Management agreements and M&A activity set to dominate flex office sector in 2023, says Workthere

The flexible office sector has continued to defy gravity with increased demand driving competition and desk prices. However, with external factors from the wider market and economy changing dynamics in the sector, combined with a growing lack of supply, Savills flexible office specialist Workthere takes a look at what 2023 holds for flex offices?

Cal Lee, global head of Workthere, comments:

“The flexible office market was quick to learn and adapt during the pandemic, which has made it a far more resilient sector. Whilst there is no doubt that it needs to mature further, it now has a good foundation on which to grow and weather the inevitable headwinds as we move into 2023. The flexibility that it offers combined with an agile structure and dynamic pricing model has made it a more versatile option for a wide range of occupiers, allowing it to both complement and compete with conventional space.”

What does 2023 hold in store for flexible offices?

Corporates continue to be a key customer of flex space

Corporate occupiers have steadily established themselves as a dominant customer for flexible office providers. Whilst this was a trend accelerated by the pandemic as larger occupiers looked for more flexible options to accommodate staff returning to the office, it seems to have generated a structural shift in the market with corporates now including a proportion of flex in their portfolios as standard, which we expect will continue. The use of flexible offices by corporates as swing space and project space is also a growing trend that we anticipate will shape much of the take-up in 2023. In 2022 alone, the number of transactions over 50 workstations that Workthere have completed has risen threefold from that of 2021. Looking forward we expect this to increase as well as the 100 and 200 desk plus sector too (albeit not as such a large jump from 2021), which is already being reflected in the current pipeline.

Management agreements set to grow in popularity

Over the last three years we have seen management agreements surge in popularity accounting for 41% of deals so far in 2022, compared to just 9% in 2019. We predict this figure will increase to above 50% in 2023 as a result of a fundamental change in the way that landlords in particular view these lease structures, having previously been less in favour due to the perceived risk associated with not having a formal lease in place, and the subsequent perceived impact on value. However, what they are now recognising is the level of control they can have in the right type of partnership with an operator, which will give them more involvement in how the space is delivered along with transparency around performance.

Flight to quality drives market polarisation

The polarisation that has been created in the market by a flight to quality from occupiers will continue into 2023 with the best quality spaces in the best buildings in the best locations outperforming and generating upward pressure on pricing for this stock. Whilst there is undoubtedly still a market for budget space, there remains a significant quantity of legacy stock in this area that needs to be upgraded and there is therefore a greater supply of available space at this end of the market. The other element bringing a new dynamic to the market is the rising number of landlords entering the flex office sector with self-contained managed spaces now competing with large enterprise space from operators. At present demand remains strong from larger occupiers, but this might be challenged over the next 12 months as a result of headwinds in the wider market and economy. Part of this will include inflation pressures on costs as well as risks surrounding the business rates review, which may have some impact on desk prices increasing as operators look to maintain margins.

M&A and capital raising activity on the rise as operators seek growth

M&A activity as well as capital raising will be another key feature of the flexible office market in 2023, continuing the trend that we have started to see this year with TOG and FORA merging, Industrious purchasing The Great Room and Welkin & Meraki, as well as IWG purchasing the Instant Group. Growth is now top of the list for many operators and scale remains a key component to accessing the corporate demand in the market, therefore we expect several operators to continue looking at operator mergers or acquisitions as a means to grow footprint at more pace than organic growth. We also anticipate that operators will look at different routes to scale, such as accessing capital and buying sites with their own operator in tow, in a similar model to Castleforge with its operator Clockwise.

Who will fill the supply gap?

We have mentioned the growing supply shortage of good quality flexible office space above, which is having an impact on the growth and maturity of the market. But who will fill this supply gap? As before, it is likely that we will see more collaboration between operators and proactive investors looking for opportunities to develop new space. We are also seeing a growing number of enterprise spaces within local communities, which we expect will continue to expand in 2023. In addition, as we have already noted, new landlord entrants offering fully fitted managed space is also likely to be a big feature moving forward. One area we can’t ignore is the drive for more ESG and sustainability focussed space within the flexible office arena. Koba Space has recently launched its fully circular flex space concept and we anticipate more providers to follow suit.