Hunt for quality accelerates polarisation in flex office market

Market polarisation is not a new trend but it is one that we have seen accelerate dramatically over the last 18 months within the flexible office sector with occupiers in the space firmly focussed on securing best in class space, in the best locations. This distinct flight to quality, coupled with a significant lack of supply for this space in the flexible office sector has exacerbated the distinction between the top and lower ends of the market. As a result, we have seen value engineered and poorer quality space impacted across the market with polarisation really beginning to show in both take-up and pricing. For example Workthere data shows a £352 difference between the higher end of desk prices in London compared to the lower end in 2022. For the rest of the UK the difference was £165 during the same time period.

Whilst value offerings still very much have a place in the market, there is a lot of legacy stock in the market that needs to be upgraded resulting in there being a greater supply of available space at this end of the market. This, coupled with the fact that employers are taking a more conscious approach when looking for new space to ensure they get it right and meets all of the working needs of their staff, with many still navigating the balance of hybrid working, means that the lower end of the market has struggled. Continued new entrants to the market, particularly from a landlord perspective is also adding a further dynamic and will inevitably add increased pressures for more value focussed products.

We have seen the flex office market perform robustly over the last 12 months, but it has not been exempt from the wider economic challenges. We have however seen providers take learnings from their experiences during the pandemic to ensure they are agile and able to adapt quickly in line with the changing environment. Typically, in more challenging markets, we would expect to see the extremes of the sector performing better with luxury and value having a ‘clear’ offer and customer base, which can sometimes result in the ‘middle market’ having to work harder to differentiate itself in order to perform. However, within the flexible office sector, we have actually seen the middle market benefitting from the strong demand at the top end of the sector. Predominantly driven by a supply / demand imbalance, occupiers have looked to good quality spaces within the middle tier to fill requirements. We expect this to continue resulting in many ‘middle ground’ need to continue to upgrade heir space in order to meet the growing demand.

Whilst high quality space will continue to generate the highest appeal from occupiers, the importance of good customer service cannot be overlooked, particularly for those more mid-market providers, and it could well be a deal breaker moving forwards. Retaining existing customers, managing renewals well and effectively keeping attrition to as low a rate as possible for any mid-market operator can be the difference between success in a single site. If a customer likes the space and feels the terms are fair, then most often they will want to stay to avoid disruption. Too often we see operators attempt renewals in the wrong approach.

Looking forward, flex office operators should be optimistic but not complacent. There is a real opportunity for the entire sector to cement its position ensuring they are future-proofed to adapt to the ever changing ways of working. A key area of consideration that will form a huge part of this is ESG. Understanding data around energy usage, what impacts a space has and where it can improve from an ESG perspective will be vital to both attracting and retaining customers going forward.