orangery Coworking in Stralsund
The number of office tenants looking to lease more than half of their space flexibly has increased tenfold since last year, with one in two tenants renegotiating to take advantage of cheaper rents, according to the latest research by CBRE.
‘Corporates are becoming more comfortable with higher flex allocations,’ according to CBRE’s report.
Around 20% of tenants are willing to rent more than half of their offices as flex offices in the next two years, according to a CBRE survey of companies with office locations in Europe. Currently, the percentage of office occupants with a flexi-office share of more than 50% is just 8%. Last year, only 2% of companies were even willing to venture beyond the 50% plus flexible office threshold.
Large corporations and companies in the technology, media and telecommunications (TMT) industry are most likely to want flex space, according to CBRE. For companies with more than 5,000 employees, the proportion is set to rise from a negligible 1.5% to 12% within two years. And companies from the TMT industry want to increase the flex office share from 13% to 22%.
Predictably, lowering costs is the prime driver behind the trend, with 43% of those surveyed by CBRE citing lower CapEx costs as making flex offices so attractive. The cost of building out space is eliminated, and companies are not tied to that space for as long. Just under a third simply want to try flex offices, and 30% see it as a viable solution in uncertain times with unresolved space needs.
New players enter flex space
However, despite its increase in popularity, flexible working space still accounts for just a fraction of the market. According to Cushman & Wakefield, they account for just 1.1% of the total office stock in the Top 7 cities in Germany. That could be about to change: landlord Vonovia has confirmed that it is in the planning phase with two different coworking models, one of which involves working with a start-up specializing in coworking, and on another model to bring coworking to neighbourhoods. Further details have not yet been released.
Other firms are also planning to expand. Coworking provider Orangery has said that it plans to open 50 locations nationwide in the next two years, primarily in B and C cities, focusing on spaces between 2,000 sqm and 5,000 sqm. The company currently has six coworking spaces in its portfolio in Hildesheim, Stralsund, Rostock and Solingen. Openings in Osnabrück, Lemgo, Magdeburg and Schwerin are to follow by the end of the year.
Hotel operator Primestar is also moving into the coworking space with a new long-stay offer combining living and working. In May, it launched three new own brands: June Six, June Stay and Worx. June Six is designed as a boutique hotel brand for a young target group and June Stay has rooms for long-term bookings. Most will ‘offer additional space and extras, such as a kitchenette and home office furniture’, according to the operating company.
Primestar is following the industry trend of keeping an eye on long-stay concepts, which proved to be relatively resilient during the pandemic. Subsequently, it is trying to link living and working more closely via the Worx brand, which is to be rolled out not only in the homes of the new own brands, but also in the existing 14 franchise homes in Germany. The offer is to be bookable as a subscription as well as via one-day passes. ‘The premises offer modern desks, coworking areas and meeting rooms. In addition, young professionals, for example, can take advantage of the hotel's offerings such as a gym or bar’, according to the group.
Almost 60% of companies have shrunk office space in past 3 years
However, companies aren’t just looking for flexible space, they are also cutting back on existing space, according to CBRE. Almost 60% of the companies surveyed have shrunk their space in the past three years, according to the survey: 7% have cut more than 30% of their office space, and in the next three years, 5% intend to cut more than 30%. The vast majority - namely around 30% of all respondents and around half of the space shrinkers - have downsized 10% to 30% of their offices or plan to do so in the next 36 months.
This is part of a bigger trend: according to a recent Your Space survey by Knight Frank and Cresa, half of international employers intend to cut their office space in the next three years. The survey of 350 businesses found that half of the largest businesses they questioned – those with more than 50,000 employees – expect to shrink their global workspaces, although most are only planning to reduce by between 10% and 20%. In addition, 56% of companies surveyed said they favoured a hybrid working model where employees divide their time between the office and home or another remote location.
‘There is no doubt that working in the office and collaborating face-to-face offer tangible benefits, but it is equally true that people value the freedom to make their own decisions regarding where and when they work,’ said Craig Van Pelt, head of research at Cresa. ‘Perhaps more crucial than changing work policies is the culture that companies cultivate and their ability to lead successful organizations through support and consistent messaging, whether in the office, remote, hybrid, or a combination of these.’
Regardless of whether organizations are expanding or downsizing their office space, they are increasingly opting for higher-quality spaces, which is fueling the need for more sustainable office spaces worldwide.
Other tenants are bringing in flex-office operators like Scaling Spaces as a service provider to help them sell off space because of home offices, wanting to keep spaces “warm” in case they need them down the line or to help them manage their new dream office space that is currently too big for them.
‘We see properties that have been vacant for two years - even though they are brand new buildings, with great expansion space, but no one wants to rent them for ten years at the moment,’ said Martin Ballweg, managing director of the flex office operator. ‘Especially not at rental conditions signed at the high price level of before Corona.’ Or as Alexander Lackner, the managing partner of investment group Neworld, which owns Scaling Spaces, puts it: ‘No one wants to admit to themselves that it is currently a challenge to get €35/sqm even for top-modern and super-designed offices, and that one should settle instead for €25 /sqm. The result is that space remains vacant for longer.’
Scaling Spaces' service portfolio ranges from pure management contracts with a fixed operator remuneration to turnover rental models. In the latter scenario, Scaling Spaces rents the space as a subtenant, for example for ten years, and pays a base rent to the main tenant. This usually amounts to 25% to 50% of the rent that the main tenant himself pays to the landlord. If Scaling Spaces achieves higher rents than the base rent when renting out the coworking space, the operator shares the rent with the tenant.
Savills, for its part, predicts that the flex office segment will play an increasingly important role in European office markets. In ten years, according to Savills - which also operates its own brokerage platform for flex office space via its subsidiary Workthere - the flex share of European office markets is likely to grow to around 20%.
‘As remote work has become part of many companies' own culture, flexible workspaces offer a convenient alternative to home offices,’ said Jan-Niklas Rotberg, head of Office Agency Germany at Savills. ‘We expect interest to continue to grow and supply to increase in Germany.’