There have been a number of high profile investments into flexible working space in the last year. Blackstone (The Office Group) and Carlyle (Uncommon) are a couple of recent examples of private equity houses investing in the sector as is Japanese multinational SoftBank Group (WeWork). It is interesting to see both specific real estate funds and private equity funds investing in this sector. It is also noteworthy that this mirrors the growth in the private rental space more generally. Rather than a recent trend, this seems to reflect a shift from conventional long leased offices to a developing sector of more flexible shorter term solutions ideal for the millennial generation and the media and technology sectors. Is this the real estate market’s answer to the gig economy?
Key drivers of increasing demand for flexible working space
Commentators have suggested that where there are an increasing number of growth businesses, there is in turn an increased demand for serviced office space. Nowhere is this more evident than the technology sector. London is a good example of this with Tech City developing as a hub for technology businesses over the past few years. These businesses often require office space at short notice with flexible terms. In particular, start-ups seek to keep long term costs and capital commitments low but also be in a position to deal with rapid expansion. This makes flexible working space ideal.
If this is true, it would also present an obvious risk – growth businesses are more likely to fail or to grow rapidly to a level where conventional leased space is preferable. It then becomes a question of whether there is sufficient demand (and replacement of tenants) for this not to be a concern. It is therefore unsurprising that valuation has proved to be such an area of contention in relation to flexible working space.
Expansion in sectors suited to flexible working space (such as information, communication and professional services) has also supported investment in this space. The UK serviced office sector, which internationally is considered to be one of the most developed and mature, would suggest that this is true looking at the anticipated growth areas in the British economy.
There is also a trend towards more flexible working in general. Globalisation and the interlinking of employment markets as a result of technology means that people can work in a more mobile manner to suit the dynamic needs of both individuals and businesses. Flexible office space is particularly ideal in this regard as break-out areas and services (such as internet) can be shared.
Recent trend or a long-term emerging sector
Given the increased investment in the flexible working space sector and the emergence of companies such as WeWork (which Taylor Wessing uses for its New York office space), The Office Group and the merger of Ur Work and New Spaces last year in China, the question is whether this will be a new area for private equity investment in the long term or merely a recent trend. It has been contended that the increased demand for serviced office space recently has been as a result of greater political and macroeconomic uncertainty. This appears to be the case in the UK, where the uncertainty arising from the Brexit vote could account for an upsurge in demand for more flexible office space.
That being said, the clear advantages of flexible working space mean that it could prove to be more resilient than appreciated. The steady yields from rental income and security of the underlying asset could present a low risk opportunity for private equity investors. The sudden influx of private equity investment into this space would suggest that this is the case but only time will tell if it proves to be wise.