Flexing your muscles

Michael Davis of JLL speaks to Theo Andrew on the emergence of the flexible office space and making the most of today’s gig economy

Flexible workspace is creeping into the mainstream of institutional real estate investment. What has led to this change?

It’s the growth of the gig economy. A cultural and generational change has occurred as more people are looking to set up startup businesses, particularly in the creative sectors, and as a result the co-working business has blossomed to accommodate this.

Every large company is looking to innovate, and the way they would have traditionally done this is by pumping a lot of money into a venture, and then trying to develop everything in-house. History has shown us that this way of working takes time, typically costs more and, by the time it has reached delivery, may not even be right for the company anymore. A lot of corporates are now looking at small- and medium-sized enterprises (SMEs) to come up with solutions for their problems.

There are two ways of doing this as a corporate: you either buy the company or you create a venture, a live petri dish of sorts where you host a number of SMEs. They can use their resources, experience and capital to help to get their idea off the ground and, in return, the SME can end up solving some of the company’s problems, sometimes problems the company didn’t know existed in the first place. It’s a much more collaborative way of doing things.

JLL, for example, has launched a joint venture with Starwood Capital and Seedcamp called Concrete, a property and technology incubator and accelerator programme. There are a number of these popping up due to the changing nature of how we work.

What kind of risks do such investments entail? How can investors manage those risks?

Compared to other sectors, the property industry is relatively slow-moving and a lot of people still see co-working as lightweight. Mostly, they question the robustness of the operators. A lot of investors have heard of WeWork—some now see it as the McDonalds or Starbucks of the co-working world—however, a number of entrepreneurial landlords see co-working operators as a good way to reposition their buildings, to add presence and diversity, particularly at ground-floor level.
We have witnessed some developers and investors enter profit-sharing joint venture deals with co-working businesses. For example, Central Working committed to a partnership with British Land on a property close to Liverpool Street. This arrangement is becoming more popular, as initially it gives the operator an easier way to set up their centre, whilse the landlord can exceed the market rent if it is successful giving both sides an opportunity to share in the upside of the venture.

We have also seen a response directly from developers. British Land has launched its own flexible office brand, Storey, and there is Brockton Capital’s FORA. Both of these have been a response to the increasingly short lease lengths in the UK, as well as the desire from companies, large and small, to take out flexible leases in emerging areas of London.

In London, there will always be an ecosystem of smaller and larger tenants. As a result, it will become increasingly important to diversify within your portfolio and cover all parts of the spectrum, and not all of this can be accomplished through conventional leasing models.

How are investors financing these deals?

It depends how much of the balance of the building is attributed to co-working. There have only been a handful of WeWork deals traded in the investment market and they’ve broadly shown that the perception of the WeWork covenant today is perhaps 50 basis points further out than a conventional tenant. Typically, buildings that have traded have tended to include a range of occupiers, with one of them being a co-working operator, so the true value of their covenants hasn’t really been tested.

Where do you see the future of co-working office space going?

In the UK, there are two dominant forces in terms of square foot occupied, WeWork and the The Office Group in Central London. However, there is now a wide variety of brands to choose from as the SME sector in general is quite fickle and footloose due to the membership structures offered.

The Blackstone deal with The Office Group is great news for UK co-working as it will undoubtedly provide an international platform and increased firepower for The Office Group’s brand to expand and scale up globally.

We are witnessing a move towards specialisation of co-working spaces, with Level 39 (FinTech), The Drugstore (advertising), Fish Island Labs (tech), and Huckletree West (fashion tech). Imperial College has launched flexible laboratory spaces in their West London campus, with an element of desk-based co-working through operator Central Working. There are also many more concepts looking for space in the worlds of automotive, gaming and cooking. It is certainly tangible that with the growth of the knowledge economy in London that other co-working specialisms could arrive.

The latest features from Real Estate Investment Times
Leo Civelli, CEO of Duff & Phelps Real Estate Advisory Group, discusses the effects of Brexit in the UK, further challenges facing the European markets, and the opportunities that lie in the non-performing loan space
The UK is coming to the end of a turbulent year for real estate, but Paresh Raja of MFS predicts a positive 2018 for those looking to expand their property portfolios
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
In the US, Regulation A has opened up doors for real estate companies and investors of all types, says Robert Kaplan of HC Government Realty Trust
International institutional investors want in on the private rented sector in the UK, says independent property expert Sam Collins
Alternatives continue to see rising demand from institutional investors in the Canadian marketplace. Tim Rourke, vice president of pensions and asset owners at CIBC Mellon, discusses how the country is well placed to meet it
Fund managers expect the private real estate industry to grow over the next three years, but Preqin’s Oliver Senchal warns against market consolidation
New regulations from the ECB have given real estate investors a lot to think about in the non-performing loans market, but appetite remains strong. Theo Andrew reports
Paul Conroy, real assets director at Aztec discusses the relationships behind co-investing and explains why it’s important to make sure it’s not just a marriage of convenience
Country profiles
The latest country profiles from Real Estate Investment Times
Kelly O’Hara and Conor Houlihan of Dillon Eustace discuss the Irish market post-Brexit, and give an update on non-performing loans available in the region
Between Brexit and post-crisis recovery, Frankfurt’s office sector is booming, with particular interest coming from the world’s financial institutions, according to Andreas Krone and Lenny Lemler of NAI apollo
Asset Servicing Times

Visit our sister site
for all the latest asset servicing news and analysis

Africa has long been coveted as the land of real estate opportunity, but more needs to be done at a local level to break the market, heard attendees at the Second West African Real Estate Forum in London
Callum Young of Savills tells Mark Dugdale why South Korea’s real estate market is attracting both domestic and international attention
UBS Asset Management Global Real Estate has launched a new business initiative in Brazil, in partnership with Brazilian consultancy Real Estate Capital. Senior adviser Miose Politi explains
A member of the EU since 2007, Romania boasts a property market that has been on the up ever since. Liviu Tudor of the Romanian Association of Building Owners explains
Alternative allocations are becoming mainstream for institutional investors, and Canadian companies are leading the pack, says Claire Johnson of CIBC Mellon
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The latest interviews from Real Estate Investment Times