Flexible workspace industry is hindered by a lack of transparency

A fundamental shift in the flexible workspace industry needs to happen if it’s to realise its full potential as an integral part of the commercial real estate sector.

Currently, much of the industry is closed and secretive, and deep industry knowledge is held by a small handful of people while everyone else is informed by conjecture, here-say and even outright misrepresentation.

In contrast, the traditional commercial workspace sector is quite transparent. It takes the well-versed little time to obtain reliable information on just about any lease or sale transaction. But it is not just the domain of the well-networked industry insiders as, in Australia at least, there are widely available mechanisms for understanding a market.

• Many leases are registered by state agencies and publicly searchable

• Headline terms of sale are often disclosed and even published by the media

• Corporate real estate houses carefully track data and report on rates, including lease incentive trends.

Disclosure is a pillar of investment confidence and empowers investment managers and tenants to make decisions.

Why the flexible workspace industry is different.

Flexible workspace has been around for around at least 40 years. However, its journey from niche toward mainstream is fairly recent, and for the most part supply is still being forged by entrepreneurs rather than institutions. Perhaps this explains why the level of reporting is minimal and self-disclosure is generally resisted.

This lack of transparency has wide-reaching ramifications making it harder for

• investors and landlords

• consumers, and

• the industry itself

1.     Harder for investors and landlords.

Investment confidence relies in significant part on good information. Investors do not just look at a company’s numbers, they want to know how it compares to the industry. Having personally seen the financials of a number of large operators I consider the industry has a great story to tell. So, what kind of information is publicly available?

Australia has three directly listed flexible workspace companies – Servcorp, Victory and WOTSO.

• Neither Servcorp (ASX:SRV) nor Victory’s (ASX:VOL) business model reflect where the growth in the Australian market is coming from and are therefore tenuous reference points for the wider industry.

• Victory’s poor financial performance is arguably a reflection of its business decisions rather than the state of the industry.

• Wotso Property’s (ASX:WOT) annual report provides valuable insights into the structure and performance of its considerable near-to-home coworking network in Australia, but its business model is atypical.

• IWG (LON:IWG) also perplexes local researchers, in part because its success and growth story is largely in the Spaces brand which represents a minority of its portfolio, but also because its local performance is not published.

• WeWork’s (NYSE:WE) annual report provides little understanding of its Australian operations which account for about 2% of its portfolio.

Reports of flexible workspace operators either defaulting or terminating leases have tarred the industry which has failed to respond with a clear narrative demonstrating why these instances are outliers.

There is a need to better communicate the state of the industry and the performance of more operators. To do so should support greater investment and embolden landlords to partner with and/or release fitout capital to quality and well-run operators.

2.     Harder for consumers

Unlike some more established markets such as London and New York City, the take-up of flexible workspace by large occupiers is still in the establishment stage. In part this is because the local product on offer is still evolving to meet requirements, but the primary reason is uncertainty as to what the product is and how to consume it. Uncertainty is an antagonist to consumer confidence.

More streamlined, like for like pricing mechanisms, and communications strategy would empower the consumer to make confident choices. While procuring flexible workspace is easier than it used to be, the lack of transparency and standardisation continues to perplex - especially larger occupiers.

Pricing

It’s not easy for a prospective customer to obtain good “last offer” pricing from a preferred selection of operators. Aggregators can provide valuable assistance, but the quality of support is variable, and some brokers are influenced by hidden incentives. Matters are compounded when among those operators who say they do not price discount some do and some don’t.

Value for money

Recently, Bioom conducted a pricing review for a client. We obtained pricing from five good and nearby operators and the pricing sat between $700 and $1,100 – 36% difference. When we factored assumed private office desk density the price difference was less than 10%. Lack of standardisation means that it is only with an in-depth understanding of the market that we could accurately interpret the pricing.

3.     Harder for the industry

Ironically, in withholding data in a bid to protect themselves flexible workspace operators self-harm.

Best practice

As is typical of many emerging industries, the health and growth of the flexible workspace sector has been hampered by inadequate sharing of best practice. Industry standard measurements of performance do not meaningfully exist and indices are vulnerable to manipulation. Last year’s formation of industry body Flexible Workspace Australia is a key milestone in the local industry’s maturation and I hope it will be a great support toward establishing a more ‘universal’ understanding of product types and best practice.

Industry health reports

There are no deeply informed, comprehensive and reliable flexible workspace industry reports produced in and for Australia. Pleasingly, reports such as those published by Rubberdesk helpfully shed some light on pricing, total vacancy data and new openings. Generic research houses also release industry-specific paywall reports from time to time – drawing much of their data from interviews with people who may or may not be adequately informed. However, all these reports are only as good as the available data which is, at best, incomplete and not standardised.

Final word

In the short-term greater transparency would likely do some harm to our business at Bioom because our knowledge of the sector is rare and valued by our clients. Nonetheless, if the flexible workspace sector is to mature into its rightful place as an important segment of commercial real estate sector and a vital service to occupiers, change is needed.