HEWN Flexible Workspace Returns Index

REPORT REVEALS FLEX ACROSS A 5 YEAR PERIOD OUTPERFORMS ERV

HEWN, the UK’s leading consultancy for flexible workspace unveils the first of its kind Flexible Workspace Return Index

A ground-breaking report on the flexible workspace sector reveals that flexible workspace returns outperform Estimated Rental Value (ERV) across multiple London markets when examining five-year trends.

The report examines three different grades of flexible workspace products, from 5* to 1*. 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.. This report aims to provide property owners with data supporting the value of flexible workspace.

“‘Flex has a problem, and that’s valuations,’ says Will Kinnear, founder of HEWN. ‘Unlike other asset classes, particularly the hotel industry—which shares similarities with flex due to its transient customer base—flex has a real battle on its hands when proving its value. This has been a major obstacle preventing flex from reaching its full potential. However, this report offers concrete data points that will help property owners understand the financial value of flex, showing that it generally outperforms ERVs.’”

HEWN’s Index uses quarterly traditional office market data, flexible workspace data compiled by Valve and proprietary data on costs to compare desk rates directly with the returns available to owners. Assumptions on running costs have been made accordingly, accounting for staff, utilities and breakout spaces.

The West End

The West End has traditionally provided a very high-quality flexible workspace product but is also arguably one of the most expensive areas to create space. Desk rates, alongside traditional office rents have traditionally been the highest in London and the UK. Throughout 2024, gross returns available for 5* flexible workspace product performed in line with premium market rents in the area, with increasing returns in Q4 2024. Desk rates outperformed all other sub-markets in London and have been 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 last 5 years, demand is strong – especially in flex where occupiers are able to grow and contract based on need.” Adds Kinnear.

City

The core City flexible workspace market has over the years, seen large volatility in desk rates with perhaps an oversupply of inferior product pre-COVID. Since then, with the rise in quality product and demand, desk rates and returns have increased alongside traditional market rents.

Over the last year, 5* and 3* products outperformed the conventional rental market with a disparity between flexible workspace income and ERV of between £10 per sq ft pa and £40 per sq ft pa (up to 140% of ERV as a gross return). Both grades of product saw an increase in desk rates in Q4 2024 with 5* product realising a 115% rise in gross returns available. 1* product, for the first three quarters, was providing gross returns marginally above the conventional rental market.

“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 1* products whilst generally outperforming ERV struggled in Q4 2024 in the City.” Shares Kinnear.

Midtown

Midtown saw the largest increase in the amount of flexible workspace stock available in 2024 meeting demand for high quality product. Despite this, desk rates and returns outperformed the traditional office market considerably for 5* and 3* products.

Southbank

Demand in the Southbank market for quality flexible workspace continues to outstrip supply. Several new operations emerged in 2024, and desk rates remained on an upward curve throughout 2024 and over the longer term 5* and 3* product’s net and gross returns outperformed ERVs. Kinnear adds, “Like all submarkets, 1* product returns in the Southbank market fluctuated massively over the last 5 years due to the flight to quality and in-demand products.

City Fringe North

City Fringe North has seen a considerable increase in supply of flexible workspace over the last 10 years offering a wide variety of product, space and services. Despite this, flexible workspace returns for all three products remained above ERV in the main in the last 5 years, although, pressures in 2024 saw net returns for 3* and 1* products dip below this level.

Canary Wharf

Canary Wharf hasn’t seen the growth in flexible workspace operations that is evident in other areas of London, either through lack of demand or operational returns. However, as with conventional market rents, desk rates and returns have remained stable for good quality product.

Stratford

Stratford is the only submarket that didn’t outperform ERV for all three products over the last 5 years. This is due a physical lack of flexible workspace in general but in particular higher quality product which is yet to drive desk rates.

Stratford is seeing huge investment in all areas from residential and retail to offices, but it is likely to see some good growth in flexible workspace product over the next few years.

“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 5* product in their buildings.” Finishes Kinnear.