some occupiers desire certainty that they will be in a particular location, while others are keen to signal a deep commitment to a city or their labour pool. “Companies are likely to seek assets that enhance the brand for their headquarter space,” says Chris Urwin, Director of Real Assets Research at Aviva Investors. Nonetheless, in general, demand for flexible office solutions should rise and therefore traditional leases will capture a smaller share.

Not all apple pie

A key premise of the flexible providers’ model is that they can use space more intensively than traditional offices. In essence, more workers and economic activity can be accommodated in a smaller amount of office space. However, for investors this implies an increased risk of oversupply. Rental growth may also be more difficult to achieve as, in effect, more economic growth may be accommodated in less office space.

An increase in the share of flexible space should mean that underlying rental income streams more quickly reflect changes in market rents. This implies that rental income streams will exhibit more volatility than in the past, closer to that of market rents. For landlords this suggests that assets will be more costly to manage, making net income growth more difficult to achieve.

We have taken a strategic stance on the rise of co-working, minimising our exposure to the potential downside risks

Leo Shapland, Head of UK Offices at Aviva Investors argues that “we have taken a strategic stance on the rise of co-working, minimising our exposure to the potential downside risks, while balancing the needs for flexibility and choice for our customers and the occupiers of our buildings.”

The key risk in the model is the “duration mismatch” between operators’ long-term lease obligations and short-term lettings or memberships. In essence, by using flexible space that can be easily divested instead of longer-term leases, the underlying occupiers are transferring the risk of being stuck with excess space in a downturn from themselves to the flexible office companies. This makes their financial strengths and risks of prime concern to landlords. If their covenants turn out to be poor, that risk may ultimately get transferred back to landlords in the event of operator retrenchments.

For landlords too, the rise of flexible space has significant consequences for income security and income volatility. The degree of impact needs to be assessed for each individual asset.

Of course, landlords can endeavour, as the flexible operators do, to use their assets more intensively by incorporating a proportion of flexible space. They too have the opportunity to develop strategies that increase asset utilisation, attract the most desirable tenants and reap the rental rewards. “A focus on traditional leases, as well as developing complementary partnerships where skillset gaps exist will make sense,” says Urwin. 

As structural trends supporting the growth of flexible working are set to remain in place, it will be prudent to develop investment strategies that minimise risk and have the potential to profit from the increased demand for flexible space. 

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Apologies, this content is currently unnavailble.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL) as at November 2019. Unless stated otherwise, any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In the UK & Europe, this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH, authorised by FINMA as a distributor of collective investment schemes.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material.  AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”).  AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Related views