Even Coronavirus May Not Quell Appetite For Flexible Office Space
With their customers working from home for the foreseeable future and their leases sunsetting, companies that offer short-term office space are on the ropes compared to traditional office operators, who may be hanging on to five- and 10-year leases. In the face of flagging revenue, flexible office companies have taken drastic measures to cut costs, with some providers laying off as much as half of their staff.
Despite this tangible setback, some industry professionals believe that in the long run, the coronavirus outbreak will not hamper appetites for "real-estate-as-a-service" models. In fact, they believe that the recovery from the crisis could serve to drive up demand for flexible office space.
“This is no doubt a severe stress test to the business model,” said Michael Kloppenburg, senior consultant for flexible office solutions at Avison Young. “But the strong operators and owners positioned to survive the effects of this crisis will be rewarded with even greater focus by enterprise occupiers looking to apply flexibility to their real estate portfolios.”
Over the last decade, Kloppenburg has tracked the rise of real-estate-as-a-service models, watching them spread from modest shared offices to sprawling, on-demand suites rented by the nation’s largest companies. The momentum and use of these kinds of spaces should survive and thrive on the other side of the current economic crisis, he said.
Real estate as a service is not a new idea. It began over 30 years ago as companies like Regus and other traditional executive suite providers began operating managed office spaces on flexible terms for businesses seeking an alternative to traditional long-term office leases.
Within the last five years, the budding industry evolved to focus more on the tenant experience with creative, efficient office design, high-touch hospitality service and shared community, giving rise to what we now call coworking.
“These concepts are now bleeding into the traditional office sector,” Kloppenburg said. “Even among the world's largest firms, there is an undeniable market demand for flexibility and an enhanced tenant experience, which we expect to continue beyond the near-term negative economic impact of COVID-19.”
Coming out of the current crisis, businesses may turn to flexible office solutions even more. Especially if the recovery is slow and halting, companies will probably turn to shorter-term, flexible leases that they can easily exit if they are forced to send employees home once more.
The coronavirus may also open up enterprises’ eyes to different office solutions. With all their employees working from home, Kloppenburg said, companies may feel more confident breaking away from traditional office leases, moving more employees to consistent remote work, or placing them in more geographically dispersed flexible offices.
If the economic downturn forces some businesses to shutter, landlords will have vacant space in their buildings and should consider whether to turn those areas into a flexible workspace. Though it is not under the happiest of circumstances, Kloppenburg said the coronavirus may provide the staging ground for “the biggest experiment in coworking we will ever experience.”
The rise of coworking has spawned dozens of different models for how to create a managed office space and the model that landlords choose could be the difference between bringing in crucial revenue in a time of crisis or opening up a money pit inside their buildings. Recently, Kloppenburg served as a subject matter expert for an on-demand course in real estate as a service from NAIOP. The course breaks down various flexible office models and when and where they have found success.
Daniel Levison, chairman of Atlanta-based CRE Holdings, also served as an expert for the course. Levison began operating a set of managed office spaces in 2015 throughout his portfolio of properties and said the course is filled with firsthand experiences from landlords, coworking operators, economists and thinkers in the world of flexible office.
“We all shared what worked and didn’t work for us,” he said. “This course is absolutely going to be useful for anyone starting out in flexible office after this survival period is over. Clients are asking for this kind of space, so you better start providing it, or they’ll go somewhere else.”
Current flexible office providers should not underestimate the difficulties of the current economy. Kloppenburg predicted that the coming office crunch will create both winners and losers, and said we will see consolidation among coworking providers before we see proliferation as institutional owners participate more actively.
This feature was produced in collaboration between the Bisnow Branded Content Studio and NAIOP. Bisnow news staff was not involved in the production of this content.