Flexible office providers, once labelled the great disrupters of the real estate industry and the future of workplaces, face their toughest test yet, with inflexible approaches to customer relationships drawing criticism and social-distancing threatening their survival.
“What was very cool before may not feel that safe and healthy going forward,” said JLL chief executive Christian Ulbrich, adding that demand for co-working space “has obviously dropped very significantly” and providers may need to adapt their business models.
Analysts at UBS Asset Management have described a downturn in demand during the pandemic as “the true test” for the serviced office business model, adding that social distancing measures in most office markets “in effect render these centres unusable”.
Small business tenants may go bust, UBS said, and those that survive will likely want to cut costs on office space. Larger companies may consolidate real estate in the coming months, the team added – and “the easiest workspace for them to vacate is, by definition, the flexible space”.
“The counter argument has always been that in a downturn, occupiers will actually seek more flexible space,” UBS said. “This may be true over the longer term, but the inherent flaw in this argument is that at the point of downturn, most corporates are still tied into traditional leases which extend past the height of the downturn. As these are expensive to break, there simply is not the option to switch from one to the other.”
Take-up may look better over the longer-term, UBS’s analysts said. “The key question, however, is how many of the serviced office operators will survive this downturn to benefit from any potential upside from a longer-term structural shift.”
These trends will add to a subdued start to the year for providers. The share of office take-up in Europe accounted for by flexible operators stood at 5% in the first quarter of this year, according to Savills, down from 9.5% at the end of 2019. And although several flex operators have remained open during lockdowns across Europe, the agency said, building occupancy is below 20%.
With reports of providers negotiating with their own landlords and lenders, several tenants have criticised what they see as an inflexibility on the part of flex operators as the Covid-19 crisis has developed.
Julian Macedo, a former investment banker who now advises companies on capital raisings and acquisitions, asked WeWork for a reduction of his bill for hot-desking in March as the likelihood of a lockdown grew, but had the request rejected. He has since cancelled his membership, and although he said he would consider re-joining after the pandemic passes, he added that WeWork’ response was “poor business practice”.
Another WeWork tenant in London asked for his company to be released from its contract early as it had furloughed staff, but was told it could only have a two month deferment – and if it terminated would be held to the full rent for its contract length.
“We’re locked in until the end of the year and paying our rent, but seeing no flexibility,” he said. “It is particularly frustrating to see this attitude from WeWork when it trades off a sense of community, entrepreneurship and connection – it prides itself on these points and purports these to be its values. Much is made of the flexibility that serviced office providers can give to tenants, but WeWork has been anything but.”
A WeWork spokesman said: “We are speaking to members individually to understand how we can support them. As we navigate the Covid-19 pandemic, we are committed to supporting our members and we are continuously evolving our plans.”
Companies that remain in serviced offices could also be a source of difficulty for providers according to Paul Henson, partner at law firm Irwin Mitchell, who said problems could arise if flexible office space providers enforce social distancing that limits the space available to tenants.
“If you have contracted to take 80 desk spaces and they’ve put in social distancing measures that mean in reality you can only [use] 30, then you are going to have arguments from the occupier,” Henson said, adding that tenants could argue their contract has been frustrated.
Several occupiers are already telling staff and shareholders that they will require less office space following the success of lockdown-driven working-from-home initiatives. Some are preparing to do away with the office altogether.
Mike Hampson, chief executive of Bishopsgate Financial, recently moved the company out of a Regus office in London. But Regus’s loss will not be any rival’s gain.
“Given the cost of office space and the percentage [it accounts for] of our fixed costs, it’s become quite an easy decision – certainly for the foreseeable future, there’s no point in getting another office,” Hampson said. “That’s not to say we won’t physically meet each other – clearly people need that social aspect – but at the moment we’ve been functioning effectively.”
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