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.