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In the past, we’ve talked a lot about the flexible office market in London and how flexible space can benefit all companies for various reasons:
- For startups, because of the flexibility to adapt to rapid growth and changing headcounts
- For freelancers, to provide a space to concentrate and meet like-minded individuals and possibly clients
- For corporates, for offsite spaces to disrupt traditional system or for innovation labs
Here, we’ll discuss the overall state of the flexible office market in London.
The Flexible Office Market in London
The property market in London is rapidly changing. While there are still many businesses operating in more traditional models such as with 5 or 10-year leases in desirable postcodes to attract their target clients, more and more businesses are becoming receptive to working in areas not typically considered prestigious, so long as the area is well-connected to the rest of the city. This has caused a revitalisation in previously overlooked areas such as Clerkenwell and Farringdon.
In recent years, the whole of London has been moving towards a flexible office market, as there has been a 41% increase of SMEs in London since 2010, a large portion of which is in the tech sector, which often operates on a culture geared towards flexibility.
Why the flexible office market benefits startups
As of 2018, the tech sector in London has reached a level of maturity when companies that were previously startups have grown into stable, well-funded businesses. However, because such companies often rely on external funding to continue operations, they have trouble taking on extra capital expenditures such as a lease, as capital expenditures do not look good in the books.
Even though taking on a 5 or 10-year lease will likely result in better deals for tenants and provide them with stability and the opportunity to grow into the space, they often choose to go with flexible office space instead because of the overhead costs involved with taking out a lease. In addition to being bound to the lease for a set term, the tenant is also responsible for spending additional capital to fit out the space.
For example, consider that a VC-funded startup goes to their investors and says that their occupancy costs will be lower if they take on a lease. The investors will likely reply with, “We just invested x-amount of money in you; we don’t want you spending half of that fitting out an office. We want you to spend this capital on growth.”
Reducing capital expenditures with flexible office space
Companies looking to keep capital expenditures to only the necessities thus look towards flexible office solutions such as WeWork or TOG. These flexible office solutions – which offer private offices as well as coworking – provide ready-to-go amenities that allow businesses to move into the space and start working right away. While tenants may pay a premium on their rent in exchange for flexibility, this can be viewed as wrapping up initial fitout costs across the length of term at a plug-and-play workspace.
The supply of flexible office space in London
From the demand side, it obvious why, with the dramatic increase of SMEs and the uncertainty of macro-changes such as Brexit, flexible office space in the capital is more popular than ever.
Supply in London has been increasing over the past few years, and takeup is well above the 10-year average. There is more and more second-hand space coming to the market, 90% of which is from professional service industries. Because occupancy costs in London are very high at the moment, and because companies are realising that their employees are happier and more productive when they work flexibly, many companies with extra space are consolidating, thereby providing more space to the market in the form of sublets or flexible space.