Serviced office providers are restructuring, as the pandemic has hit revenue streams, and questioned the future working style of office users.
Recent weeks have seen US-based Knotel agree to sell its US business to a new investor, after declaring chapter 11 bankruptcy there; while global leader IWG, with its Regus and Spaces brands, has revealed plans to cut 4% of its global presence.
But while cashflow and business volumes may be constrained in the short term, those active in the sector believe that the pandemic will further shift the world of work towards the flexible office model.
IWG’s founder and CEO Mark Dixon believes Covid-19 has upended office working such that his company, and the whole serviced office sector, stands to win in the medium–term. In a year end trading update, in which the company admitted 2020 had been its hardest yet, there was also confidence: “Hybrid working has become the new norm and, in our view, is here to stay. IWG is the leading enabler and beneficiary of this trend. We are seeing more enterprises wanting to partner with IWG to benefit from this new way of working.”
Patrick Kennedy, flexible workspace specialist at Colliers’ Manchester office, has seen several shifts due to the pandemic, and the effect of large scale enforced working from home. He expects more corporates to move to a hybrid operational model with staff in an office part-time, and much greater desk sharing.
“I’m seeing more established businesses looking to utilise flexible offices,” and notes several moves where corporates have opted to sign with a serviced office operator, for new space. “And we’re now seeing occupiers being attracted to buildings with a flex operator in them,” perhaps taking a floor or two themselves, but exploiting a flex offering on another floor for meeting space, project teams and to make future expansion easier.
Typical of the type of deal IWG is seeking is an agreement signed with global consultancy EY in Norway. There, EY will take four floors in a new Spaces building, as well as flexibly using other facilities in the building, and at other Spaces properties globally. Standard Chartered has also signed a corporate deal giving its 90,000 staff access to IWG offices globally.
And in November, Deloitte signed a deal to move its 800 strong Manchester office into a WeWork facility in the city. “The space provides an exciting and inspiring place in which our people can work,” said Andy Westbrook, practice senior partner for Deloitte North West. “It will best support the needs of our people and our clients as we grow our business in the region.”
And Mathieu Proust, general manager UK and Ireland for WeWork commented: “This is a great example of a business recognising the right workspace as a critical resource that enables connection, innovation and company culture to thrive.”
Kennedy says operators of all types should have a strong future, and have nothing to fear from landlords trying to offer flexible space directly. “Operators exist for a reason – it’s a specialism.” And he sees no reason why smaller niche players cannot thrive once lockdowns ease, so long as they have survived the period financially. “The operators all have their own USPs, and can really add a more bespoke feel.” Some, he notes, opt only for tech businesses, and can really curate an occupier mix that ensures synergistic benefits between businesses sharing the space.
Covid-19 has also ripped up the rule book about lettings: “We’re being creative with terms, even a pay as you go mechanism has been offered.”
But undoubtedly the sector is ripe for consolidation. Tom Sleigh, head of flexible workspace at Colliers, says the Knotel transaction confirms a shift he predicted in an October report on the sector. “The market segment Knotel focused on involved fitted suites, and this has seen increased competition as many landlords across the world are responding to the changing needs of occupiers and are offering their own fitted out, flexible office products.”
“During 2019 we saw many operators opening new locations across Europe, and even last year some new sites launching despite the challenges of the pandemic. In some markets, there is a flex supply deficit and we expect regional growth to continue as the sector matures. Over the next year or so we’re expecting to see more merger and acquisition activity – this will most likely be in the form of distressed purchases.”
What’s less clear, is whether the post-pandemic landscape will see the hotel sector move more into providing flexible workspace. Some, such as Accor and Village Hotels, had previously made a commitment to workspace provision, while others have reacted with blended offerings through the pandemic; sometimes in response to demand, at other times perhaps simply in an attempt to drive a little more revenue.
Accor linked up with Bouygues-backed Wojo in early 2019, providing space within Accor properties, alongside a growing portfolio of flexible offices in French cities. As of last autumn, Accor had rolled out 300 Wojo Spots in 70 French cities, all within its hotels.
Several hotel brands have spotted an opportunity to combine working and staying, for the truly mobile worker. Arguably, CitizenM has been most creative on this front, offering a variety of subscription-based choices.
HA Perspective [by Chris Bown]: Will we, won’t we? Locked down office workers are sizing up the opportunity of returning to the office, just as their bosses work out how much they could save on premises, if everybody worked from home.
The result will probably be another major shift towards more hybrid working, for more people. The cynic amongst us would say this has been possible for the last few years, it’s only been held back by the reluctance of management who still believed that being present in an office led to more actual productive work. Forced to test the alternative by the pandemic, they’ve now seen that letting go wasn’t so scary after all.
As the agents note, the winners will be those that listen best to their customers, and provide a bespoke service. The really clever operators will also curate their occupiers, and even deliver some sort of corporate matchmaking service.
Where does that leave hotels? By and large, not really convincing mainstream alternatives to the serviced office – with a few notable exceptions. But the pandemic has forced creative thinking and the formulation of a range of package and subscription deals – some of those may just stay the course, as the revenue manager’s focus returns to revpar and overnight stays.
Additional comment [by Andrew Sangster]: It is often hard to spot long-term trends, just ask the frog in the pan of water being gradually heated.
In the case of the pandemic, however, the water has suddenly become scalding hot and most of the frogs have noticed.
To repeat our mantra: it is a case of Covid acting as an accelerator rather than Covid as a change agent.
Flexible working was already happening, particularly for mid-level and above executives. It has become a forced reality for all office workers.
Mark Dixon, CEO at IWG, agrees that the trend was happening before the pandemic and that it has subsequently been dramatically speeded up. For him, the world has changed forever and cities will never be the same again.
He said in a Bloomberg interview in January that half of CEOs had now embraced hybrid working and the “strong economic and ecological advantages”. He predicted offices would be repurposed and cities would become more affordable.
Up to a point, he is right. But the tailwinds of urbanisation remain, the pandemic has not swept them away. People need to network and pool their talents to drive the best mutual outcomes.
The hegemony London has as Europe’s financial centre is not easily going to dissipate to a multitude of secondary financial hubs like Frankfurt, Paris, Dublin or Amsterdam (or even Manchester, Leeds or Edinburgh).
More business will be conducted remotely, maybe even most business will be conducted remotely, but forging new client relationships, refreshing existing contacts and completing difficult deals will require face-to-face activity.
Jes Staley, CEO of Barclays, sums up the situation by saying remote working is not sustainable. He said at the virtual Davos in late January (the World Economic Forum meeting): “It will increasingly be a challenge to maintain the culture and collaboration.”
The World Economic Forum pioneered the term “fourth industrial revolution”. This knowledge economy accelerates urbanisation and the concentration of talent. Culture is critical and without proper social interaction, companies will struggle to build it.
For professionals established in their careers, working from home is an advantage: there is no commuting and it is easier to avoid distractions. But for anyone starting out or keen to develop their career, not being able to informally network is hugely limiting. Zoom calls just don’t cut it.
I think it is clear that this is not the end of the office. But is it the end of some offices and, if so, what is the net reduction? This is a much harder call to make and as IWG’s Dixon admits, it is going to take time for tenants to end their leases.
The short-term will certainly see a repurposing of space. More sofas and coffee machines, fewer dedicated workspaces and more meeting space seems likely. Within this there is a clear opportunity for branded hospitality companies.
The opportunity for hotels to exploit long-stay guests who want to remote work is less clear. But operators believe there is a market: Melia calls it Workcation and Accor prefers Workspitality. It might be a new niche or it might simply be a rebadging of something which has long been happening.
Another new-but-not-new niche could evolve as more workers choose to live further from the main office and commute at irregular intervals. This could well be ripe for the sort of subscription models that CitizenM was among the first to market.
How much of this requires a radical rethink of what is offered and how much is simply doubling-down on what should already be there – fast wifi and a good desk – is a matter of conjecture. It does at least appear to be a meaningful marketing opportunity.
The future winners in office real estate will need to offer more than floors of a building on a long lease in a certain location. The owners of buildings will need to care more about the experience of tenants and offer solutions to tenant needs.
Alongside hospitality and accommodation, this includes wellness (everything from gyms to sanitary and viral free environments) and digital services to enhance security and environmental benchmarking / reporting.
The picture for long-term supply and demand is nuanced. There are a number of companies that have embraced remote working as a permanent solution and this will lead to a decline in demand. I suspect that the out turn here will not be as big as some fear (for all the reasons given above) but forecasting at this point is challenging.
My own view is office is not facing the same net decline as retail. As if to crystallise this point, as I write this commentary an email arrives announcing that Cambridge’s second-tier shopping centre, the Grafton, is to see 15,000 sq ft of space turned into offices under the x+why brand.
Owner of the centre, Legal & General, claimed it was one of the first retail centres in the UK to convert to flex office. “Repurposing excess retail space into alternative uses that change the rhythm of the asset is at the heart of the business plan,” said fund manager Tom Williams.
So what does seem likely is that there will be more disruption and change in the next few years than the office market has seen for decades. This will heighten uncertainty and risk which will, other things being equal, push out yields relative to other real estate asset classes. More opportunities are set to be created, particularly for investors and operators well versed in taking on operational risk.
A final thought is about the likely new entrants to the space. Knotel, a company that has spoken at our Hotel Alternatives Event in the past, has gone into Chapter 11 in the US. This flex office player has been bought by Newmark, a property services company that is allied with UK-headquartered property adviser Knight Frank.
The Knotel business model was to provide offices to companies that occupants could brand themselves with Knotel simply managing the building. The approach was supposedly more stable than WeWork but the same flexible lease terms offered by WeWork has been the undoing of Knotel.
Buying long-term and selling short-term is not a happy business strategy unless an effective way of de-risking can be found. It clearly was not. Knotel went from achieving unicorn status (a valuation exceeding USD1bn) in summer 2019 to bankruptcy this January.
The future for flex offices looks bright but it is going to require an approach that relies on more than lease arbitrage. Some companies have got out of leasing altogether. Canadian flex office provider Breather (which has around 40 premises in the UK) has switched to what it describes as an “Airbnb like” model that is digital only. More than 400 locations have been closed as a result.
But somebody has to run the offices. Those companies that have a service culture with a hospitality-like approach seem best-placed to succeed. This is not so much about co-working but about hotelisation of the office.
Knotel had the appearance of a successful business strategy but was undone by its inflexible lease structure. The hotel sector has the experience of how to cope with this and suitable alternatives. Knotel should have been a bit more hotel.