Flexible workspace returns have outperformed estimated rental values across multiple London submarkets when compared with five-year trends.
A report by flex workspace consultancy Hewn examined the one-, three- and five-star grades of flexible workspace products to provide property owners with data supporting the value of the workspace.
Its index used the highest desk rates achieved in the market to compare five-star products with premium, traditional rents or ERV, showing the highest likely returns from the best product. The lowest desk rates achieved covered the one-star product market.
Hewn’s report said due to a lack of transparency in the sector, property owners have struggled to understand how the perceived short-term agreements of flex perform against traditional market rents.
Hewn founder Will Kinnear said flex “has a real battle on its hands when proving its value”, even when compared with other “transient customer base” asset classes such as hotels.
“Flex has a problem, and that’s valuations. This has been a major obstacle preventing flex from reaching its full potential. However, this report offers concrete data that will help property owners understand the financial value of the flexible workspace market, showing that it generally outperforms ERVs.”
Hewn’s index used quarterly traditional office market data, flexible workspace desk data and proprietary data on costs to compare desk rates directly with the returns available to owners. The report made assumptions on running costs, accounting for staff, utilities and breakout spaces.
Big City life
In the London submarkets, the report found the core City flexible workspace market has seen five-star and three-star products outperform the conventional rental market product, with a disparity between flexible workspace income and ERV of between £10 per sq ft per annum and £40 per sq ft per annum.
Hewn said the City has seen large volatility in desk rates, suggesting an oversupply of inferior products pre-Covid. Since then, with the rise in quality products and demand, desk rates and returns have increased alongside traditional market rents.
Both five-star and three-star products saw an increase in desk rates in Q4 2024, with five-star products realising a 115% rise in gross returns available. One-star products for the first three quarters provided gross returns marginally above the conventional rental market.
Kinnear said: “It’s all about the right product, for the right space and location. There is a flight to quality, and here we can see that one-star products, while generally outperforming ERV, struggled in Q4 2024 in the City.”
West End performs
The West End, which has traditionally provided a very high-quality flexible workspace product, is also one of the most expensive areas to create space. Desk rates in the area alongside traditional office rents have traditionally been the highest in the UK.
Hewn found that throughout 2024, gross returns available for five-star flexible workspace product performed in line with premium market rents in the area, with increasing returns in Q4. Desk rates outperformed all the other London submarkets and were stable throughout the year.
“The West End continues to perform strongly, it is where businesses want a HQ address. Despite harsh economic conditions over the past five years, demand is strong – especially in flex, where occupiers are able to grow and contract based on need,” Kinnear added.
Variance across the capital
Hewn’s report found demand for flex in the Southbank submarket outstripped supply. It said several new operations emerged in 2024 and desk rates remained on an upward curve, with net and gross returns for five-star and three-star products outperforming ERVs.
Kinnear added: “Like all submarkets, one-star product returns in the Southbank market have fluctuated massively over the past five years due to the flight to quality and in-demand products.”
Hewn said the City fringe north submarket has seen a considerable increase in supply of flexible workspace over the past 10 years. Returns on flex workspace for all three products remained above ERV in the main, although pressures in 2024 saw net returns for three-star and one-star products dip below this level.
Canary Wharf hasn’t seen the growth in flexible workspace operations evident in other areas of London. However, as with conventional market rents, desk rates and returns have remained stable for good-quality products.
Stratford was the only submarket that failed to outperform ERV for all three products. Hewn’s report cited a physical lack of flexible workspace and higher quality products that are yet to drive desk rates.
Kinnear said: “Stratford is a real anomaly in this report, but it is unsurprising as it is still going through a huge transformation. This is an area to watch, with the opening of the V&A, Sadler’s Wells East and the recent move of UCL, and the campus transformation with Imperial moving in, flex is set to take off with a number of developers and owners already looking at providing five-star product in their buildings.”
Image from Hewn
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