Mahdi Mokrane: Landlords don’t need a big brand to compete with WeWork

By virtue of having been an early adopter, expanded aggressively, and marketed itself imaginatively, WeWork has become almost synonymous with the trend of ‘co-working’, or ‘flexible working’. This encompasses office tenants seeking workspaces that offer shorter or more flexible lease terms, more and better amenities and services, community activities, and adaptable physical layouts. However, demand for and provision of co-working space extends far beyond one company. London has been at the forefront of the recent rise in demand, with flexible space accounting for 15% to 20% of office take-up in the UK capital over the last three years. In continental Europe, meanwhile, flexible space’s share of office take-up has doubled year-on-year since 2014, reaching 12% by the end of 2018. The expectation is that this figure will continue to grow at a fast pace. This growth in flexible working is part of a more global trend impacting residential, retail, and healthcare properties, where a blended ‘space and services’ model is fast growing in popularity. Our conviction is that this demand is driven by three structural shifts: the rise of small business, changing employee aspirations, and changes in accounting treatment for short leases. Varied clients The growth in the creation of small businesses in the last 15 years, spurred by technology reducing barriers to market entry, is swelling the volume of fast-growing corporate tenants less willing to commit to, say, a five-year lease for a fixed amount of space and less able to devote capex to renovations. Technological advances have also facilitated more geographically diffuse client bases, which can be more cost-effectively serviced with a local presence in a co-working space than from permanent offices in multiple locations. When asked, no business would state that they need an office for the sake of occupying an office space; what they would say is that they need a highly productive workforce. On a human capital level, the presence of quality amenities such as lounge areas, themed meetings rooms offering private dinners, or corporate functions and events, as well as services such as catering and on-site technical support, are becoming an increasingly important differentiator for attracting the new generation of talented employees, who place greater importance on work-life balance and wellbeing at work than previous generations.  From a financial accounting perspective, new international accounting standards coming into effect this year incentivise flexible leases by permitting the removal of leases shorter than 12 months from balance sheets, enhancing a firm’s financial profile. Consequently, the office market has seen demand for traditional leases on sub-5,000 sq ft floorplates all but disappear. Asset owners must therefore respond to the challenge posed by flexible office operators, even if their footprint only currently accounts for a small proportion of space within Europe’s key office markets.  A different approach Landlords need not necessarily adopt a similar big-brand approach to WeWork to do so successfully. The most common response has been for landlords to work in partnership with flexible office operators, such as by leasing large office spaces to them on a long-term basis or by contracting the operator to manage the space. More recently, some landlords have created their own flexible office brands to clearly differentiate their product offerings. At LaSalle, we have favoured a slightly different approach, continuing to secure long leases where possible with corporate tenants that we deem better positioned financially to meet covenants than flexible workspace operators. We pair this with an approach towards offering co-working space in which we essentially act as the WeWork-style ‘technology platform’. This requires us to interact directly with the community of individual tenants, taking on the additional operational workload, but being able to efficiently expand or contract each tenant’s footprint across our portfolio of flexible office spaces. However, this is only possible if a landlord has anticipated developments in demographics, technology, urbanisation, and the environment, and built an office portfolio in key urban locations that can provide the requisite services and amenities.  What’s more, with corporates still representing the vast majority of demand for our buildings and preferring that the space be delivered for them to fit out, our flexible spaces are strategically positioned to be adjuncts to our core offering, serving as spill-over space.  Traditional landlords that do not acknowledge the current flexible office trends will likely face hard times ahead. With their attractive membership models and all-in rates – and despite rent levels that some would argue are far off market levels – flexible office operators are changing office market dynamics across Europe.  Landlords must address the demand for more amenitised and serviced space required by modern office occupiers. To do so they must invest in modern digital technology, but also use the skill of their assets managers to better engage with their office residents, or risk missing the current trends of changing tenant requirements.  Mahdi Mokrane is head of research and strategy for Europe at LaSalle Investment Management