If the rise of the rent-a-desk revolutionaries has passed much of the City property market by, last week’s letting of 170,000 sq ft by WeWork at Moor Place, EC2, should be a wake‑up call.
The “co-working office space provider”, which in less than five years has gone from start-up to a $6bn (£4bn) company, is the highest-profile of a wave of serviced office-esque occupiers that have become a major force in the London market.
According to the Instant Group’s Serviced office review for 2015, published this week, 30 new serviced offices opened in London last year, equivalent to more than 10% growth in almost all the major submarkets (see table below).
Serviced offices of varying descriptions now account for 12% of the central London office market, according to the report.
And the rate of growth is likely to accelerate.
Will Duncan, head of broking at Instant Offices, thinks the supply of serviced offices has some way to go before it surpasses demand. “We have seen strong and steady growth since 2008, consistently throughout the downturn and into the present market,” he says.
WeWork plans to operate from 500,000 sq ft in London by the end of this year and 1m sq ft by the end of 2016.
It now has locations in Soho, the South Bank and three in the City and is actively targeting almost all of the other major submarkets.
But while London landlords may welcome this new source of demand in what remains a patchy lettings market – Moor Place being a classic example of a prime new-build development that failed to attract tenants anything like as quickly as its original developers would have liked – just how strong are their covenants?
Are WeWork and the ilk here to stay or are they part of an over-hyped fad, at best risking over-supply and at worst epitomising a new dotcom bubble?
James Townsend’s and Luke Appleby’s niche agency start-up, Kontor, advises WeWork in London and the pair are adamant that the company’s business model has legs.
“WeWork taking such a significant amount of space in the City is proof that the market is undergoing a significant structural change,” Townsend says.
“We see very clearly in our business that flexibility and inspiring spaces are no longer luxuries but essential business requirements – this is only the beginning.”
2014 vs 2013 (YOY UK figures)
| City | Number of centres | Centre growth | Average workstation rate (£) | Workstation rate growth |
|---|---|---|---|---|
| UK | 2,335 | 3.60% | 423 | 11.40% |
| London | 552 | 4.50% | 615 | 12.90% |
| – City/ Docklands | 151 | 10.20% | 661 | 20.00% |
| – West End | 141 | 11.00% | 717 | 5.70% |
| – Midtown | 45 | -4.30% | 679 | 13.80% |
| – South Bank | 28 | 16.70% | 530 | 18.80% |
| – Other London | 187 | 16.70% | 446 | 21.50% |
But for every bull there is a bear. Last week one credible voice came forward to talk down the prospects of angel-backed start-ups exactly like WeWork.
Tech billionaire Mark Cuban, who made his money in the late-1990s founding and selling Broadcast.com for more than $5bn (£3.3bn), argues the tech bubble is back – and in a more dangerous way.
In a blog post published last week, Cuban argued that while the last dotcom bubble was public – with equities investors hit hardest – this time around over-valued tech start-ups are being funded privately. As a result, they are much less liquid and therefore considerably riskier investments – and riskier tenants.
“The only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity,” he wrote.
Cynics question how WeWork and other co-working start-ups have managed to expand so rapidly – particularly without having conducted any public fundraising.
Late last year it emerged that JP Morgan had led a $150m (£98m) fundraising for WeWork in February 2014, alongside Harvard Corp and Benchmark, in a deal which valued the company at $1.5bn.
JP Morgan was attracted by WeWork’s 2014 revenues of about $150m and operating margins of 30%, generated by charging a significant premium for office space by bundling in various membership benefits, most notably the ability to be part of a start-up community.
And that model has started to attract the interest of property types, too.
Boston Properties owner and US real estate grandee Mort Zuckerman was one of the private investors who backed WeWork’s 2014 fundraising. He has since agreed a deal with the company that will see it anchor his new $300m redevelopment of the Brooklyn Navy Yard with a 200,000 sq ft facility.
What Zuckerman has recognised, according to some analysts, is that WeWork and its kind are not just for tech start-ups, as significant a part of the zeitgeist as they may be.
Instead there is a growing belief that even corporates are increasingly sold on the idea of maintaining a permanent base of, say, two-thirds of their total likely requirement, and using serviced offices to absorb the rest, allowing them to expand and contract more easily with the cycles.
The idea is backed up by Instant Group’s research, which also found more corporate demand for temporary spaces.
“We are also seeing robust growth in the number of corporate clients seeking flexible office solutions, ranging from SMEs and mid-caps through to FTSE 100 and Fortune 500 companies,” Duncan says.
With that in mind, it becomes easier to see why some people think a serviced office company that started less than five years ago is already worth about 25% more than Great Portland Estates.
