Never Mind Inflation, Stagnation is Coworking’s Biggest Threat

• Flexible workspaces must avoid stagnation by adapting to current challenges in order to remain relevant, match evolving business needs, and stay ahead of the competition. 
• Demand for flex space is soaring as businesses emerge from the pandemic in search of hybrid solutions, but many still don’t know exactly what their workplace strategy will be. 
• How can workspace operators protect themselves from the energy crisis? Which business models are most favorable? And what’s the future of flexible space? Five flex space experts share their views.

Covid-19, the energy crisis, rising inflation and a looming recession; it seems we’re moving from one crisis to another. While flexible space businesses historically perform well during periods of economic uncertainty, there’s an entirely different threat facing workspace owners: stagnation. 

The pandemic hit the brakes on expansion plans and investment opportunities for many flex space operators, and since then, some have struggled to make up for lost time. However, at a time when demand for flexibility is surging, “business as usual” is a dangerous place to be. 

“Those who haven’t done anything in the last three years to stay relevant will struggle,” said Zoe Ellis-Moore, CEO and Founder at Spaces to Places. “Those who are pivoting and adjusting are healthy and moving forwards.” 

Research from the Instant Group shows that demand for flexible workspace in the U.K. and the U.S. is up 22% and 58% respectively, when compared with pre-pandemic levels. 

Much of this growth is coming from businesses that are emerging from the pandemic and looking for flexible or hybrid solutions. They are exploring a more flexible and low-commitment style of workspace that won’t tie up their capital for years to come. 

“It’s a bumpy ride coming out of Covid and business leaders are still not definite on their strategies, which is impacting office decisions. All they do know is that they don’t want to commit to a traditional lease,” said Ellis-Moore. “They’re trialling flex and working out the best model for them.” 

Jonny Rosenblatt, co-founder at Spacemade, is also seeing this trend first-hand. 

“For our members, the requirement to commit shorter term to space or to simply access space on demand, means that we’re able to help businesses mitigate long term risk and overloading their balance sheets with onerous leases,” he said.  

Workspace is Competing with Working from Home 

For Jane Sartin, Executive Director of FlexSA, there is certainly demand for flexible space — but businesses are taking their time and seeking a higher quality of space. 

“If people are going to return to offices, there needs to be a strong offering that competes with the comforts of working from home.” 

She noted that design-led workspaces with high-quality facilities are proving popular, as are those that have adapted to offer a greater degree of flexibility to suit hybrid workers, such as hourly access and day passes. 

Ultimately, operators must be clear on what they offer and market these strengths accordingly. 

This could be a center’s value for money, design standards, or its business support or networking opportunities.  

“Customers are all looking for something slightly different, so will seek out what best meets their needs,” according to Sartin.  

Energy Crisis and Soaring Costs 

With the current energy crisis and rising cost of living, many firms are negotiating and attempting to lower their monthly rate. But there is danger in discounting. 

“A lot of operators get burned by discounting too much. It’s a tough one — but flex operators need to stay firm with costs,” said Ellis-Moore. “Hold at the market rate and don’t be tempted to discount, or it will cause problems further down the line.” 

Flexible space operator, Office Space in Town (OSiT) is already ahead of the situation. 

“We have our energy secured until October 2023, and we are already locking clients into new license agreements to cover us beyond 2023 with inflationary increases built into them to secure our income,” said CEO, Niki Fuchs. 

As Fuchs noted, it’s actually cheaper for staff to be in the office than heating their homes during the day. This has the added benefit of encouraging staff back to their offices. 

However, she warned that energy costs are a real threat, and operators need to act carefully. 

“If you cannot control your costs and your income is not robust, committed, or secure, you are at risk. There will be more pressure on the landlords of flex space operators who lease to help them — which they may or may not be able to do after giving such assistance during the pandemic.” 

For Jon Weinbrenn, Director of BE.Spoke, flexible space provides protection from turbulence in the form of cost certainty and agility. 

“Our customers are craving shelter from the storm. They understand that we have a unique ability to provide workspaces where their teams can flourish – where design, tech, hospitality, health and safety, wellbeing and sustainability are blended into our offering.” 

Flexible Space Business Models 

What’s the best future-proof business model for flex space operators? This is an important decision that defines a workspace’s ability to scale.  

“Operators that are growing have their business model nailed down,” said Ellis-Moore. 

For Fuchs, the message is clear: “Owning your own building and running it as a flex space is the most robust and the most future-proof of all models,” she said, “followed by management contracts, then followed by leases.” 

According to Weinbrenn, there has been “exponential growth” in the management agreement/partnership model over the past 36 months, which can be partly attributed to the challenging economic landscape over this period. 

“This time though, I think we are experiencing a structural change and a broader acceptance of these structures from institutional landlords and even some funds. I think in years to come, we will look back at this time as a pivotal moment in the acceptance of landlords partnering with operators in the same way the hotel operating model emerged decades ago.” 

That said, he doesn’t believe the owner/operator (freehold) or lease models are dying out. 

“Absolutely not! Running a portfolio across multiple models can be a great strategy to mitigate risk, and at the same time there’s a strong argument now for foreign investors to take advantage of the weak pound and invest in prime real estate in the UK.” 

For Spacemade, working in joint venture means they can tackle any crisis “in partnership rather than in conflict.” 

Rosenblatt attributes much of Spacemade’s success and growth — including its recently completed fundraiser to open 50 workspaces within the next three years — to its operational partner model. 

“Rather than slapping a cookie cutter brand on a building, we partner with landlords to understand the needs of their individual space and how it might benefit wider asset or the surrounding area. The brand, positioning, design — everything — depends on the specific requirements in that instance. We truly believe that the operational partnership model is the future of flexible workspace.” 

It appeals to landlords because they get a custom solution that suits their space, and their own business model. For operators, it promotes shared risk and shared reward. 

On the flip side, a traditional lease agreement “becomes a transaction where both parties always sit on the other side of the table from each other.” 

Like every business agreement, it’s a decision that must fit all parties. Regardless of the type of model, the good news is that landlords want to provide a flexible offering, which will only stimulate further education and growth within the flex industry. 

“We get daily calls from landlords who want us to look at a particular asset or understand how we can apply our model across their portfolio,” added Rosenblatt. 

The Rise of “Brandlords?” 

As noted by Ellis-Moore, flexible space “used to be the poor relation” in commercial real estate. But it’s now a solid part of the traditional office strategy, and landlords and investor groups are pushing ahead with flexible space integrations. 

“Some are taking the traditional approach of acquiring or investing in existing coworking brands — such as CBRE who have increased their stake in Industrious to over 40%. Others are taking a more novel and involved approach, becoming what we can call ‘brandlords.’” 

They should not be under-estimated.  

Landlords-turned-coworking-brands may not have the experience and dedication of traditional coworking brands. But, they are usually well-funded and have the distinct advantage of owning their own space; as noted by Fuchs, that’s the most robust and future-proof of all flexible space models. 

In the same way that occupiers are waiting and watching, trying to figure out the best way to develop their workplace strategies, landlords and flexible space companies are trialling how best to serve them — all while protecting their own assets in a challenging economy. 

What’s the Future of Flexible Space?  

In a word: consolidation. 

Two flexible space brands, The Office Group (TOG) and FORA have recently merged, and other operators have sale or flotation in mind as part of their growth plans, according to Fuchs. This will give rise for more consolidation in the next two to three years. 

“There is a lot of money in the world searching for a secure home. Flex space is a CRE solution that is growing at the expense of the traditional lease model, so I think that it will continue to grow.” 

Weinbrenn noted that flexible space has the ability to weather the storm ahead. 

“Whilst we are by no means immune to external market forces, the core elements of our offering address face on, exactly the kind of uncertainty and turmoil the country (and the world) is experiencing.” 

In terms of consolidation, he added that all types of mergers, new entrants, and emerging forms of flex space “will all have a part to play”. 

“Eventually we won’t be referring to the traditional market and the flex market – they will start to merge into one.” 

For Sartin, the industry will be influenced by those who use it — and that means there will always be demand for independent and boutique operators. 

“As the sector grows, customers have greater choice. Some will be attracted to the big, known brands. However, smaller operators are often more agile in meeting the needs of individual customers, and more embedded in their local community.” 

Sartin believes there will continue to be new entrants to the market, creating competition, which will “make for an exciting future for the sector as it continues to diversify.” 

Rosenblatt noted that while the current crisis is a huge concern for many people, it will accelerate the move towards flexible workspace. 

“Unquestionably, I see significant growth opportunities. The flex model is proving critical to the success of many buildings, either as a whole, or as an amenity play to enhance the overall offering and drive traditional rents.” 

He believes there will always be opportunities for flex to find new markets and evolve as a sub-sector of the real estate industry. 

“As we focus on growth in city centers now, as well as suburb markets, we can see that the appetite for flexible workspace from both a tenant and landlord perspective is only increasing month on month.” 

For Ellis-Moore, even though there are significant challenges to face in the coming months, flexible space is a “resilient sector with so much to offer. It’s a tough market, but demand is there. It’s maturing now and continuing to grow; the challenge now is ensuring supply can meet this demand.”