Flexible office businesses count on serving tomorrow’s workers
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This year was always going to be a challenging one for WeWork. The unravelling of the flexible office company’s plans for a $47bn initial public offering in September 2019 was followed by the departure of its talismanic founder Adam Neumann and a bruising appraisal of its culture.
Coronavirus has only piled on more pressure. The pandemic is a particular challenge for companies like WeWork, which, having made flexibility their calling card, now risk haemorrhaging customers who can go as easily as they came. Flexible office companies insist that when the pandemic recedes they are well placed to benefit, but for now they are concentrating on staying afloat, offloading ballast and keeping tenants aboard.
The term “flexible working” is an umbrella for coworking, shared offices and serviced offices. Unlike traditional office landlords, which lease buildings out to one or a few tenants over a number of years, flexible office operators sign years-long leases with the building owner, carve up the space, equip it with modern amenities, and then rent it out to tenants on a shorter-term basis. The operators bear more risk because of the precariousness of those short-term lets, but in good times they can lease out the space for considerably more than they are paying for it.
These are not good times. WeWork is offering discounts of up to 50 per cent to some tenants as occupancy levels dip. IWG, the largest company in the sector with an 11 per cent market share and more than 3,000 offices around the world, registered a pre-tax loss of £176m for the six months to the end of June, against a £35.5m profit a year earlier.
WeWork has appointed Knight Frank, the estate agency, to renegotiate leases with its landlords in the UK as part of a global review and sold off control of its Chinese business in September. In Manhattan alone, 23 flexible offices covering 1.2m square feet have been closed since the start of the pandemic, according to property agency Newmark Knight Frank.
“We’ve talked to all of our landlords across the world and looked at which [offices] were great and which ones were tough. To some, we say respectfully ‘this is an asset we don’t want in the portfolio’,” says Patrick Nelson, head of international real estate at WeWork.
IWG’s management has taken a more aggressive approach, placing about a tenth of the company’s US portfolio into Chapter 11 bankruptcy and declaring its largest subsidiary Regus, which provides rent guarantees on 500 properties, as insolvent. The company is making good progress on lease negotiations but the restructuring process has been “torturous” according to Mark Dixon, chief executive.
A flexible future?
Although they are firefighting now, leading flexible office companies are bullish on what comes next. “The future has never been brighter, because the whole world has been force-fed flexible working,” says Mr Dixon. “This forced adoption has made both people who run companies and those who work for them realise that this is a productive and sensible way to work.”
The pandemic may also have lessened the appeal of traditional, long-term leases for office occupiers. Following an economic recession “people won’t have money, the last thing they will want to do is spend on a 10-year lease,” Mr Dixon says.
According to Colliers International, the property adviser, corporate preferences are already shifting: two-thirds of businesses told it in a recent survey they were looking for more flexible offices.
That may be wind in the sails of flexible operators, but it is also tempting traditional landlords to adapt. The two groups are converging fast, according to Jonny Rosenblatt, co-founder of Spacemade. “Traditional leases have been getting shorter and shorter, and on the flexible side, they are getting longer and longer,” he says.
Mr Rosenblatt’s company signs a management contract to operate a space on the landlord’s behalf, rather than leasing the building from them. “The clear comparable is the way the hotel industry operates: landlords remain engaged, but the operator plugs in their knowledge and brand,” he says.
That model looks likely to grow. IWG, is pivoting its own business as it looks to pare back lease commitments and reduce costs. “About a third of our business today is management contracts. I expect in three years’ time that it will be two-thirds. It’s a sea change,” says Mr Dixon. The company is also looking to shed its city centre offices and double down on suburban locations, which it sees as the mainstay of future demand.
Meanwhile WeWork is eschewing the management contract approach and focusing more and more on securing large corporate occupiers on longer leases in its city centre locations. Roughly half of WeWork’s tenants are so-called “enterprise” clients, and the company anticipates that proportion rising.
WeWork, IWG and traditional office owners are all placing their bets on what the office will look like after coronavirus. But for now, home remains the main workplace for millions of people all over the world, and getting out the other side of the crisis will be a challenge for some stretched operators.
Even Mr Dixon, so confident about his own company’s prospects, is under no illusions about the scale of the tumult facing his sector: “Covid is like dynamite. . . no one is ever going to work in the same way again.”