Although some flexible workspace operators had not until now weathered a downturn what we learnt from the Global Financial Crisis in 2008 was that demand for flexible workspace in times of uncertainty tends to remain high.
However, today’s social distancing measures have turned this on its head and provided the biggest challenge to date to this until recently fast growing part of the market.
The majority of flexible workspace buildings remain open and have not been part of any government mandated closures. That said operators are deploying skeleton staff and are implementing much more stringent cleaning routines.
Whilst a significant proportion of customers of flexible workspaces have signed month to month agreements which allow them to walk away with little notice, what has also changed since 2008 is the amount of large corporates leveraging flexible workspaces as part of their property portfolio.
In general they will be on longer term agreements and will therefore provide some much needed stability over the coming months.
Unlike traditional landlords flexible workspace operators invoice monthly in advance and the majority of payments are made by direct debit. The next few days will therefore be critical in determining what proportion of customers intend to continue to pay their bills.
All operators have been inundated with requests for payment holidays/early terminations and in turn a number of major operators have requested the same from their landlords.
In addition, a collective of smaller operators have asked the government to consider a 12 month holiday from business rates payment in-line with concessions granted in the retail sector.
Taking all of this into consideration and depending on how long the current social distancing measures are in place it is highly likely that a number of businesses in this space will struggle to survive.
We have been highlighting for some time that due to the structure of this sector that there is likely to be an opportunity for consolidation and COVID-19 could well prove to be the catalyst that causes that to take place.
Having said that, acquisition is not straightforward as many operators differentiate by the strength of their brand and product offer so any targets would either need to be aligned or an owner could develop a portfolio of brands to target different sectors similar to IWG’s multi-brand strategy.
Although enquiries for new flexible workspace have declined dramatically in the last couple of weeks the fundamentals of the sector are still strong and we therefore expect demand to return in-line with a market bounceback.
Additional short term opportunities may also arise from traditional occupiers needing swing space as a result of delayed office moves or needing additional space to comply with potential phased return to work measures.
Longer term however, this raises a question around the rental arbitrage model employed by flexible workspace operators taking traditional leases and committing to a fixed cost base.
Operators who own some or all of their portfolio and/or landlord’s who have developed their own flexible workspace offers have more flexibility to respond to changing demand in times of distress.
When the market does return we therefore predict that landlord’s and owners who value flexible workspace as part of their portfolio may be more willing to consider managing the space themselves or working with a partner under more flexible commercial terms.