The question facing all these companies - and their investors - is to what degree the changes that will almost certainly be required to keep them alive will be enough to restore consumer confidence in their operating models. And whether the utopian 'sharing economy' ideal will be supplanted by larger companies looking to reduce real estate expense in the face of economic turmoil who may be their salvation. JL
Karl Tomusk reports in Wired:
The coronavirus-induced crisis the flexible office market is facing: with the majority of tenants working from home, a model based on short leases is in danger if customers decide to stop renewing memberships. But operators aren’t panicking. For years, their survival has rested on ditching fickle short-term customers. The lockdown is a catalyst for ditching them faster. At WeWork, corporate clients – businesses with 500 or more employees – accounted for 40% of memberships in 2019. When a sector is forced to grow up, it learns it might have to (focus on) that corporations that can pay its bills.
Anna*, who runs a London-based sports business, lost 90 per cent of her income when lockdown started. Overnight, she faced a now familiar problem for businesses everywhere: how do I pay my rent?She, like many other businesses around the world, rents office space from coworking giant Regus. When disaster struck, Regus told Anna that its priority was ensuring continuity of business and paying its own landlords. Early terminations or a pause to monthly payments wouldn’t be possible, it said, attaching its ‘house rules’ outlining in full legalese that stated Regus isn’t responsible if Anna can’t use its services for any number of reasons – including disease or quarantine. If Anna stopped paying rent, Regus could kick her out of the office and send a collection agency her wayA month of unanswered emails and phone calls later, Regus got in touch again, this time offering Anna extra vacant space at half price to help her reopen while respecting social distancing rules – even though her team all work from home and did not need to risk coming back to the office. Regus eventually broached the subject of rent repayments, offering 50 per cent off rent in May and June if Anna added three months at full price to the end of her contract, or if she spread the cost of the discount over the end of her tenancy. This was non-negotiable.Although Anna says the deal was “sensible” and she might have taken it if it had been offered in March, she says the lack of communication during the most stressful period early on and an unwillingness to discuss options, while IWG – Regus’s parent company – renegotiates its own leases with its landlords, was “disgusting”.
“I’ve been a tenant for two years. Where’s the loyalty?” she says, adding with no hesitation, that she’ll cancel her membership as soon as she can. An IWG spokesperson says: "We want to help our customers get through this difficult time. Our customer service team is on hand to help anyone if their business is facing financial difficulty."Anna’s story reflects the coronavirus-induced existential crisis that the flexible office market is facing. With the majority of tenants working from home in line with government advice, a model based on very short leases is in danger if customers decide to stop renewing memberships. But operators aren’t necessarily panicking. For years, their survival has rested on ditching those fickle short-term customers. The lockdown is a catalyst for ditching them faster.Flexible offices account for about 15.1 million square feet – or 5.5 per cent – of London’s office stock, according to commercial property agency Cushman & Wakefield. Pure coworking for individuals or small groups hotdesking with short rolling leases accounts for just seven per cent of the UK’s flexible office space, figures from the Instant Group show. The rest are self-contained or hybrid offices for businesses, typically with longer lease lengths. At WeWork, for example, corporate ‘Enterprise’ clients – businesses with 500 or more employees – accounted for 40 per cent of all memberships as of 2019, while individual offices comprise more than 80 per cent of its space.“Those kinds of organisations [such as WeWork] have been moving away from hotdesking already before this, and anyone who hasn’t is going to be exposed,” says Luke Appleby, co-founder of Kontor, a commercial property agency that specialises in advising tech and media SMEs.The basic calculation is that corporate clients will pay rent whether or not the operator can offer the frills they include to push their brand image. While WeWork remains open in London, for example, it has stopped its communal activities – midday vinyasa yoga, breathwork classes and live DJ sets. A neon pink meditation room and a secret speakeasy in a library at WeWork Waterloo remain empty in lockdown.
Smaller tenants are getting annoyed: WeWork and other operators like IWG offer a service where everything is included in a fixed price – and they’re still paying for it. “They’re demanding you pay full rent for a skeleton service where even their employees aren’t there,” says Simon Alexander Ong, a user of IWG’s luxury Clubhouse brand, where a personal membership is as much as £450 a month at a time when members sit at home, sans complimentary refreshments. Like Anna, he was eventually offered 50 per cent off rent in May and June if he extends his membership, but he suspects his time with IWG is coming to an end.Larger businesses, on the other hand, are tied to longer leases – HSBC signed up to 1,135 desks at WeWork in Waterloo last year on a three-year term – and are there for a practical reason. “We have an acceptance within occupiers that forecasting needs is an incredibly difficult art. It is not a science. Therefore, the long-term lease has been challenged,” says Ben Munn, global head of flexible space at JLL. “There is no doubt that occupiers will only increase their level of demand for flexible options.”It’s a thought Heather Hopkins, founder of asset management firm NextWealth, echoes, saying that both she and her clients want more flexible leases. “As a business, I will pay a premium to not pay for a three to five-year lease,” she says. The appeal isn’t yoga, but the chance to upsize or downsize as needed – especially when no one knows how long they will have to socially distance – decentralise a company’s presence and cut unneeded costs.Corporate unwillingness to make 15-year commitments on buildings is ideal for flexible office providers desperate for tenants willing to make commitments measured in years and not months. Someone like WeWork scooping up those businesses is a win-win.Some of WeWork’s smaller tenants feel that its response to the virus is a reflection of these priorities, with the smallest tenants getting few concessions. Hopkins, herself a WeWork user in Bank with two dedicated spaces, managed to negotiate a one-month deferral on her rent. Another WeWork customer with 18 desks was offered a two-month deferral. “I don’t think people like me were a massive focus,” she says, adding that she was disappointed that the savings WeWork is making from cutting services isn’t being passed on to people like her. But she says she “wouldn’t fault” WeWork for focusing on larger clients: “If they lose me with two dedicated desks, that’s not really going to hurt them, but if they start losing much larger workspaces it would.”
One source close to WeWork, who wishes to remain anonymous, suggests that rent deferrals have been standard practice, but enterprise clients have been offered rent-free periods and reduced rents if they are approaching the end of their lease in an effort to avoid vacancies and re-letting costs. WeWork says it has been working closely with individual member businesses to come to mutually beneficial solutions.But nowhere is the growing divide between ‘coworking’ and ‘flexible offices’ more apparent than among London’s largest landlords. In its recent annual results, Landsec, a FTSE 100 landlord, lists serviced offices as risky occupiers, but the paragraphs before and after are an ode to a flexible office future. Mirroring fellow FTSE 100 landlord British Land, Landsec launched its own flexible office brand, Myo, last year with the intention of avoiding coworking completely, focusing instead on one to three-year leases for corporate clients. In other words, an industry notorious for papering over gigantic losses by attracting waves of endless venture capital with skate ramps and flowing beer taps has a new wave of operators for whom caution and balance sheets matter.There’s just one problem. Although the industry has an idea of the types of cautious providers that will survive the pandemic, the future of the sector hinges on the UK avoiding a protracted lockdown. As Oliver Knight, head of Myo at Landsec, says: “It will be challenging in the next 12 months, but after that there will be a real opportunity.” But he calls himself an optimist. The opportunity might not survive if that 12 months turns into 18 months or two years.For instance, it costs Workspace, a FTSE 250 office provider, £5m a month to fulfil its pledge to cut customers’ rent by 50 per cent. John Robson, the company’s asset management director, isn’t worried about losing tenants (typical leases are two years long), but he admits income is a concern. While the cost of installing safety measures like screens in reception or using Zoono – an industrial decontaminant – have been offset by cheaper running costs, every day that social distancing continues will eat away at its £70m cash reserves. And this is a business that is in a relatively stable position for an office provider: between comparatively longer leases and owning all its own buildings, Workspace has security many operators lack.In the long-term, that will likely mean mass consolidation and an overhaul of operators’ businesses – at least among those who have the capital and tenants to scrape through the pandemic. Pure coworking will fall by the wayside, or be mopped up by bigger investors who, like IWG, have a portfolio of brands. Others will team up with landlords on management agreements. They will cut their liabilities by sprucing up someone else’s space and managing it instead of taking out a traditional lease. Businesses like Mindspace and Industrious are already doing it, and the expectation among agents and landlords is that they will see more of those once lockdown ends.
After all, economic downturns have a habit of culling recklessness. When a sector famous for its child-like, fantastical enthusiasm is forced to grow up, it learns it can’t be anything and everything it wants. It might have to decide that maybe those corporations that can pay its bills are worth courting even if it means losing its utopian appeal. And maybe those who don’t give them long-term security aren’t worth the effort. As lockdown is making abundantly clear, however, for people like Anna, the feeling might just be mutual.*Names have been changed
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