One morning in 2000 I was taken around the City’s back streets by an estate agent who wanted to show me a new phenomenon: developers who were carving up second-rate office buildings in order to create smart flats. The differential in value between residential space and commercial space, it was explained, had grown so wide that it was well worth the hassle of lobbying the City of London Corporation for planning permission — something that had previously been denied as the Corporation sought to preserve every square inch of office space it could.
Suddenly the boot is on the other foot. The long boom in residential property — which led to Far Eastern investors buying London flats regardless of quality or location — seems to have subsided. Meanwhile, the London office market is resurgent. Forget fears that Brexit will lead to an exodus of jobs from the City; in the first half of this year, Savills reported, the take-up of office space in the City rose by 13 per cent compared with the same period last year — 26 per cent higher than the ten-year average. There have been some big deals done, with the Korean state pension fund buying Goldman Sachs’s headquarters at Broadgate for more than £1 billion.
Office space is a hot commodity, at least if you go by the valuations being put upon WeWork, the US company which provides flexible accommodation for small companies. It may have lost $723 million in the first half of this year — a fourfold increase on 2017 — yet that hasn’t prevented its Japanese backer Softbank from putting a valuation of $20 billion on the company. It is easy to dismiss WeWork as an over-hyped start-up destined to crash and burn (its ‘summer camp’ outside Tunbridge Wells, which some likened to an evangelical church gathering, might well turn out to be its high-water mark). A few weeks later, at the end of August, Moody’s withdrew its credit rating for the company, saying it couldn’t get enough information on its financial position.
Yet some see enough in WeWork’s business model to want to emulate it: last year property giant British Land launched its own flexible office brand, Storey, which accounts for 10 per cent of the company’s office portfolio. The offices are let on leases which average 27 months, a period after which many small companies will either have outgrown their offices or gone bust. Balanced against the shortness of the leases, landlords are able to extract a sharp premium on rent relative to longer, less flexible office space. The Office Group, a privately owned company set up in 2003 to do, more quietly, what WeWork does, offers the right to use a desk for £375 a month. Much of the flexible office market works around ‘hot-desking’ — allowing the landlord to let the same desk to more than one worker.
Flexible offices are a world in which fashion and lifestyle statements seem to be as important as wifi signal. The Office Group offers gyms, bike storage and meditation rooms. WeWork tries to attract young companies through bold environmental and ethical statements — for example, it has banned its employees from reclaiming the cost of meals which contain meat.
Many of the doomsday predictions made for the City in the aftermath of the Brexit vote have proved, like the Treasury’s forecast for the economy, to be laughably wide of the mark. Last January, the then CEO of the London Stock Exchange, Xavier Rolet, claimed that 232,000 City jobs could be lost: employment in the financial sector has actually grown since the Brexit vote. With valuations of office developers and investors depressed — British Land and Land Securities are both down around 25 per cent since their 2015 peak — it might suggest that now is not a bad time to buy into office space.
Yet not all is healthy. The main flexible office-provider quoted on the London stock exchange is the International Work Group, formerly known as the Regus Group. Inspired by WeWork’s valuation, the company has tried to sell itself on several occasions over the past year for a fancy price. That might not sound an unreasonable ambition given that IWG makes a profit doing the same thing that loses WeWork copious sums. But IWG’s shares have see-sawed as each proposed match has come to nothing and the company has been forced to issue profit warnings. Maybe its directors need to go vegan.
One thing to remember if you’re taking a punt on office space is that economies suffer recession from time to time, Brexit or no Brexit, and when they do it tends to be the start-ups which take the brunt. Even businesses that do survive are often driven to take cost-cutting measures, such as retracting their offices into their owners’ spare bedrooms.
At some point there has to be a risk that the flexible office boom comes to a shuddering halt. I don’t think I would like to be owning an office block — or even a slice of an office block — then. Unless it can easily be converted into flats.