Office landlords feared that flexible working would destroy the asset class. Now it’s set to save it. Isobel Lee reports.
While traditional office assets struggle to find their place in the workplace ecosystem, flex office spaces are in ever greater demand across Europe. But what if the latter’s potential could actually help the former? That’s an idea invigorating the sector, according to leading voices in the flexible workplace segment.
‘We really are the bright spot in office real estate,’ says Enrico Sanna, CEO of Fora, formerly The Office Group (TOG), which has more than 70 locations in the UK and Germany.
‘Without a doubt we are much better placed to take a grade B or C building and turn it into a sustainable office to benefit its landlord. We recently took over a space in Chancery Lane in London that used to be a traditional office, but the physical configuration made it hard to divide. We have repositioned it and have been able to dedicate over 25% of the space to amenities, making it a much richer workplace.
‘The idea of flex offices is that yes, you need an office, a place for your brand, your culture, your team, but it’s the access to amenities that really elevates the space.’
Italian-born Sanna was the founder of workspace provider Fora in 2017, which merged with TOG in 2022 to create the largest flex office landlord in London. Appointed as CEO of the combined group, Sanna says that TOG spaces will now rebrand as Fora, in the merger’s final phase. ‘Fora is the plural of the Latin word forum, which is a centrally located place to do business, so it continues to be a very appropriate name for the mission of this platform.
‘We also wanted to provide our customers with a seamless transition between our sites, as there are a lot of clients that use multiple spaces across the platform. From a tech perspective, it enables us to provide a better service.’
Illustrating the mainstream shift that flex offices are experiencing, Sanna confirms that the firm’s clients ‘very much reflect the wider office market’. He adds: ‘We tend to skew slightly more towards SMEs than large caps, but many of our clients are fintech and financial service providers, lawyers, and other core commercial sectors.’
In line with its high-profile clients, the firm has a strong ESG approach. ‘For the buildings we control, we use green energy, have EPC ratings in place and plans to improve their performance by 2027 or 2030. We also help our clients audit their carbon footprints on request. Beyond that, we are very focused on the social impact, and in fact I’m shortly heading to Liverpool where we support a charity using music and sport to help underprivileged children. Finally, everyone in the organisation has an element of their bonus linked to ESG performance.’
The lessons of WeWork
It’s impossible to talk about the rise of the flex office sector without discussing the demise of WeWork. After going bankrupt in the US in November, one of the firm’s European pillars toppled in early December with an insolvency filing in Germany. Says Sanna: ‘The failure of WeWork does not reflect the health of the flex office market. Post-pandemic, demand has shot up, mature assets have occupancy levels above Covid levels, and the sector as a whole is looking very dynamic.’
Yet one of WeWork’s most high-profile flaws, its leasehold model, has arguably delivered important lessons for the sector as a whole. While WeWork was locked into long and expensive rental contracts for the properties it occupied, it remained subject to the whims of extremely short-term sub-lets and macroeconomic variables. The latest generation of flex office operators has largely taken note.
Sanna says: ‘We have always led our business model to be freehold first. Of around 50% of our sites, we actually own the buildings or are working for another landlord under management agreements. Less than half are on leaseholds. The ownership model allows us to really transform the quality.’
Fora’s relatively asset-heavy model makes it virtually unique in the UK flex office space. The majority of the firm’s competitors also avoid a WeWork-style significant exposure to leaseholds, but operate solely via management contracts. Alan Pepper, the CEO of UK flex office business Orega, describes the firm’s model as ‘a joint venture partnership business with landlords’.
‘From the outset, we are sharing risks and rewards with the property owners, very much on a month-by-month basis,’ Pepper explains. ‘We do better, they do better. We don’t have a fixed cost base, which means we can ride some of the waves that have affected the sector, like Covid or more difficult trading conditions.
‘We also have a very firm view on where we want to be, what locations work for us. We aren’t a pure coworking business or targeting start-ups. You won’t find a lot of glass in our centres, it's rather built around privacy and security. Our average client is a mid-sized corporate and as a result, we have longevity with our customers.’
Like many of its peers, Orega is in a phenomenal growth phase – ‘by March we should have registered around 60% growth in the last 18 months’ – with plans to double that in the next three years. Yet the firm was founded in 2001 and Pepper says that this has given them resilience and perspective. ‘We went through the financial crash and through Covid – we understand the cycles and the long-term appeal of flexible workspaces.’
With its landlord partners, the idea is that Orega will be a stable and long-term presence – ‘once we’re in a site, we never want to leave’, he adds. ‘We have a couple of sites we have been in for more than a decade, and one where we have operated for 15 years. For many income-based funds, we can deliver better cash flows than a regular office lease, and the property owner benefits from transparent customer audits within the active JV.’
Like Sanna, Pepper sees the appeal for landlords too in the amenity provision, which ‘increasingly supports their conventional lettings. We often take a significant share of a building and also run the reception for the whole property – but it’s very much a partnership conversation about what the landlord wants to achieve'.
According to recent Savills research, the flex office model via management agreements is increasingly the path of choice. Based on interviews conducted in October 2023, the firm found that landlords’ appetite to operate their own flexible workspace has weakened compared to a previous survey. Now 58% of landlords have ‘no interest’ in operating their own spaces, although 52% of them remain positive about the sector. Instead, some 54% of landlords said that they were neutral or open to considering a management agreement with a flex operator, which was marginally above the previous year.
The Savills report adds that there is a growing trend of landlords recognising that flexible office space as a part of the amenity offering in a building can help support the letting performance of a scheme. Furthermore, there are an increasing number of corporate occupiers who will only consider buildings which provide this offering when relocating amidst the greater demand for tenant flexibility.
A recognisable model
Spacemade, another UK flex office provider in rapid growth mode, also steers clear of leaseholds by using the management contract model. Yet founder Jonny Rosenblatt tips his hat to WeWork and all it has done for the sector’s growth.
‘WeWork were the biggest occupier in London at one point so that says a lot about their impact,’ Rosenblatt says. ‘They did several unbelievable things. They built the strongest brand that has existed to date in commercial real estate, a brand that permeated through and created an asset class to an extremely high standard.
‘Now, their exit opens up a lot of opportunities for others in the market, although it is somewhat bittersweet.’
Spacemade operates by taking over a floor or two of a large multi-let building, or the whole building – ‘you have more control over the whole user journey with an entire building, but we are seeing a lot of growth in just taking over part of a space’, he says. ‘Most landlords that are now putting these buildings up want to let to traditional tenants but also want to offer flex space. Our brand creates fluidity within the fabric of the building by offering events spaces, meeting rooms and other overflow space.’
In July, a recent Spacemade opening for CBRE Investment Management in central Birmingham saw the flex office provider take around 30,000 ft2 to deliver a coffee operator and private offices in a 200,000 ft2 building. Adds Rosenblatt: ‘The occupiers that are now in the flex part of the building can grow within it as they need more space, and the landlord gets to keep control of that user journey.’
As with Spacemade’s peers, Rosenblatt sees a decisive shift to small and medium-sized corporate occupiers taking the lion’s share of flex spaces, rather than single-desk users or start-ups. ‘The average client is probably a business taking desks for 20-30 people, but sometimes it’s as many as 150,’ he notes. ‘It’s replacing traditional leases, especially for firms which are slightly uncertain as to how the team will operate, and don’t want to fit out a huge office or worry about supplies. You can move in the next day with no lengthy legal process required.’
The next interesting projects for Spacemade include a partnership with the Howard de Walden Estate, virtually the sole commercial landlord in Marylebone, to roll out flex spaces across a slate of buildings. Further assets across the UK are also in the pipeline. Although they are not yet in Europe, Rosenblatt doesn’t rule out eventually travelling with some of its landlord clients which have a cross-border footprint, as demand continues to rise.
Rosenblatt adds: ‘Flex offices are still only around 10% of total office use in the UK, but most studies suggest that could rise to 20 or 30% in the near future, so there’s lots to play for.’
Sanna agrees. ‘The predictions that the sector could expand to as much as 30% of offices sounds reasonable,’ he says. In terms of Fora’s expansion, ‘as well as Germany, which is the biggest economy in Europe, we also really like Paris and Amsterdam. But first and foremost, we want to grow sustainably and will only do deals with the right assets, in cities of a certain size.’
He adds: ‘At the end of the day, employees are demanding better working environments. We just surveyed 2000 people and 44% said that their workplace doesn’t meet their expectations. That rises to over 50% for the under-35s.
‘When you provide the right office, people come in to work and enjoy it. Whether you are a tenant or an operator, it’s time to make the office a very exciting place.’