Cities across Europe are at the forefront of a seismic shift in office leasing, as corporate culture shifts towards space as a service. And office landlords are now facing the issues hotel owners face, wondering whether to opt for management contracts, partnerships or franchises, as the preferred route to market.
The aggressive levels of growth have called into question the sustainability of the model and the problems around WeWork, previously a poster-child for what the industry could offer, has warned some investors off.
Among those continuing to push hard into the flexible office market is Knotel, which finished 2019 with around 5m sq ft of office space signed globally, and close to 10% of that in London.
Supported by a USD400m funding round, it is continuing to grow – prompting comparisons with WeWork. In a new year update, CEO Amol Sarva brushed off suggestions the portfolio had significant vacancies, and said revenues were now around USD350m, while cashflow is due to break even in 2020, and “profitability is very much in sight”.
Knotel’s portfolio has grown by agreeing partnership deals with landlords. In the fourth quarter of last year, chief investment officer Jonathan Goldberg reported that one third of its real estate deals were management agreements, “which allow us to serve our clients quickly and in a more capital efficient manner while increasing income for our owner partners.”
Investor Newable has acquired coworking operator Bold, and with it one site in Shoreditch, London, to add to its growing pipeline. Newable operates the NewFlex brand, and has a target of supporting Bold to open 25 sites over the next three years. At the end of 2018, Newable also bought Citibase, which it intends to back in doubling in size to 80 locations.
Troubled serviced office provider WeWork has pulled back from its breakneck expansion, but recently appointed Sandeep Mathrani as its new chief executive, a move some have noted signals an acceptance that the company is actually a property player, rather than a tech company as previous senior executives claimed. The real estate veteran moves across from Brookfield Properties, where since 2018 he has headed its retail division.
“London is arguably the most mature market globally – around 6% of space is flexible,” said James Pearson, associate director of EMEA research at CBRE. “The corporate office market is going through a paradigm shift.” Landlords, he notes, have three choices: lease to an operator; agree a management or partnership arrangement; or self-deliver.
“Landlords are all wrestling with the operational challenges,” according to Stewart Smith, managing director of CBRE Flex, as they discover the level of infrastructure needed, to deliver a flexible office product to the market.
“There is a general move towards management agreements.” Being less capital intensive, they also allow faster scale. Meanwhile, the biggest, most mature brand in the market, Regus, is now leading the charge towards franchising. “In many ways, the franchisee is more driven to deliver better customer service,” compared with process-driven corporates.
Smith said there is a cultural shift underway that is driving corporates, not just new businesses, to think differently about office space. “It’s to do with the general move in society to consume things on demand. Space as a service is simply a reflection of that.” Pearson confirmed: “Corporate behaviour is changing – they are seeking agility in their portfolios.”
Looking ahead, Smith sees further moves towards market maturity. “One of the themes we’ve been seeing is there’s a convergence, in terms of what the operators provide.” Despite declarations of unique offerings, he notes a general move towards less coworking spaces, and fewer social space amenities, with more, smaller distinct offices for specific users. “Anyone can set up a cool space with a coffee machine – but it’s the enterprise space that makes the money.”
Landlords are also developing a clearer product, again converging on a simple tenant-ready space with minimal service support – but with simplified contracts, which appeals to those wanting their own front door.
UK landlord Arlington, which specialises in business parks, has recently launched its own flexible office product, named Adapt. “Adapt is our response to our customers’ growing desire to occupy the sort of high-quality headquarters accommodation we’re known for, but with the flexibility and ease of access not offered by a traditional lease,” said James Raven, chief executive of Arlington.
The company has long relationships with serviced office providers such as Regus, renting them space. The move means the group will now offer its space directly, in formats from coworking spaces to individual private offices. It has launched the service at its Uxbridge business park.
Coming into the flexible working arena from the hotel end is Accor, which rebranded its Nextdoor joint venture with construction giant Bouygues, as Wojo. The brand is looking to build a presence on three levels; Wojo Sites, its own office buildings; smaller Wojo Corners fitted into buildings such as Accor hotels; and Wojo Spots, effectively affiliated coffee shops.
The brand has 11 sites open in France with one about to launch in Barcelona, plus a pipeline taking it towards a 2025 target of 80 buildings. The first Wojo Corners are already open in France, with Spain the next area of growth, heading towards 100 open by 2023. And the joint venture is a quarter of the way towards its target of 1,000 spots, currently all in France.
Also keen to get a bit of the coworking action is Sir Stelios Haji-ioannou, as part of his Easy group. The company is actively promoting easyHub as a flexible working brand, seeking franchisees. The company says the orange brand is well-known, with a highly positive satisfaction rating, and “this recognition means that we generate more enquiries per building than a lesser known brand.”
But the biggest challenge for the London market in the short term, is a shortage of stock. Said Smith: “We’re seeing Chinese, French, US operators – they’re all looking at the streets of London for a foothold.”
HA Perspective [by Andrew Sangster]: There has been a good deal of scepticism about co-working since the failure of WeWork, or more accurately the We Company, to succeed in its IPO.
There are obvious structural flaws in the WeWork model, the biggest being buying long and selling short. If the market turns, WeWork is left with a huge amount of exposure through its long-term leases.
But the WeWork debacle does not remove the fundamental drivers for the flex-office space. Back in 2017, CBRE talked about the “flex revolution”. It cited three drivers: technology; economic change; and shifts in corporate behaviour.
These drivers are all still present, I would argue, so it’s worth taking a closer look. Technology is about mobile enabled work and the ability of platforms (like WeWork) to aggregate small scale demand. On this latter point, it is essentially allowing real estate owners to tap into the long tail of smaller micro businesses who need space.
Alongside the technology itself is the economic change that this technology is unleashing. Definitions of the New Economy are as fuzzy as WeWork’s original business model but broadly it refers to tech-enabled business which is also covered by terms like the knowledge economy, the data economy, the sharing economy and more. The key common feature as far as office demand is concerned is that the bulk of the workforce is not on traditional long-term employment contracts, instead it is, as CBRE puts it, contingent labour.
The final driver is the change in how companies see themselves and what they want to be. “We need to be more entrepreneurial” is a common cry among corporate leaders. Whatever the reality of how well their corporate culture is adapting to change, the physical manifestation is in the office environment which is much more casual and relaxed, with coffee machines, hot desking and other wacky ideas ranging from ping pong tables to think zones. This matters possibly for productivity but certainly in terms of making corporates a more attractive place to work.
The CBRE research highlighted that back in 2017 less than 40% of co-working centres globally were profitable. The most up-to-date version of that research, from Deskmag’s Global Co-Working Survey 2019, finds that just 43% of co-working space is profitable. Better, but not much.
Almost 90% of co-working spaces are profitable if they: have more than 200 members; are older than one year; [and] do not subsidise their operation through other businesses. A key route to profitability appears to be letting out whole offices to teams rather than just offering one big space open to all.
WeWork has lost its mercurial founder Adam Neumann and brought in a real estate industry veteran as chairman. Sandeep Mathrani starts in about a week, having left his post as chief executive of Brookfield’s retail division.
In the meantime, WeWork signed just four new leases across the US in the fourth quarter, down 93% from what it had been doing over the previous four quarters on average. IWG, the parent of Regus and Spaces, is now the most active flexible office space provider.
London-listed IWG has a market cap of under GBP4bn. A far cry from the USD47bn once touted for WeWork but IWG is a business than looks a lot more sustainable.
For hoteliers, flex office growth offers numerous opportunities, from mixed-use developments featuring hotels that give offices access to f&b and similar, to the installation of co-working facilities within hotels.
Already hotels are introducing flex office concepts. Accor’s move with WoJo is probably the biggest noise by a major player in Europe but there are also interesting smaller initiatives such as Village which has launched its VWorks shared work-space concept.
Growth is coming but from a small base. Colliers said that at the end of 2018 about 1.5% of office space in major European cities (5% in London and Amsterdam) could be characterised as flex. JLL said last year that in the UK, among key cities, flex will account for more than 8.5% of total office stock by 2023.
Hotel companies and hospitality professionals are set to be in the forefront of many of the most interesting developments.