Co-working and flexible offices are in danger of not being cool any more – but that is precisely what needs to happen if the market is to flourish long-term.
The meteoric rise of the flexible workspace model has been driven by disrupters such as WeWork, intent on upending the stale landlord-tenant dynamic in favour of a more customer-oriented approach. Now, experienced commercial property owners are getting in on the game.
This week, Land Securities – the listed UK development giant – launched Myo, a standalone brand offering leases ranging from 12 months to three years to businesses in need of space for between 15 and 80 people. Even that most establishment of property firms, the UK monarch’s Crown Estate, has got involved, launching its first flexible office offering earlier this month.
This might smack of the property industry’s old guard playing catch-up with the upstarts. However, those in the business of buying or lending against office buildings stand to benefit from the experienced owners of commercial real estate embracing the flexible working model.
Established property owners, after all, have a role to play in creating a mature flexible workspace market. By expanding their product offering to meet tenants’ demand for flexibility, supply of such space will not be controlled just by start-ups that are yet to prove themselves long-term. The risk inherent in the shared space market will be spread. Landlords with existing property portfolios will also be better-placed to dial down the supply of flexible space across their portfolios should demand waver.
Several debt providers have demonstrated they are comfortable lending against buildings that have long-term leases to WeWork; recently in London, Legal & General and Bank of Ireland lent circa £150 million (€172 million) and £104 million, respectively, to fund buildings occupied by the firm.
Co-working operators now occupy so much space across Europe’s cities that lenders in the business of funding prime buildings will struggle to avoid them. Indeed, some will welcome the long leases such operators take on their properties.
Demand for flexible workspace is not going away – tenants have had a taste of real estate as a service industry and it is impossible to put that genie back in the bottle. However, the industry faces the challenge of incorporating the provision of that space into a robust office sector.
As it stands, cynics have questioned the resilience of the current model in which start-ups have long-term leases on vast swathes of offices they then rent out on a short-term basis. The model has not been tested through harsh market conditions in which tenant demand is sure to drop. Earlier this month, SoftBank’s downsizing of its support for WeWork prompted our sister title, PERE, to ask whether co-working is having its ‘emperor’s new clothes moment’. The shared-space model, our colleagues concluded, needs to be road-tested across a cycle before the decision-makers in the world of institutional capital completely understand it.
Lenders face short-term questions about how exposed they want to be to the sector. They have reason to remain cautious, since flexible working is a problematic concept for those seeking to underwrite predictable income streams across fixed periods of time. But while the flexible workspace market is yet to calibrate, lenders cannot ignore this growth sector. Flexible working’s transition from trendy to mainstream will ultimately make it a less risky proposition for them.
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