The WeWorks fiasco may have been a result of its’ founder Adam Neuman’s shenanigans fueled by Softbank’s megalomania. But it also showed the fundamental weakness of the co-working business model i.e, an asset-liability mismatch with long dated assets in the real estate backed by short term contracts with tenants, a classic recipe for disaster, exacerbated by the current lockdown situation. As people get used to the concept of ‘WFH’, some offices may never come back to full utilisation even when normalcy returns thereby exposing the whole commercial real estate industry to a structural crisis. Naturally, co-working will likely suffer more due to the mismatch. However, in the longer run, co-working or flexible office rentals in general could be a gainer as businesses on the back of the current crisis look to lower fixed costs permanently. Marcellus operates out of one such space as not only do the low fixed costs allow us to offer clients a purely performance-based fee option but also allows us to add space and hence costs only as we grow. This piece in the WIRED brings out the twin dynamic of the near-term existential threat and the longer term opportunity facing the co-working and flexible offices concept.
“Anna’s story reflects the coronavirus-induced existential crisis that the flexible office market is facing. With the majority of tenants working from home in line with government advice, a model based on very short leases is in danger if customers decide to stop renewing memberships.
“We have an acceptance within occupiers that forecasting needs is an incredibly difficult art. It is not a science. Therefore, the long-term lease has been challenged,” says Ben Munn, global head of flexible space at JLL. “There is no doubt that occupiers will only increase their level of demand for flexible options.”
Corporate unwillingness to make 15-year commitments on buildings is ideal for flexible office providers desperate for tenants willing to make commitments measured in years and not months. Someone like WeWork scooping up those businesses is a win-win.
But nowhere is the growing divide between ‘coworking’ and ‘flexible offices’ more apparent than among London’s largest landlords. In its recent annual results, Landsec, a FTSE 100 landlord, lists serviced offices as risky occupiers, but the paragraphs before and after are an ode to a flexible office future. Mirroring fellow FTSE 100 landlord British Land, Landsec launched its own flexible office brand, Myo, last year with the intention of avoiding coworking completely, focusing instead on one to three-year leases for corporate clients. In other words, an industry notorious for papering over gigantic losses by attracting waves of endless venture capital with skate ramps and flowing beer taps has a new wave of operators for whom caution and balance sheets matter.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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