A recent trip to Australia wearing my newly acquired flexible-workplace-solutions hat has been an eye-opener. There is definitely awareness of the potential of the flexible market filtering into the minds of the various players in Sydney’s established commercial property sector.
Post by Libby Humphreys, Director Transactions at The Instant Group
Australia is a beautiful mix of ahead of the curve and behind the times. Where Australia has embraced flexible working styles for years and delivered world class fit out design, there are areas where it is still not yet caught up to global standards and this is apparent in embracing flexible office solutions.
The UK has seen substantial growth in the Serviced Office market, the Nordic countries have been operating on 6 monthly rolling leases forever, and Asian leases are 2 – 3 years in length. WeWork’s rapid growth in the US has demonstrated an enthusiastic acceptance of flexible space and co-working that is really shaking up the market.
What’s coming for Australia and why should the next trend be a flexible one?
The two biggest commercial markets in Australia are Sydney and Melbourne. Typically a tenant’s entrance into one or both of these is fixed in nature – a business is likely to enter the market and remain for a long time. Hence why traditional lease terms for larger tenants are around the 7 – 10 year range and serviced office or non-traditional solutions are often considered more costly and not aligned with the business plan.
What Does the Data Say?
However, consider the following statistics from the Australian Bureau of Statistics published in June 2014 (the most recent published on the site):
- In June 2014, 61% of actively trading businesses in Australia had no employees, 27% had 1-4, 10% had 5-19, 2% had 20-199, and less than 1% had 200 or more.
- In 2013-14, business entry rates were highest for businesses with annual turnover of between $50,000 and $199,999 and lowest for businesses with annual turnover of $2 million or more.
- In 2013-14, business exit rates were highest for businesses with annual turnover under $50,000 and lowest for businesses with annual turnover of $2 million or more.
So with 97% of companies having up to 19 employees and a majority of entry and exits for those businesses with lower revenue, there is an obvious requirement to provide flexible options for tenants to consider.
There is also the issue of managing growth and contraction in the 1% of businesses that make up the +199 employee size range. These companies have ‘buying power’ with landlords and are therefore able to negotiate expansion and contraction rights (taking more or handing-back space) in their leases.
Landlords do not like to be hamstrung with offering these rights for less than 5 years as the traditional market has dictated that tenants hold onto their leases for a 7 – 10 year timeframe and leasing these gaps in a building is difficult.
But if big tenants are seeking flexibility in their leases to manage changes in the economy and to adjust business size accordingly, then there is a clear market opportunity for shorter tenancies to cater for these short-term space requirements.
The growth of big-name tech companies in Australia is also a key indicator that flexibility will become a burgeoning trend. The names of Twitter, Apple, Amazon and Atlassian are starting to become buzz words in the property world. These companies are the talk of the street because they are taking significantly more space than anyone had anticipated.
Office space in Sydney had been known for the financial services sector in the past where swathes of space had been taken to cover headcount growth. Similarly Silicon Valley in the US has seen multiple Tech firms taking on too much space with the assumption that it would be filled as they grew in headcount. But if there is anything we should have learned from the global financial crisis of the last decade it is that no one can accurately predict headcount growth and, therefore, flexibility in space occupancy is vital.
Let’s take a look at two case examples in Sydney
‘Tech Firm 1’ and ‘Tech Firm 2’ both choosing the route of the traditional or ‘fixed’ lease strategy that I mentioned earlier as being considered a market norm.
Tech Firm 1 has recently taken space equating to 1 person for 40sqm. Using a benchmark of 1 person per 10sqm (which is being generous for a flexible-working style) this amount of space is 4 times that of what the company could have taken.
Tech Firm 2 experienced similar pains taking double what they needed and according to the market is now trying to sub-lease half the premises. Taking more space for 5 years is a risky strategy with the great unknown of future headcount and this should be particularly so for Tech companies where there is high volatility in the longevity of business and in the market.
Signs indicating a movement toward flexibility in the market
- Global trends are often adopted by Australia, so where flexibility is being seen in the US, UK and Europe – Australia is likely to follow suit;
- SME’s continue to make up a large part of the market and these companies’ life spans are significantly shorter than the +199 employee company size;
- Larger companies are seeking flexible lease terms in expansion and contraction to mitigate risks of fluctuation in their business headcount; and
- Tech companies are becoming more significant and taking more space in the market but the Tech industry is typically more flexible in their business strategy.
Instant Group currently tracks the number of Serviced Offices and Co-working spaces (by quantity) in Australia at 287, which has significantly increased over the past few. Co-working is growing and WeWork is coming – all indicators that a new approach to leasing space is headed for Australia. For Australia’s office sector, I am confident that the new buzzword will be “flexible”.