Are flexible offices losing their appeal?

by Adam Branson

21/11/2019

The news followed hot on the heels of the collapse of The Clubhouse and Central Working – IWG bought the former and is in advanced talks to snap up the latter – and the well-documented recent woes of WeWork.

So why are so many flexible workspace companies struggling at the moment? Has the bubble burst or is there still scope for further growth?

The sector has grown exponentially in the past few years, with new centres opening on a weekly basis.

Questions started to be raised in earnest about the robustness of the WeWork model last year, but the first sign of trouble in the wider sector came this July when Property Week revealed that Canadian firm OneEleven was closing its first UK office.

A month later, The Clubhouse, which has four central London locations, filed for administration. Then, last month, Central Working, which had 11 UK offices, collapsed.

Some of the strugglers haven’t got the business model right  

Emma Swinnerton, C&W

Second Home, the flexible office company co-founded by former David Cameron aide Rohan Silva, is also reported to be seeking new funding after incurring substantial cost overruns on the development of its first centre in the US.

While some industry experts have been surprised by the flurry of bad news, others have been expecting it for some time. In January, Mat Oakley, head of commercial research at Savills, warned that some smaller London providers could be forced to close this year, and claimed certain operators were already paying more for space than they were charging their customers.

Oakley’s assessment proved eerily prescient and he fears there could be more pain to come in the capital at least.

“We are starting to see the effects of strong competition and limited product differentiation in the mature London market,” he says. “Operators that only compete on price are in a race to the bottom.”

More trouble ahead

As well as getting their pricing wrong, some operators have struggled because their business model is not financially robust.

“The reality is that if you look at the companies that have had difficulties, such as The Clubhouse, and some of the more pure co-working products, we know that’s not a scalable, profitable model,” says Douglas Green, a director at flexible office advisory firm GKRE.

“The Clubhouse had some fixed space, but the model was all about club membership. It was too much for it in terms of taking a lease on some fabulous buildings and making them profitable without the fixed-office income. It’s too hard.”

Emma Swinnerton, EMEA head of flexible workspace at Cushman & Wakefield, agrees that “some of the people who have struggled are the people who haven’t got the business model right”.

She also concedes that it is “strange, coincidental timing” that the issues affecting a number of different operators have arisen within a short period of time.

However, she cautions against making sweeping generalisations about the market. Those that have found themselves in trouble have often been contending with issues specific to them.

Not working: last month, Central Working, which runs 11 offices across UK including this one in Victoria, collapsed

Central Working is a case in point. “My take is that it was a historical debt burden that it was carrying [that was the problem], but that its current operation was profitable,” says Swinnerton. “Some of its most recent locations were very positive. So I think that one was really just unfortunate.”

Swinnerton does not believe Second Home’s recent problems are evidence of a wider malaise in the sector either.

“Second Home has had some challenges, but with that one it was to do with a project it had done in the US,” she says. “Whenever you go into a new market, it can be difficult. It was an overrun on a project that caused problems.”

A representative of a London-based flexible office operator, who prefers to remain unnamed, agrees. “I think inevitably in every fast-growing new sector there will be some growing pains,” he says. “With Central Working and WeWork, there were specific reasons they had problems.”

However, there are commonalities between some of the flexible workspace operators that have struggled. For one, many are over-reliant on leased space, says Giles Fuchs, chief executive of Office Space in Town.

Those that own their space are not immune to the wider pressures on the sector, but they have shown more resilience, he argues.

“There is still an abundance of operators out there – with about 3,000 flexible workspace operators in the UK alone – providing a plethora of distinct and niche services, all of which are underpinned by the long-term change in the behavioural practices of businesses and employees,” says Fuchs.

“Many of these own rather than lease their spaces and most are not suffering with the same cashflow or operational issues as the likes of WeWork, Second Home and other troubled flexible office operators. Far from it – the majority provide an extremely viable and promising mode.”

Swinnerton agrees that the market fundamentals for flexible offices remain strong. “I think that people who have the right business model have proved that they can run a profitable operation,” she says.

Source: Shutterstock/ Monkey Business Images

“There is continuous demand from occupiers for this type of model and potentially that is still growing. I feel like there is room for this to continue to grow.

“If WeWork takes its foot off the pedal then maybe the pace will slow a bit. But I do believe that the sector as a whole will continue to grow.”

That said, Swinnerton acknowledges that the take-up of space by operators in London is likely to slow.

“I think that take-up is going to be challenged because of constraints in terms of the availability of good-quality office stock coming up in the London pipeline,” she says.

“There is going to be increased competition for the same buildings, so regardless of what is happening with WeWork I think take-up will be challenged going forwards.”

Reduced take-up from flexible office providers could help ease downward pressure on desk rates. According to The Instant Group data, there has been a 6% decline in rates in London over the past year as more operators have set up shop in more suburban areas of the capital where the desk rates are lower.

“Because supply has been focused on Zone 1, Canary Wharf, the City and so on, what we’re seeing from user demand is that it is still there but they want a bit more diversification when it comes to location,” says John Williams, head of marketing at The Instant Group.

Suburban focus

“That supply in Zone 1 was quite extreme, really quick and quite highly priced, so I think this is just the market settling down. There is also pricing competition between all these new operators trying to find their niche.”

Swinnerton adds that it is difficult to gauge exactly what is happening with desk rates, meaning that reductions could be going under the radar.

“You have to look at what’s being marketed and what is actually sold, and of course the latter is hard to get hold of,” she says. “We know that WeWork has been more aggressive than some of the other operators when it is filling large volumes of space.

“We expect that to change going forward and I think that the rest of the operators have been behaving in a fairly sensible, commercial manner and not doing big discounts because they don’t need to.”

In short, while some flexible workspace operators have been experiencing problems, many others continue to go from strength to strength.

Predictions that the flexible workspace bubble has burst are probably premature, but the recent struggles of many operators could be an early warning sign that the sector, which has enjoyed stratospheric growth over the past few years, is about to experience a slowdown.