Has the serviced office market overheated or is the flexible model here to stay?

With news this week that SoftBank has slashed its investment in WeWork from $16 bn to $2bn and that IWG's profits are predicted to fall, has the serviced office market overheated or is the flexible model here to stay?

The serviced office umbrella includes the more traditional office model where the occupier takes a flexible lease or licence and co-working space where the more open and relaxed design encourages collaboration and knowledge sharing. The continued rise of the sector has been driven by growth in the number of start-ups, the rise of the gig economy and general shifts in lifestyle with a more agile workforce placing increasing value on the working environment and a sense of community.

Historically the service office market was fairly one dimensional and dominated by one name – Regus. It has over recent years become a much more mature and sophisticated market and with the rapid growth of WeWork and the entrance into the sector of a number of institutional investors and landlords, including Blackstone, British Land and Brockton Capital, the sector has continued to expand with the take up of space for serviced offices in London alone, about 20% last year.

But with continued political and economic uncertainty and increasing competition from the many providers who have now entered the space are WeWork and IWG in trouble? Is there likely to be a downturn in demand in the sector in general? 

IWG has a number of legacy Regus issues. It is looking to grow its more contemporary Spaces brand and on Friday appointed adviser, Eastdil to look to market the brand which may be valued more highly as a separate business to Regus. WeWork may need to slow its pace of expansion as its rent frees expire. Consolidation in the market as competition for occupiers increases is bound to happen. But the provision of quality serviced office space is hard to achieve and demands a real understanding of service and hospitality. It is vital to create the right balance between office space and amenity areas. Flexibility and quality of product is key and the larger global operators understand this. It is possible that some of the smaller less experienced operators might fall away if recession hits but the reality is that the sector is here to stay and the likely increase in take-up of flexible space over the next few years by corporate or enterprise users who have traditionally taken standard FRI leases will ensure the serviced office market becomes more mainstream and challenges the conventional investment model.