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Is 2021 going to be coworking’s big moment, or Armageddon?

Coworking operators and developers ponder the future – and it might not be as bad as you think. David Thame reports.

20/10/2020 6 min read
Douglas House, coming soon from The Office Group

Is the coworking market in meltdown as it confronts Covid-19 and renewed demand for home working? Or is this the ‘eureka moment’ operators (and landlords) have been waiting for when major corporates abandon long-term leases for flexibility and coworking? 

Words: David Thame

The coronavirus pandemic is pretty much the opposite of everything coworking stands for. Idea-generating social collisions are replaced by rigid social distancing, the beer pump is firmly out of bounds, kitchen table start-ups are yesterday’s story, and nobody, but nobody, wants to commute into the office.

The effect on the (already doubtful) mathematics of coworking is dramatic. Buying wholesale on long-term leases, and selling short-term on licenses, is never going to be a recipe for stability. Given that both WeWork (now pulling back from growth in the UK regions and some of its global expansion) and IWG have endured periods of profound uncertainty suggests this is not a sector that can cope with much turbulence.

Coworking is kept alive, financially speaking, by patterns of high-density use and a rapid turnover of new tenants. Unplug both of these occupancy drips and the patient doesn’t stand a cat’s chance. Worse, the coworking sector’s habit of charging per workspace (rather than per sq ft) adds to the problem in the eyes of many occupiers, who wonder why they are being charged for a 10-person room that can now only accommodate three. The answer, of course, is that the per desk pricing was always a trick to disguise per sq ft pricing – but it’s no use explaining that to a tenant in an angry mood.

The financial pressure is evident in the appeal for relief of business rates made by the 6,000 members of the Flexible Space Association. They also called for an end point to the recently renewed call to work from home, with a demand for a regular review of WFH guidance and ‘a clear aim of encouraging people to return to offices at the earliest opportunity’.

Yet flexible space operators claim to see in today’s chaos a once-in-a-lifetime opportunity to benefit from the looming mighty rethink of working habits.

This is not entirely self-delusional. The Office Group, one of the big names in London flexible working, has signed a string of large corporates since the lockdown. They say the list includes BP, who took 50,000 sq ft at Douglas House, west of Tottenham Court Road. The arrangement gives BP 700 desks for 1,000 staff, plus meeting rooms.

It is very good news for The Office Group’s major owners, US investor Blackstone, and others who have gambled on the success of the coworking sector.

Perhaps more surprisingly, some consider this the perfect moment to debut in London. Convene, who operate a mix of flexible workspace, event space and meeting rooms, are in the first stage in an expansion plan which, the firm has revealed, includes repurposing defunct or surplus retail floorspace.

Convene have been reported to be in active discussions to take on London retail space and convert it into large and very visible new homes for big corporates who want to exchange their traditional leases for lighter-touch flexible workspace. Convene have even gone so far as to suggest they might make the ideal anchor tenant in some retail schemes, replacing the department stores who once occupied that lofty position. The big advantage of being anchor tenant is that you generally do not pay much rent, the idea being that the anchor attracts other rent-paying businesses around it like barnacles, and no doubt Convene has this in mind when making the suggestion. Given the plight of Debenhams, House of Fraser and store closures by John Lewis and Marks & Spencer, Convene could be onto a winner.

So how to make sense of this confusing picture? Is 2021 going to be coworking’s big moment, or Armageddon? Will new development begin or will the temporary freeze on coworking continue as developers (and operators) largely sit on their hands?

Convene's new home, 22 Bishopsgate

Researchers at Cushman & Wakefield have been tackling this question, and have come up with a plausible answer.

The background to their thinking is analysis, which suggests the office property market is probably in worse shape than you think. Hopes of an early return to normal business are misplaced, they say.

Early evidence from the US suggests the office market will spin off its usual axis until 2025 and that the hit to floorspace demand is more serious than either the Great Financial Crisis of 2008 or the dotcom bubble of 2001. Something similar can be confidently predicted on this side of the Atlantic, too.

This is where it gets interesting, because it isn’t clear that a drop in demand for office floorspace means a drop in demand for flexible workspace. It may, in fact, mean exactly the opposite in the same way UK recessions almost invariably mean less employment but more self-employment.

Emma Swinnerton heads the flexible workspace team at Cushman & Wakefield in London. She says localised pain will contrast with sector-wide gain.

‘There are some pockets, particularly London submarkets, where we might have short-term problems of oversupply of coworking floorspace,’ she says.

‘My guess is the oversupply problems will be like the tide – they will wash in, and out, in particular localities as new supply comes onto the market and then gets occupied.’

Emma says that, in the near-term, outcomes will vary from operator to operator, and building to building, depending on the profile of its customers: some coworking spaces are vulnerable because they depended on sectors like the arts, which are struggling to recover, others have shorter-term contracts, or smaller business tenants, and some have occupiers eager to capitalise on the flexible space they have – whilst others do not. These variations will determine who thrives and who merely survives in the next 6-12 months.

As for new development and operator expansion, Emma suggests this will be patchy until the economy has stabilised.

‘A lot of growth has been put on hold, but to be honest that predates the COVID outbreak, as operators like WeWork, who were driving growth, changed their approach to seek profitable locations rather than simply volume of floorspace,’ she says.

The likely outcome is a series of more flexible hotel-style operating agreements between landlords and coworking brands. And if this becomes the norm, and is widely seen as viable, it could kick-start a new round of coworking start-ups and expansions.

‘This is a challenging time for all operators, who mostly have fixed leases with landlords,’ Emma explains. ‘Some operators are trying to renegotiate those arrangements in the same way that retailers are now talking to landlords, but it is still early days and, unlike the retail sector, we are not seeing floorspace returned empty, although this is possible. We’ve certainly not seen the rash of CVAs (company voluntary arrangements) that has enabled the retail sector to reconfigure its property.’

A lot of growth has been put on hold, but to be honest that predates the COVID outbreak, as operators like WeWork, who were driving growth, changed their approach to seek profitable locations rather than simply volume of floorspace

More risk sharing with landlords is the likely outcome, even in London, where high competition for good locations means landlords haven’t (so far) felt the need to take on any risk with their tenants. ‘Landlords will begin to take a view on the level of risk they want, and will engage in more partnerships with coworking tenants, and the COVID-19 experience will accelerate that. We could be moving to an arrangement more like that in the hospitality sector, which for a long time has been about signing management agreements.’

Many landlords already acknowledged that every large multi-tenanted office building needed an element of coworking (to nurture new occupiers, provide overspill for big occupiers, and provide a sense of animation and freshness). The proportion of coworking may be rising from 10% of floorspace to 15% or more, as the pandemic works its effect on office occupancy strategies.

Far from being the victim of coronavirus, coworking could come out a winner in the longer-term as office occupiers migrate towards a new form of workspace ecosystem that involves long-term leases along with a blend of flexible floorspace, working from home and working from the coffee shop or community hub. Such an ecosystem plays to the flex sector’s strengths.

The way governments worldwide have handled the coronavirus pandemic will be examined for decades to come. There is no doubt it has been deeply damaging to, among other things, the office market. But for coworking the cloud could (fingers crossed) have a shiny silver lining.

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