A Blog by Jonathan Low

 

Mar 25, 2021

The Reason Flexible Offices Anticipate Increased Demand Post-Covid

As long as return to work remains uncertain and the percentage of people working in offices, vs those with hybrid work arrangements and those who have said employees can work remotely forever, companies are going to be hesitant to sign traditional long term leases. 

This makes coworking and flexible work spaces more attractive alternatives. JL

 Carol Ryan reports in the Wall Street Journal:

As long as work patterns remain up in the air, that kind of service may be more in demand. Few companies will be in a rush to sign a 10-year lease until they understand how employees will divide their time between home and the office in future. Some may turn to looser office arrangements longer term, accelerating a trend building before the pandemic. Real-estate analytics firms estimate flexible leases will grow from 2% of total U.S. office space today to 10% by the end of the decade.

Co-working and flexible-office providers were hit hard and fast by last year’s shift to remote working. Their challenge as business recovers may be a more crowded market.

Companies such as WeWork—which is in talks to go public, The Wall Street Journal reported in January—and Regus IWG -2.66% owner IWG had a harsher pandemic than regular office landlords. A risky business model where they sign long leases and sublet space on short-term contracts meant that many of their tenants bailed out quickly. WeWork’s global occupancy rate dropped to 47% at the end of 2020 and it lost $3.2 billion, according to an investor pitch seen by the Financial Times. IWG also racked up big losses.

Flexible BenefitsShare-price performance of office landlordsSource: FactSetAs of March 23
%IWGDerwent LondonSL Green RealtyGreat Portland EstatesFeb. 2020'21-80-60-40-20020

They reacted to the crisis by slashing their capital spending and footprint where possible: Around 7% of all space returned to the Manhattan office market from March 2020 through February this year came from flexible providers, Colliers data shows. By comparison, traditional landlords have been cushioned by serving blue-chip tenants locked into long leases. U.K.-based Derwent London and New York-focused SL Green both collected over 90% of the rent they were due last year, even as tower blocks sat empty.

Investors are warming to flexible-office providers, though. After plunging last spring, IWG’s stock has recovered and is now slightly up against the likes of Derwent and SL Green since February 2020, before pandemic fears set in.

As long as work patterns remain up in the air, the kind of service the likes of IWG provide may be more in demand. Few companies will be in a rush to sign a 10-year lease until they understand how employees will divide their time between home and the office in future. Some may turn to looser office arrangements longer term, accelerating a trend already building before the pandemic. Real-estate analytics firm Green Street estimates that flexible leases will grow from around 2% of total U.S. office space today to one-tenth by the end of the decade.


But it is too early to say whether flexible-office providers themselves will be the biggest winners. A lot depends on which new working arrangement dominates after the pandemic. Companies such as Google are opting for a so-called hub and spoke model: keeping a central office as well as lots of smaller satellite locations. This model could play to IWG’s strengths. It recently signed a deal with Standard Chartered Bank that gives the bank’s employees access to IWG’s global network of offices.

The alternative for companies is to keep a large central office and ask workers to split their time between this main base and home. Landlords who own centrally located office blocks will make it their business to big up the benefits of this option, luring tenants with looser terms where necessary. London-based Great Portland Estates plans to almost double the size of its pre-pandemic flexible office business to around 20% of its total portfolio.

The rise of WeWork a few years ago attracted lots of imitators: There is nothing complicated about leasing an office and refurbishing it for itinerant tech workers. If the sector finds itself in a new sweet spot, particularly one that takes business away from established landlords, the old problem of intense competition will likely return with a vengeance.

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