The impact of COVID on the future of flexible workspace.

The economic impact of the pandemic on flexible workspace demand and supply will be harsh and defining. The current crisis will be a likely catalyst for major structural changes in how commercial property is consumed. The shifts were occurring anyway, but they will be expedited.

The impact on the flexible workspace providers will be significant. Bioom considers this will be a step-change year. For those operators that survive the current circumstances, their place as an essential component in the Australian economy will be assured.

The changes we are likely to see will in small part be driven by infection management planning. More so, they will be driven by

·      the establishment of new norms

·      a heightened sense of vulnerability to economic cycles and disruptions

·      observation of cracks that became apparent during the national shutdown

The following lists Bioom’s top six predictions for the impact of the pandemic on the flexible workspace sector.  

1.  Not all operators will survive

Across all the markets Bioom has good visibility of operators are facing unprecedented numbers of cancellation notices. Most, if not all operators are seeing negative net absorption rates. Knowing that regaining a lost customer is time consuming and expensive, the better operators pivoted quickly by offering price reductions or payment holidays in a bid to retain customers. 

For some operators that were already under stress this pandemic will be their undoing. Large operators are not immune. Bioom is keeping a close eye on struggling operators such as Knotel. Bioom expects to see failures in the next quarter, even if the virus is contained quickly.

Rent comprises a significant part of their operating cost (especially in CBDs) and how their landlords respond to requests for relief will play a large role in their survival.

2. Failure will be a catalyst for consolidation

The next few years was always going to see consolidation in this fragmented sector. However, the current crisis will act to significantly speed this up.

This period of financial stress will reveal the solid and prudent operators that are running their business sustainably rather than as a vehicle to support a get rich exit strategy.

Despite the stress even the best operators are under, solid operators will be well placed to take over choice centres that are underperforming. Acquisitions will be at low or no cost and the incoming operator has the opportunity to take over or reset the lease and rebuild its customer base.

Consolidation will improve economies of scale and help operators to better service framework agreements with large employers.

Poorly maintained spaces will likely disappear more quickly than they would have otherwise as there will be no buyers.

3. Rise of suburban offerings

Remote working will become more acceptable, encouraged and practically supported. Even businesses that have resisted flexible working, and there are many, have had to accept it and this will inform new norms.

Yet the limitations of working from home are already being keenly felt by many employees and employers. There is a need for suitable equipment, infrastructure, services and, importantly, culture and human connection. Working from home can cause or exacerbate loneliness, and flexible workspace operators that can deliver well curated community will be rewarded.

One of the common comments Australians are making is, “I don’t miss the commute.”  The shift will embolden operators to move out of the CBDs into SBDs and core suburban locations. In Australia, to date this has been the domain of businesses like WOTSO, Waterman and Corporate House but the range of operators will become more widespread.

Shopping centres and curated town centres will be ideally placed to support these offerings because they

–      will have spaces that were once occupied by large retailers

–      have access to cheap capital to support fit out costs

–      already offer a range of amenity making it all the more compelling for people to not work from home

4. Businesses will incorporate a wider range of real estate solutions into their portfolios

Businesses across Australia are clamouring to secure temporary rent relief. When the pandemic settles, they will be more highly attuned to their exposure to long term leases over large spaces. Some, if not many, will look for ways to reduce their exposure and maximise their flexibility to dial up or down space according to demand, and an obvious solution will be through the take-up of flexible workspace to supplement their primary space.

This trend already started in the Australian mining sector after the end of the last peak cycle. BHP Billiton has been releasing significant amounts of space in most cities and plans to draw upon externally managed flexible workspace for almost all future growth. It is possible this crisis will have a similar effect on a number of sectors and businesses, resulting in a long and steady growth in demand for flexible workspace in all CDBs and many SBD’s and key suburban markets.  

5. Further loss of appetite among flexible operators for traditional leases

The GFC was a brutal time for flexible workspace providers. The buy long, sell short approach made operators, even the good ones, highly vulnerable to sharp demand reduction. IWG, then Regus, went into Chapter 11 and many failed. 

In recent times a number of the leading flexible workspace providers were approaching traditional leases with caution. They tie up considerable working capital in bank guarantees and offer little flexibility to meet the market price during downturns. Their increasing preference is to partner with the landlord as a means of sharing the down cycles and up cycles. It has been shown that (with the exception of viral pandemics such as SARS and civil unrest such as the Hong Kong demonstrations) that if the desk rate is set in line with the underlying market price for property occupancy remains quite strong.

The impact of COVID-19 will strengthen many operator’s resolve to grow through partnerships or variable income structures or not at all. Major landlords will be keenly aware that long term, straight line leases to flexible workspace operators do not offer the surety they had hoped for. They will need to increasingly incorporate flexible working to their portfolio and will be faced with the choice of accepting flexible arrangements or venture into self-management, which has its own set of risks.

The goal of securing predictable, secure income month on month for years can no longer be a driving force. Landlords will need to assess emerging opportunities with flexible workspace operators in the context of

–      Return on cost

–      Cashflow

–      Brand alignment

–      Amenity uplift

6. Government will get more involved

Government will play a vital role in the restoration of the economy post COVID-19 shutdown. As an economic stimulation and decentralisation tool, there is a lot to be said for the provision of flexible workspace in town centres.

Government will increasingly use carrot and stick mechanisms to promote supply. There will be an opportunity for the larger landlords (especially during the development cycle) in suburbia to proactively engage with Government around the delivery of these services and improve the prospect of securing positive incentives rather than being forced into prescribed outcomes.

This note is an opinion piece. It reflects the views of Bioom based on the information available to it at the time of writing, 26 March 2020.