WeWork’s decision to file for Chapter 11 bankruptcy in the US has prompted concerns about what could happen to investment in the UK’s flexible office sector, should it also go into administration here.
Where it all went wrong for the flexible office operator has been well documented in books, a documentary and a TV series. One of the major sticking points is undoubtedly the mismatch between the long duration of the leases taken out by WeWork on the buildings it sublets as co-working spaces and the short-term contracts favoured by its tenants.
Documents filed ahead of the company’s ill-fated attempt at going public in 2019 revealed the average length of leases taken out by WeWork was 15 years. This means that while WeWork’s tenants can pack up their desks and vacate at little notice, the company itself is on the hook for billions of dollars for space it more than likely negotiated in a pre-Covid world, under very different market conditions.
WeWork’s modus operandi of behaving more like a technology than a real estate business, namely its use in its early days of ‘venture predation’ tactics, also played a significant part in its downfall. This dubious practice of using venture capital funds to undercut competitors and sweep up market share before jacking up prices once the competition has exited the market has, understandably, come under criticism for stifling competition. It has resulted in WeWork burning through cash at an extraordinarily fast rate, operating at a loss since its inception.
Another major problem faced by WeWork stems from the profile of its customer base. Flexible offices have traditionally been most popular among start-up businesses. The business model enables entrepreneurs to upgrade (or downgrade) the space they take, often at a month’s notice, according to their business’s needs. Tenants of more traditional office developments, on the other hand, are typically bound by much more restrictive longer lease terms, complete with fees for early termination.
Not only does the WeWork model afford little predictability in terms of revenue, but start-up businesses are traditionally more exposed in times of economic downturn than their longer-established counterparts. As venture capital money dries up and market confidence drops, businesses with limited finances may be forced to forgo the expense of prime office space in favour of a remote working model.
Higher upfront operational costs are also a problem in the sector. Flexible offices need to be kitted out with all of the latest mod-cons and high-quality amenities, with these ‘big-ticket’ items being used by employers to tempt workers back into the office.
Conversely, tenants in traditional offices generally assume responsibilities for furnishing spaces.
Operators of flexible office spaces may also have to hire a raft of ancillary staff members, from baristas and bartenders to yoga instructors and events co-ordinators, adding further expense to the balance sheet.
Happily, WeWork’s problems do not seem to be emblematic of the flexible sector. Taking a longer-term view of the market, the shift in working practices is a boon to the sector, reflected in strong occupancy rates. Indeed, IWG, the parent group of Regus, another co-working space behemoth, posted revenues of £2.2bn in the first nine months of 2023 – an increase of 10% compared with last year.
While there is undoubtedly a problem of oversupply when it comes to poor-quality office space in less-than-desirable locations, the prime central London market continues to see a flight to quality. Grade-A space is in high demand, with commercial landlords of sustainable ‘plug-and-play’ office spaces seeing rents hold up extremely well despite the challenging economic conditions.
Moving into another ‘new’ employment market cycle, where working from work is being encouraged by employers, and sought after by employees, the flex option will only become more attractive to businesses that are continually seeking to retain and attract the best talent.
WeWork certainly achieved its objective of shaking up the commercial real estate space, but its businesss model was never going to be viable in the long term. Its downfall will create opportunities for competitors, such as IWG, which has already acquired some of the sites vacated by WeWork and is on the lookout for more.
With hybrid working here to stay, flexible workspace in prime urban locations will continue to perform well. However, operators in this sector should look to WeWork as a cautionary tale of the perils of growth at all cost.
Antony Antoniou is chief executive at Robert Irving Burns (RIB)
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