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Flexible office sector's quick recovery in 2021 puts market in a strong position for 2022, says Workthere in its annual predictions

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12/01/2022

While a 2021 bounce back in the flexible office sector was almost inevitable after the challenging year of 2020, the speed of this recovery has been remarkable says Workthere in its flexible office sector review of 2021 and predictions for 2022, putting it in a strong position for the next 12 months.

Cal Lee, global head of Workthere, comments:

The earlier than anticipated recovery in the flexible office market during the second quarter of 2021 was very welcome and has allowed the sector to regain some of the pace and progression it had before going into the pandemic. The real positive is that this demand level was sustained through Q3 and Q4 of 2021. We have also seen a rebalancing of pricing with the competitive deals that were on the table for occupiers no longer available as competition for space heats up.

Whilst we cannot ignore the ongoing backdrop of Covid and new challenges that the Omicron variant is bringing, the flexible office sector is in good shape and has proved that it can adapt quickly to changing market conditions.

What does 2022 hold in store for flexible office space?

Rising demand and larger requirements

Recovery for flex space came earlier than anticipated in 2021 and has continued on an upward trajectory from the second quarter of 2021. We expect this to continue in 2022, particularly for larger requirements (50+ desks) that have become more commonplace over the last six to nine months. Whilst increased demand is hugely positive for the market, for these larger units we are seeing a distinct lack of supply in many city centres across the UK, which could result in a bottleneck if operators are not able to cater for both small and large requirements.

Changing nature of supply

Here enters the landlord. As flex operators struggle to keep up with the increasing demand for larger managed floors, the landlord managed product market is on the increase and helping to meet this demand. We have seen landlords creating their own product both on the flex and traditional side of the market and even more are willing to either speculatively fit out floor plates up to 10,000 sq ft or undertake a Cat B fit out on behalf of a tenant once salient terms are agreed. We expect this trend to continue across the market.

With less operators willing to commit to leases, we also anticipate management agreements and joint ventures with landlords becoming more commonplace allowing both parties to work together for mutual benefit.

Flex take-up

Operators have been busy in 2021 looking at new sites as they seek to expand. We have not yet seen this translate into the take-up figures to any great extent (517,525 sq ft or 6% of overall take-up in up to end of Q3 2021 against an annual average of 2,235,483 sq ft or 12% of overall take-up over the last five years), however we expect this to change in 2022 and that serviced office take-up will reach 10%. Much of this take-up is likely to be via management agreements rather than leases, as operators adjust their model to reduce some of the risk on their side and instead share in the returns with the landlord as a partner.

Greater competition will drive price increases

Following the substantial deals that providers were offering during the peak of the pandemic in 2020, we have seen a neutralising of power between occupiers and operators over the last eight months that will create a healthier market. As we move forward, the increased competition for space will ensure that desk prices for flexible space remain robust in 2022 with increased upward pressure to steadily grow as the year progresses. The current average desk price in the UK is £460 and we expect this could rise to £500 in 2022 as demand heats up.

Importance of affordable office space

Supporting new and emerging talent across all industries is crucial in developing innovation as well as driving job creation, new business formation and ultimately, boosting our economy. The flexible office sector has a vital part to play in this. By offering a viable affordable provision to new businesses, start-ups and individuals, the flexible office sector acts as the first step in the talent ecosystem.  However, in order for this to be achieved, local authorities need to step up and act as catalysts for change. The past five years have seen a growing number of local authorities introduce affordable workspace policies in some form, but no single organisation can create affordable workspaces on its own. Councils need to collaborate with local businesses, business associations and workspace providers to identify the businesses that will be key occupiers for affordable spaces.

Is workspace on demand here to stay?

The uncertain nature of the last year has resulted in many business wanting a greater level of flexibility in their workspace portfolio and this can be seen in the rise in requirements for workspace on demand within the flexible office sector. This is where a company can empower their staff by providing them with membership access to co-working spaces, allowing them to work wherever they wish. Over the last few years, we have seen the amount of co-working space in any new centre shrink with the focus on private offices where the lion’s share of the revenue and profit is made. If workspace on demand takes off, this might force operators to re-think this slightly and re-address the balance. 2022 will be an important year for the workspace on demand market.

Jack Williamson, Head of Workthere UK, says:

Whilst there remains uncertainty around what impacts the pandemic will continue to have on society, the flexible office market is in a strong position moving into 2022 with some very exciting trends expected for the year ahead that should only help to boost the sector further.