Changing workplace practices have transformed the way businesses view commercial office space and it is now considered a critical talent-retaining asset. Major corporates have wellness and amenity at the top of their wish lists and office sector developers are incorporating these features into new projects in response. The ability of smaller firms to compete in this capacity has become critical to the success of the startup economy and the co-working sector offers a potential solution.

In 2017 and 2018 reports[1] JLL projected that, by the year 2030, the footprint of flexible space would equal to 30% of total office stock in some markets. With major global cities seeing specialized flexible space operators becoming increasingly dominant, such as in London and Manhattan, where WeWork is now the largest single occupier of space, is it plausible that a city like Melbourne could reach these projected levels?

Figure 1: Flexible space take up – Melbourne CBD
Source: JLL Research as at 2Q18

We expect that flexible space operators (including some landlord-led operated spaces) will account for 1.7% of occupied CBD stock in Melbourne at the end of 2018. Their footprint increase of over 30,000 sqm this year alone  represents an increase of 73% year-on-year. However, based on current totals, these groups will need to continue to expand at 135% of their current total stock per annum to reach a 30% occupation of office stock by 2030. Whilst the growth levels are not currently on pace, it is important to consider the context in which the expansion to date has occurred. Vacancy in the CBD is currently sitting at levels we have only seen once since 2000, right at the previous cycle’s peak in 2008, and it appears that demand is only being dampened by supply constraints.

Looking forward, it is apparent that the flexible space market in Melbourne is entering into a new phase. In its most recent market overview, Office Hub reported that, for the first time in the industry’s short history, co-working space supply levels were accelerating to meet demand, causing some co-working fixed seat rents to stabilise and even begin to come in slightly. However, co-working expansion is likely to continue, as more office space becomes available through the current development cycle, and increasing demand for flexible space continues to support growth rates; Office Hub have reported a 105% increase in the use of co-working operators by ‘large’ businesses over 2017/18, indicating a changing sentiment from big business who are beginning to take flexible space seriously.

While many of the drivers are in place to see accelerated growth in the industry, there are a range of factors which may inhibit future expansion. The main two threats which are likely to be present are potential oversupply, either due to excessive expansion or a drop off in demand due to an economic downturn, and the consolidation of businesses replacing new expansion.

At present, it is not entirely clear whether Melbourne will be able to reach the magic 30% by 2030, however many of the fundamentals are in place to snowball its ongoing growth.

[1] Bracing for the Flexible Space Revolution (2017) and Spotting the Opportunities: Flexible space in Asia Pacific (2018)

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