Last week, Colliers’ Occupier Services posted our initial response to questions we received from our global webinar here; we have now prepared this additional response regarding questions related to flexible workspace.
A material amount of the demand and actual absorption of office space in most major markets around the world in the past few years has been a result of the dramatic growth of flexible workspace (coworking, serviced offices, etc.), both large and small. While of course attractive to small businesses and start-ups, this trend took off with the “enterprise” client base as well. As a result of the pandemic, this segment of the industry has been particularly hard-hit. This is due to a number of factors, namely:
- Virtually zero new demand, which is normally anticipated on a monthly basis
- The month-to-month or very short-term nature of many of the agreements, allowing customers to terminate and go home
- Some customers with longer terms contracts withholding rent payments and/or pushing for rent relief
- Drying up of extra fees being generated for ad-hoc services and products that are sold only when spaces are occupied.
Further, beyond the current economic challenges of the business model, there are other subjective factors coming into play, such as:
- Mixed confidence in how effectively operators are responding to the current crisis and adapting spaces to minimize health and safety concerns
- Unknowns regarding who else is occupying these spaces
- Spaces generally being designed in a more densely populated layout
Potential for a Bright Future
While the above may first appear overly negative outlook for this sector, we actually see several factors that lead us to believe that this category of occupancy could still have a bright future.
We have always believed that the key value proposition for occupier clients was the ability to materially enhance flexibility compared to traditional leases. With a pandemic upon us, we see that flexibility for occupiers will become even more of a priority moving forward. As had already been the case prior to the pandemic, traditional landlords were starting to offer flexible solutions to tenants directly, sometimes without a flexible workspace operator involved. We see this trend continuing, but we also see significant opportunity for many operators to manage this offering within the landlord’s building, similar to a management agreement like a hotel or food service operator. This would also provide the flexible workspace operator more risk mitigation, instead of the operator having to lease the space from the landlord, then turning around and having the obligation to make a profit by re-licensing the rights to the space to other tenants.
Now that virtually all occupiers around the world have been forced into a work-from-home experiment, many will increase their use of remote working accommodations for their people going forward. Instead of providing more formal leased office space arrangements for as many of their employees, they will offer flexible workspace arrangements to these people that would like to work from home part-time and in a well-accommodated office space part-time. This could result in greater use of flexible workspace in suburban neighborhoods and non-core markets.
Lastly, as we have mentioned elsewhere, there are forces at play regarding the potential decrease in demand of office space moving forward due to the work-from-home movement and the expansion of the gig economy. However, there could also be significant increases in demand for office spaces due to de-densification of spaces to accommodate social distancing and safer standards of operations going forward. This could also provide a source of material demand for flexible workspace sector. For example, if a company has housed 1,000 employees within a building that the company leases for another 10 years, and now that same building will only accommodate 500 employees, there is now potential new demand for a significant amount of space, and a flexible workspace solution could be an optimal fit given the various issues mentioned herein.
For more information, please visit our Colliers’ Occupier Services page on our website.