I’ve consistently tried to be careful about editorialising on WeWork. But, in the interest of full disclosure, I was quoted in Property Week a couple of years ago as saying that WeWork was coming up in meetings so often that we needed a WeWork swear jar. We never did put out that jar, but if we had, the last month would have filled it twice over.
On reflection, I think the pile-on of doomsdaying and schadenfreude needs a bit of tempering and think it could be worthwhile to reflect on how our industry has responded to the WeWork phenomenon and any lessons we might learn.
Customers expect a better experience
WeWork and its peers have been gaining market share (some for decades) by offering a more customer-centric service including more flexible lease terms, easier lease contracts, better interior design and amenity space and a sense of community.
This sector has brought us much-needed disruption and introspection. Its success has been helped by the dinosaur landlords that are “in the business of collecting rent”. The good news is that landlords are evolving with their own solutions to lure the customer back.
Serviced offices are here to stay
We should expect some consolidation if WeWork sheds locations now it is no longer compelled to validate a sky-high valuation with exponential growth. WeWork’s challenges also take pressure off its peers to “grow or risk irrelevance”.
Even a restructuring does not equate to a death knell for the industry. There are many great operators out there serving established tenants and helping to build and incubate businesses, which in turn is driving future office space demand.
Don’t mistake a pendulum swing for a paradigm shift
The pendulum of power is always swinging from the tenant to the landlord and back, driven by a range of factors that include supply, demand and the economy. Serviced office operators benefit from a tenants’ market as landlords accept low- or no-covenant and offer tenant incentives that further reduce the operator’s location costs.
Coincidentally, “tenant markets” are often associated with weaker demand due to economic uncertainty where tenants are often looking for more flexible leases – feeding the demand for serviced offices. However, in a landlord’s market when supply is tight and demand is high, landlords are more likely to hold out for credit tenants, and tenants are more concerned about securing long-term space to ensure business continuity.
I would suggest WeWork’s ascension as London’s largest occupier has been helped by a tenants’ market over recent years.
With constrained supply on the horizon, we are already seeing an increased level of pre-lets by traditional tenants, which suggests the pendulum may be swinging back to landlords.
If it walks like a duck and quacks like a duck…
… it’s probably still real estate. For the past few years there has been a lot of hype around the software and services side of this business being more important than the real estate. Cool, we were told, took priority over covenant when in fact as a landlord and investor there is no reason we can’t deliver both.
I believe it is too soon to say where Serviced Offices 3.0 goes from here, but this is a great time to search for lessons while the experience is fresh in our minds.
The landlord in me welcomes the much-needed disruption and evolution arising from the ascension of WeWork and its peers, while the fiduciary in me feels a sense of relief that – this time, anyway – fundamentals that drive value still matter.
Tyler E Goodwin is founder and chief executive of Seaforth Land