Remote workers and start-ups have driven a shift towards shared offices. Will it survive a recession?
Earlier this year, New York-based flexible workspace provider WeWork became the biggest individual corporate occupier of office space in central London – the only entity that takes up more office space in the capital is the UK government. In central London, flexible workspace operators now occupy around 10.7m sq ft – roughly 4% of the total amount of office space, according to property consultants Cushman & Wakefield.
The amount of flexible space has almost trebled since 2007, with most of the growth occurring in the past five years. This rapid expansion is partly explained by the growing number of businesses and individuals looking for co-working spaces, as well as by the boom in remote working. For example, since 2001, the number of self-employed people has risen from 3.3 million (12% of the labour force) to 4.8 million (15.1%) last year, according to data from the Office for National Statistics.
Investors are keen to get involved. Last summer, real-estate investment trust (Reit) British Land launched “Storey”, which offers shorter leases to small companies, while private-equity firm Blackstone acquired the majority stake in flexible office space provider The Office Group. Earlier this month, shares in IWG, owner of the Regus serviced-offices chain, surged 35% on the news that three private-equity groups were considering a takeover.
However, the long-term profitability of the sector is unclear. IWG reported a pre-tax profit of £150m for 2017, but this figure was below market expectations and prompted the company to issue a profit warning that knocked a third off its share price (which is also why the stock rallied so hard on the takeover news). WeWork, which is spending heavily on new facilities, had net losses of $883m against revenues of $886m, the firm diclosed in offering documents for its first bond sale in April this year.
Shorter leases, bigger risks
WeWork’s bond was initially well received, raising $200m more than its $500m target, but the price of the bond quickly fell to 95.25 cents on the dollar (ie, well below its 100 cent face value).
Many bond investors were “hesitant to buy into a company whose core business involves signing long-term leases on office space and charging members by the month to rent it”, says Alexandra Scaggs in the Financial Times. And no wonder. By March, WeWork had more than 14m sq ft of office space (occupied by 220,000 members, and 251,000 desks in 234 locations) – for which it had entered into long-term lease obligations totalling $18bn, reports Bloomberg.
The danger is that when an economic downturn comes along, start-up firms will have to close or move to cheaper premises. That could leave providers of flexible office space with large amounts of unlet space, which they might need to close (WeWork’s leases are held in separate individual subsidiaries rather than being guaranteed by the parent) or risk going bust.
Even larger property firms could be exposed to some fall-out from this: for example, Landsec, the largest UK Reit, which has 38% of its portfolio in London offices, saw the serviced-office sector accounting for 17% of its take-up activity last year, against a ten-year average of 5%. Hence all office-space investors should be keeping an eye on the shift towards flexible working, how it might fare during a recession, and what the knock-on effect might be on the wider London market.