The past five years have seen a fundamental shift in which office space is used by occupiers, which has changed the way that office space is being delivered by the real estate industry.
The growth of flexible offices — defined as “office space provided on a short-term lease or licence, at variable prices or on a membership basis” — has been one of the major trends affecting the global office market in recent years. We remain convinced that this structural change will continue, with further growth in the amount of flexible office space being delivered in Dubai and, more broadly, across the region.
The stock of flexible office space increased at a phenomenal 28 per cent across Europe in 2018. By the end of this year, JLL estimates the total stock of flexible offices in the 24 largest office markets in Europe would be in the order of 6 million square metres.
This rapid growth has, however, come off a relatively low base, with this sector accounting for just 2 per cent of the total office stock, though this figure is somewhat higher in leading markets, such as London (6.8 per cent) and Amsterdam (6 per cent).
Some catching up to do
The Middle East has to date lagged behind global office markets in the delivery of flexible office space. Dubai, the largest office market in the region, currently houses around 70 flex space facilities — less than 1 per cent of the total office stock and around half of the average across Europe.
While the Dubai market remains relatively limited in scale, it has certainly recorded a rapid rate of growth, with the amount of flex space increasing by 175 per cent over the past five years. The major driver of this growth comes from occupiers, who themselves are responding to the changing demands of their employees for office space as an experience rather than a physical commodity.
Helping occupiers attract millennial-aged staff is, however not the only benefit offered by flex solutions. Other benefits include agility — the ability to acquire and shed space quickly in line with rapidly changing requirements — and reduced capital costs, with the expense of fitting out and managing offices transferred to the operator.
While these trends will continue, the major driver of future growth is likely to be a shift in the type of companies using flexible space. Many of the earlier flex operators targeted, entrepreneurs, start-ups and SMEs. This model is, however, changing, with large corporations now seeking to house up to 30 per cent of their staff in flexible office accommodation.
Corporate take up
The growth of enterprise clients (those with more than 1,000 staff) is providing a new scale to the flex market that will allow it to grow faster than would have been possible from the previous focus on start-up businesses. Changes to the current business models and licensing arrangements are also likely to contribute to the continued growth.
Most landlords in the region have sought traditional leases rather than the profit-share business models preferred by flex space operators. This situation is now changing, however, with the rise of tenant-favourable market conditions, encouraging landlords to be more flexible and consider a range of options, including the delivery of more fitted or partially-fitted spaces that require tenants to invest less capital in their fit-outs.
There has also been a marked relaxation in the licensing requirements for both free zone and onshore locations across Dubai. These regulations had previously required tenants to lease a certain level of space for each employment visa issued, which worked against the take up of flexible space.
These regulations are now being loosened with the issuing of more flexible or virtual licences that are interchangeable across different free zone locations and the granting of joint licences that allow onshore and free zone companies to operate from the same premises.
As the market continues to mature, we expect to see new lease agreements that combine elements of both traditional real estate leases and performance-based models currently being sort by operators. While some landlords are likely to offer more “micro-units”, others are likely to operate flex space themselves across a range of alternative assets that include warehouses, hotels, and “dead space” within malls.
In conclusion, the trend towards more flexible office space is a long term one that will continue regardless of any short term uncertainties. The Dubai market has shown itself to be agile and highly adaptive to global trends in the past, and we believe this experience (along with the growth of the local proptech industry) will ensure the current constraints are overcome and the market for flex offices will expand rapidly over the next five years.
Thierry Delvaux is CEO of JLL Middle East and Africa.