Coworking Creates Turmoil Across the Pond

Fiona Don, Senior Researcher, Avison Young. Image courtesy of Avison Young

While “serviced office” providers (or coworking providers, as we call them in the U.S.) are these days perceived as more mainstream than before, “some landlords and investors continue to be relatively cautious with regards to leasing space” to them, according to a new report from Avison Young’s U.K. arm. This is especially the case when a lease has not been underwritten by a parent company, with WeWork’s attempted IPO further muddying the waters.

Noting the explosive growth of coworking, the report ties slowing economic growth and an uncertain political climate to “a long-term trend towards shorter leases and greater flexibility.” As a result, landlords are finding it harder than ever to lease space that comes into direct competition with serviced offices. For example, the report points to “a clear fall in traditional demand” across Central London for office suites smaller than 5,000 square feet, as the coworking sector has grown. The drop was substantial: 60 percent over a 12-month period spanning 2018 and 2019.

READ ALSO: Expo Real: Is Coworking for Everyone?

In addition, the report points out that coworking providers typically lease space via a separate Special Purpose Vehicle, which gives the provider more flexibility, but increases the landlord’s risk. Three instances in which Regus dissolved such SPVs are noted. Furthermore, tenant turnover within coworking spaces tends to be “considerably higher than on traditional leases.”

The report adds that “Serviced offices make it harder for investors to raise affordable debt, and over-exposure affects the overall investment value of the building.” Avison Young’s research indicates that serviced office–leased investment deals averaged 46 basis points above the prime yield for their respective submarkets.

The search for solutions

Despite all the challenges, the report acknowledges that serviced offices can, among other advantages, comprise an amenity for traditional tenants, by providing overflow space. In a larger sense too, some owners are finding competitive strategies for the coworking onslaught.

Avison Young suggests that one solution for a landlord might be to enter into a management agreement with a coworking provider and points out that Industrious and Convene are already doing this in the U.K. As in the U.S., the growth of coworking has pushed some landlords to offer fully build-out, “plug and play” spaces, which both enables potential tenants to visualize the space and speeds up the move-in process.

Avison Young’s research also found that “void periods” can fall drastically, from 6 to 12 months down to just one to three months, with this type of build-out. Furthermore, rent premiums of about 10 percent have been achieved with such space, even as rent-free periods have been cut from, say, nine months, to six months or even just three.

In a blurring of roles, however, coworking operators such as Knotel and WeWork HQ are offering space with custom build-outs and tenant branding opportunities. In another parallel with the U.S., some landlords in the U.K. are offering their own coworking spaces, such as British Land’s Storey. This even as WeWork and at least a few other U.K. coworking providers are gradually acquiring their own buildings.

One advantage for building owners, according to the report, is the opportunity to build customer loyalty, which could pay off if a tenant grows to the point that it seeks a traditional lease. The landlord would be “in essence, incubating its own future tenants.”