FLEXIBLE OFFICE SPACE WILL SEE STRONG GROWTH
Our analysis suggests that flexible office space demand is not a fad, but is supported by structural economic, behavioral, financial, and government shifts. Looking across these four drivers we see a strong case that demand for Flexible Office will continue to grow and it will take share from traditional tenant-owner lease arrangements.
Growth of Small Firms: Small- and medium-sized businesses typically account for 60%- 80% of jobs within an economy. Small business creation has increased in the last 10-15 years, far surpassing the growth of larger firms. The forecasts for major economies are for this trend to accelerate over the next decade.
Technology is a major catalyst of this growth, reducing barriers to market entry and allowing small businesses access to a wide range of markets. In-line with the structure of major economies, 60%-80% of demand for flexible offices comes from small occupiers. Small, fast-growing firms are also less likely to want to commit to a 5-year lease for a fixed amount of space.
Their space needs could swing up and down, and many are willing to pay extra for this flexibility.
Growth of Key Industries: While there is a lack of systematic data on the users of flexible offices, we know from a City of London survey that the finance, business services, and information and communications sectors are the key occupiers of flexible office space in London.
Office-based employment projections indicate that these sectors will grow twice as fast as other sectors, as we see continued growth in knowledge-based sectors. This growth will support the trends we see in flexible offices.
Project-based work in other industries is also growing, where teams come together and then dissolve when the project is done. Our analysis of the media/entertainment industry in Los Angeles suggests that creative teams working on new content also prefer the flexible office model.
Changing Business Practices: Technology is increasing firms’ geographical reach, thus their client base is more likely to be geographically diverse. While it is costly to have permanent offices in multiple locations, membership-based flexible office space allows even small companies to have a “home base” close to clients.
Changing Employee Needs: Younger employees are increasingly footloose, and frequently demand work arrangements that are flexible and accommodating of their varied lifestyles. Businesses that need access to these workers need to offer a range of work venues that appeal to their work-life balance. Flexible offices allow smaller firms to meet this need in various locations.
Cost Efficient for Certain Users: Cost may drive small businesses to occupy flexible office space rather than investing in the build-out and operation of a standalone office.
For start-ups, cash flow may prohibit office renovation when there are other more important capital necessities. And in situations where the long-term outlook is uncertain, flexible offices allow occupiers to avoid being locked into longer-term leases that are unlikely to meet their future needs.
Changing Accounting Standards: New international accounting standards that go into effect in 2019 will make flexible leases more desirable as they allow the removal of leases shorter than 12 months from balance sheets. This will reduce liabilities and enhance the financial profile of those looking to raise capital from the markets.
Government intervention, particularly in the Asia Pacific region, has been a catalyst for the growth of flexible offices. In Australia and Singapore, the public sector is developing or supporting the construction of flexible space. In Japan, the government has been pushing “work-style reform” to encourage companies to explore more flexible ways of working. Both approaches are driven by concerns around productivity, work-life balance, and improving the participation of women. In several countries, business incubators or accelerators have been subsidized by local governments that are eager to attract technology firms to their cities.
