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Co-working: it’s not all about the free beer

December 24, 2016 Enterprise Comments Off on Co-working: it’s not all about the free beer
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Co-working company WeWork, noted for providing free beer for its members, has recently announced plans to open its first centre in the UK outside London in Manchester.

The sector, which has evolved out of the more widely known serviced office market, has grown ten-fold in the capital over the last three years, with WeWork alone now operating 11 facilities in London totalling 700,000 sq ft. But what is behind its popularity, and is co-working’s growth sustainable?

Serviced offices are by no means a new concept, with the grandfather of the sector Regus operating 2,300 business centres across 120 countries. The sector evolved as a response to the inflexible nature of the traditional commercial property lease, which many start-ups and small businesses feel is incompatible with the needs of a growing business in a volatile world. Generally companies can rent space by the desk on a weekly or monthly basis, with the ability to add on extra services such as secretarial or AV support on an on-call basis. Other models do exist in this increasingly competitive space, with some offering more of a club type model where you pay an annual fee to use any of their centres globally. 

This flexibility comes at a price, with some operators charging ten times per square foot more than the going rate for traditional office space on a traditional lease. However, for young businesses in particular, the ability to flex in and out of the space on a month-by-month basis makes it worth paying the higher rents. Furthermore, the community that these spaces offer is becoming an increasingly attractive reason for paying these higher costs.

WeWork is one of the newest players in this space, and from its establishment in 2010 it has grown into a $16 billion business that many describe as the Airbnb of office space. This big leap has as much to do with the changing way that we are working as it does with the added community features that the brand and its competitors are offering to a new generation of entrepreneurs. Its founders have admitted that its roots are in the commune-style environments that they were brought up in, and their pitch to prospective tenants is as much around the flexibility of the terms that they offer as the business ecosystem that the space enables. Small start-ups get the benefits and environment that have historically only been on offer to large businesses, while sharing a space with like-minded individuals from dramatically different sectors. As one current co-working tenant recently commented: “If I need a patent lawyer or html programmer, then there is probably someone in this building I can reach out to. It’s so easy to find people to collaborate with in this space.”

The timing of the rapid growth of co-working also has a lot to do with a change in the way we work and the economic cycle. While economic downturns have always stimulated a boom in start-ups, the most recent cycle has seen an explosion in the growth of SMEs and the rise of the entrepreneurial culture among the millennial generation. According to Companies House, 608,110 businesses were started in 2015, the highest ever annual level and a 5 per cent rise on the previous year. The Centre for Entrepreneurs describes this continuing growth as part of a “sustained cultural shift towards entrepreneurialism rather than a short-term response to the financial crisis and a poor job market”. In many advanced economies such as Britain, creativity and flexibility are becoming increasingly valued and aspirational, and the co-working sector has naturally grown to service the needs of this new generation of businesses. 

So, where do we go from here? While some question the exponential growth of co-working, it is clear it has tapped into a need. In London it has grown from around 1 per cent of the office market in 2005 to 10 per cent in 2015, while in the top nine UK regional cities serviced office businesses only accounted for 1 per cent of the office leasing activity in 2015 and 2016. WeWork’s plans to expand into Manchester are only the beginning of a similar trajectory, and I expect a boom in the delivery of these types of space in the UK’s big regional cities over the next five years. The model will undoubtedly evolve to match the economic and business cycle, and the rising uncertainty post-Brexit may well increase the demand for such space as businesses demand more flexibility in confusing times. Finally, we may see these brands moving into other markets – WeWork is already testing a co-living concept in the USA which, if it is a success, could well be the next challenger to the traditional private-rented sector in the UK.

Mat Oakley is director and head of commercial property research at Savills

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