Flexible workplaces and co-working spaces, originally the domain of creatives and solo entrepreneurs, are increasingly attractive to larger companies in their quest to attract and retain talent.
While this is a Europe-wide phenomenon, employers in Central and Eastern Europe (CEE) in particular have a strong incentive to offer employees appealing working spaces as the region faces a squeeze of its labour markets and rising competition among employers for workforce. This has helped turn CEE capitals such as Prague and Warsaw into hubs for flexible workspace, and further growth is anticipated.
This is in line with forecasts by real estate specialists of strong growth in the co-working or flexible space segment across Europe. A 2015 report from JLL forecast that up to 30% of corporate portfolios could be made up of co-working or flexible space by 2030, and the projection is borne out by more recent research from the international real estate consultant.
“[W]ith Europe’s flex space market growing rapidly – up by as much as 35% a year over the last three years, and with further growth on the cards – companies have never had more choice in finding additional space that meets their unique needs,” said JLL’s latest report on the segment, "Flexible Space: Transforming real estate".
Strong growth in the flexible space market. Source: JLL.
Global real estate advisor Colliers is also bullish about flexible and co-working space. In its Flexible Workspace Outlook Report 2019 it anticipates “flexible workplace options rise to around 10% of all office space in major European cities in the years ahead, from around 1.5% (on average) as of end 2018.” It points to a big jump in the volume of space available between 2014 and the end of 2018, during which time the number of flexible workspace sites expanded by 205% in major European cities, while the number of operators expanded by 138%.
Europe's flexible workplace market expands. Source: Colliers.
According to Colliers, a wide range of factors — both demographic factors and changes in working practices — have converged to drive a significant upward shift in the demand for flexible workspace arrangements across Europe.
They range from the emergence of the “gig economy” to companies seeking more flexibility to respond to changes in demand, to a shift towards hub and spoke operations, and government encouragement for SMEs and start-ups. There are cultural reasons too, especially in countries (such as most CEE economies) where there is a race to attract and retain talent: “Increasingly, millennials and fresh talent view companies offering ‘well-designed/cool’ flexible space options as increasingly desirable companies to work for. In the race for talent, providing these flexible workspace options could be a deciding factor in winning or retaining talent,” says the Colliers report.
Central and Southeast European countries have long been seen as attractive destinations initially for manufacturing and now increasingly for tech and outsourcing, owing to their skilled workforces, relatively low costs and proximity to Western Europe. This, combined with natural population decline and mass emigration that has led to dramatic decreases in working age populations across the region, is resulting in growing competition for workers and upward wage pressure.
As a result, employers are seeking to position themselves as desirable companies to work for, as part of a range of creative solutions to adapt to the labour market squeeze.
“It's not only start-ups and small and medium-sized enterprises that seek flexible spaces for work. Large multinational corporations are also in the hunt for such space, selecting flexible solutions when seeking additional space due to sudden expansions, and addressing the design needs or wanting to provide their employees with a creative and inspiring place to work,” commented Adam Lis, who was taken on by JLL earlier this year as the firm’s flexible office solutions manager in Warsaw, according to a report from the firm.
Another factor is the ability to scale up without a long-term financial commitment. “[Fa]st-growing tenants from IT, fintech and software development sectors are beginning to see flexible workplaces in large buildings as a strong advantage that could enable them to secure additional space for potential expansion without having to sign up for such space for five years in advance,” said Jarosław Pilch of Savills, in a comment on the Polish flexi space market.
“Flexible office space helps [companies] to attract specific talent pools, particularly younger generations, who tend to favour a less traditional corporate office setting while meeting the requirements of specific teams in areas such as digital or product innovation,” says Tom Carroll, head of EMEA corporate research at JLL, quoted in a report from the firm.
“For some companies, flexible office space enables them to act quickly if they need a temporary space, or to access a new market. For others, it’s an opportunity to increase exposure to the zeitgeist in a particular industry or to help change their working culture.”
As a consequence of this trend, while small independent co-working spaces were once the norm, now the market is increasingly dominated — in CEE and elsewhere — by major players such as IWG, which incorporates Regus and Spaces, and WeWork. As larger corporates seek out flexible workplaces, the quality (and cost) of the spaces on offer has risen.
Up the value chain in Prague
This pattern has become evident in Prague, arguably the CEE region’s most developed co-working space markets. “Over the last two years the market has seen a shift in line with global trends: from traditional serviced offices to more modern co-working centres,” says Colliers. Initially co-working centres targeted “young creative individuals, freelancers and independent entrepreneurs who were keen to share space with other likeminded people”, but the first co-working centres focused on corporate clientele opened in 2017. The quality of co-working space has improved in tandem with these changes.
According to JLL, there are already 57 centres in Prague that offer flexi space, with the Prague 1 district being the most popular location. The firm forecasts 67% year-on-year growth in flexible offices in Prague this year.
“At present, we see great potential for the growth of flexi space in Prague. We also expect a rise in the importance of this trend in larger regional cities; however, the development in Prague will fully show where this trend will continue. At this point, it is difficult to predict development over the longer term,” says Martin Stričko, senior analyst at JLL.
Flexi space takes off in Poland
The flexi space market is growing fast in Poland, accounting for around 13% of total office take-up in 2018. It offers an alternative to long-term lease for young entrepreneurs, start-ups and freelancers and more and more often for corporations,” says Colliers. Local market leader WeWork as well as Regus have a presence in Warsaw and other major cities. Colliers notes that as demand for office space exceeds supply in Warsaw, “leasing flexible workspace is one of the best ways to secure office [space] in the city centre of Warsaw until the new wave of supply will be delivered to the market.”
Warsaw is ranked as the ninth biggest “flex city” in Europe, and saw the largest growth of flexible space on the continent last year, according to JLL data. In 2018, brands such as BeYOURSeLF, Solutions.Rent, Spaces, The Nest, Workin and WeWork all opened in Warsaw.
“As many as 76% of the flexible office space in the country is located in Warsaw, currently offering 17,000 full-time seats. Another 9,000 have already been secured with lease agreements for further new leases to be signed soon. This high level of activity has stemmed from a large variety of tenants operating on the capital market,” said Lis, according to a press release from the firm.
“As many as 76% of our survey respondents, among whom were the biggest flexible space operators in Poland, claimed that Warsaw still has suitable space for further development of the flex segment. This confirms the high potential and absorbency of the capital market, particularly at a time when there is a temporary drop in supply of traditional office spaces and rapidly changing needs amongst tenants,” Lis added.
A report from global property agent Savills takes a similar view, writing that co-working spaces “took the Polish market by storm” in 2017. During the year, Warsaw “saw more lettings signed for flexible workplaces than the capital cities of Spain, the Netherlands or Austria”.
“The flexible workplace market is growing at such a rapid pace that some commentators are beginning to recognise risks lying ahead. In Poland, however, there is still a place for new co-working providers and further expansion of those firmly established on the market. Some regional cities, in particular, represent a growth potential that has so far been untapped by this sector,” said Savills’ Pilch.
Emerging flexi space hubs
Bucharest’s flexible workspace market took off in 2018, says Colliers, when take-up of co-working space rose almost threefold within the year. The Bucharest market is dominated by IWG via its Regus and Spaces brands, though other players include Mindspace and 3house. The firm anticipates more than 10,000 sq metres will come onto the market this year.
Looking at the clients for co-working spaces in Bucharest, Colliers makes the somewhat controversial claim that “Romanians do not have a culture of entrepreneurship like other European peers” (it cites data showing that the country ranks among the lowest in the EU in terms of number of companies per capita). As a result, it says, “we believe that a steady flow of demand might come from companies seeking to offer their employees the flexibility to work from other parts of the city. This would help employees with their daily commute, as Bucharest is regarded as one of the most congested major cities in Europe.”
In Romania, as in Central Europe, the major international players have arrived, but local companies are also active in the co-working segment. 3house announced in June that it had opened two new floors in its co-working space in the centre of Bucharest with an investment of €900,000. They plan to add a new 3,400-sq metre location in the popular Floreasca area of north Bucharest this autumn.
3house was launched by two local entrepreneurs: Vlad Craioveanu, who introduced the first co-working space in Romania in 2012 by launching Impact Hub Bucharest, and Ilinca Păun, CEO of The Entrepreneurship Academy business school. Commenting on the company’s vision, Craioveanu said 3house designs and builds its spaces in keeping with “the spirit of the community”.
Flexi space currently accounts for 2.6% of the office stock in Budapest, comprising both professional serviced offices aimed at traditional, corporate office occupiers, and smaller co-working centres for SMEs and young entrepreneurs and creative workers. “[D]emand for flexible workspace solutions is on the rise and as a result Budapest is likely to see further new international flexible workspace operators entering the market before the end of 2019,” says Colliers’ report.
A flexible option in Moscow
Flexible workspace is a recent development in Moscow, but there are already around 120 spaces in the Russian capital, according to Colliers, mostly located in areas with a high concentration of business activity, in particular the CBD and the MIBC Moscow-City business district.
“Flexible spaces with rapid development have already become a strong competitor to traditional offices. The role of flex space on the market has increased because not only startups but also large companies are interested in such format for more efficient and flexible use of leased space. For office market this fact has already become a disruptor which makes its analysis more complicated,” said a blog post from real estate expert Olesya Dzuba published by JLL. "The appearance of this format may raise [the] question of vacancy rate calculation – although the space is occupied by the operator on a lease, it is simultaneously available in the co-working market."
“At present the demand for flexible workspace premises can be described as steadily growing. According to the information from co-working operators, the average occupancy rate of open spaces ranges from 70% to 90%,” writes Dzuba.
“However, comparing to the background of international experience, Moscow’s flexible workspace market is only at the initial stage of development – the number of large centres, able to accept a major client, is limited, which leads us to predict further expansion of this sector in Moscow.”
A bubble ahead?
The flexi space model isn’t for every employer. IT security and branding remain a concern for some occupiers, notes Colliers; however, the growing adoption of flexible workplace options by traditional landlords will allay some of these concerns.
Overall, the projections for the segment are so bullish that they have led to speculation that a bubble could form. However, Colliers’ report says that concerns over ‘excessive growth’ in the sector “seem overblown”; as of the end of last year, it accounted for an average of only 1.5% of total office space in the 22 major European cities it has surveyed. The highest share is in Amsterdam and London, where it tops 5%.
Risks to the outlook for the sector include a future economic contraction that “is likely to really test the flexible workplace market for the first time”. This is especially likely to apply to inexperienced new entrants to the market that have jumped on the flexi space bandwagon. “The large diversity of operators across Europe suggests de nite scope for future consolidation and M&A activity down the line as the market matures,” says Colliers. However, the firm’s report notes, the flexible nature of co-working space means it may be better placed to bounce back from economic difficulties than conventional space.