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Is now a good or a very bad moment to be launching new high-concept flexible workspace? Mark Gregson, founder and chief executive at Impact Working, hopes the answer is that this is a good moment. Impact’s debut hub in Bristol opened in November and as many as 10 more will follow.
It’s a brave move. After a pandemic that saw dozens of smaller serviced and flexible workspace operators go out of business – and others hang by a thread – the sector is in a twitchy mood.
There’s clearly scope for expansion as hesitant office occupiers opt for flex space as an alternative to expensive and onerous traditional leases. Expansion in London and the regions is already underway, some of it thanks to landlords creating their own-brand operations: Grosvenor has launched a very flex office offer called 25EP and Land Securities plans to expand its Myo brand from two units to six. And yet operators confess that their margins are squeezed and their business models under pressure. Some familiar names will not make it to New Year 2023.
Gregson insists Impact will still be here next year and for years to come. “We’re planning to open in six locations over the next three years, but we’re beginning to think we might accelerate that programme,” he says. “We’re about to go into legals on four new sites and we’re now looking at a total of eight to 10 locations.”
Each location will be an average of 20-25,000 sq ft, room enough for 350-450 desks. Around 25% of the footprint will be allocated to common areas, gyms, and breakout spaces. Design, layout and location will borrow from the hospitality sector and respond to a new mood in the workplace, says Gregson. Above all, occupiers want to align their values with the values of the flex workspace operator (and vice versa). The way flex hubs look and feel is going to be a big part of this, he says: “Every surface, from walls to carpet to furniture, has a code so you can scan and live the story on sustainability. You don’t have to take our word for it and you can see that we’re not just greenwashing,” says Gregson.
Design clichés are out. “Ours isn’t the most glamorous space [fit outs are £70-90 a sq ft] but we’re trying to be better than anyone else at the values we profess,” Gregson says.
Huckletree, the funky flex operator founded by Gaby Hersham, is also planning expansion. But Hersham confesses how fragile the sector can sometimes feel.
“Our ambition is to grow at quite a rate this year. We think there’s an appetite for the curated office ecosystems we offer,” says Hersham, speaking of Huckletree’s policy of creating clusters of like-minded businesses wherever possible. Charities, fintech and venture capital all have Huckletree hubs so far. The ambition is to grow from a 200,000 sq ft portfolio to around 1 million sq ft by 2025. Hubs will also get larger.
“Our largest today is 50,000 sq ft at White City, and we want to push that higher,” says Hersham. “We’re at nearly 90% occupancy over the group, up from about 65% during lockdown, but we were discounting prices then, so there’s been a much larger uptick in revenue.
That revenue streams are back is a big relief to many small but ambitious flex operators. But the mathematics are tricky. WeWork’s unhappy attempt to list on the Stock Exchange in 2019 was followed by a massive restructuring. Nobody wants to repeat their mistake of signing up for huge leasehold liabilities which couldn’t be repaid. For now, landlords are prepared to offer flex space operators easy terms and incentives. But they aren’t happy – they want to cut the incentives and would prefer to let offices to somebody else – and don’t like signing management agreements. The moment the economy picks up some landlords will drop serviced offices like a red hot brick. That is why operators like Huckletree know their opportunity to expand is time-limited – and time is running out. “We’ve got to jump now,” says Hersham.
They also know that reproducing the lazy design clichés of flex workspace – blonde wood, mid-century styling – will no longer cut it with occupiers.
“You walk into our hubs and there has to be a surprise factor – though not the exactly same surprise in each one. It also has to be efficient, so we leverage the same designers and suppliers, with the aim that they all look different and offer different things, whether that’s a meditation yurt or a brain-dump studio full of lightboards so customers can map things out,” says Hersham.
But in this challenged, complicated and heavily fragmented market, there are going to be casualties. The smaller operators – and those who experience simple bad luck – will not last, says Hersham.
“Mergers and acquisitions are something we’re aware of. We’ve been approached a few times by buyers. We had conversations only this morning with a big operator who wants to scoop up some smaller operators, because a lot of smaller occupiers are going through a really tough time and want out, which I totally understand,” she says.
For Huckletree, the medium-term prospect is more as a buyer of other smaller operators, than a sale of its business to someone else. But longer term, who knows?
“It is really easy to let your operational costs skyrocket and end up with buildings than never break even, let alone deliver the margins you want. We look for 20-25% and it’s amazing how quickly and easily you can turn those margins to zero or negative. It only takes a few members leaving, costs rising and you’re there,” says Hersham.
Amy Taylor is head of flexible office advisory at property consultant Cushman & Wakefield. Her job is to help office occupiers into the flexible office space that suits them best and that makes her an ideal spectator on the triumphs and potential tragedies operators face.
Taylor says that sustainability concerns are now dominating occupiers’ minds – and that flex operators that fail to address these issues will face trouble.
Taylor agrees there will be many mergers and acquisitions during 2022 as a muddled market consolidates around fewer, larger operators. The large operators are already preparing themselves. IWG is bringing its post-COVID, neighbourhood-focused coworking format, Spaces OpenDesk, to the UK from California. Birmingham will see its first 50,000 sq ft outing, providing more flexibility – and privacy – than the standard product. Visible high street locations will be a priority.
The other big players are also on the offensive. The Office Group has 300,000 sq ft of new floorspace in the immediate pipeline, whilst WeWork has announced a deal to work with coworking aggregator platform Uplex, which adds 4,800 third-party spaces provided by over 700 flexspace operators, to the shared network. This represents a real challenge to IWG.
At the same time independent operators face mighty risks. “The harsh reality is one big occupier pulling out of a flex office hub and operators may have to close the whole hub. So for independent operators everyone is on the line when an occupier renews their contract or a deadline approaches. That’s quite sad,” says Taylor. The next 12 months are going to be a rollercoaster ride of the flex sector: the best advice is, hang on tight.
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