What does the future hold for flexible workspaces?

Covid-19 | Covid-19 Advice | Property & Construction
Nick Wright

Nick is a property expert and here for Business Leader, he talks about what the future holds for the flexible working space. 

A few short months ago the sector was on a sound footing, set fair for long term, sustained growth, notwithstanding the odd misstep. Then the risk that was on no one’s register became a reality: a pandemic bringing forward an economic cataclysm, seemingly cancelling all plans and voiding all bets.

The resulting deep uncertainties, darkest hours, serial catastrophes are showing signs of leading to a state of economic petrification.

However, the moment when the crisis is most acute can also be the time of the greatest opportunity. It is certainly true that moments of dislocation are moments that also serve to germinate the ‘next wave’ of businesses. As the dotcom crash begat Amazon, Google, and Facebook, so the financial crash germinated WeWork, Airbnb, and Uber.

“The new normal” has become something of a meme. It is a recognition that the world is not what it was. It is a grudging embrace of disorientation and strangeness. However, it rarely seems to come with a clear vision of what the world will morph into. Yet, ironically, the new normal is an old concept. First popularised by an article of the same name by Ian Davis of McKinsey published in March 2009, the height of the last crisis.

Davis argued, rightly as it transpired, that “executives preparing their organisations to succeed in the new normal must focus on what have changed and what remains the same for their customers, companies, and industries.

The result will be an environment that, while different from the past, is no less rich in possibilities for those who are prepared.” In many senses this echoes another familiar phrase popularised during the last crash – Rahm Emanuel’s “never let a good crisis go to waste”.

His was a clarion call to do things differently, to pivot, to innovate.
The themes and opportunities I point to, clearly overlap, and co-mingle, however for ease I have grouped them around the age-old pillars of People, Places, and Propositions.

I have also liberated myself from the challenges of delivering, managing and monitising the Co-vid secure office. In a single bound I am free to consider how workspace providers might reboot and re-imagine their fortunes.

PEOPLE
It can be argued that what helped fuel the flexible office revolution could potentially finish it. Improvements in internet provision and the mainstreaming of cloud computing freed knowledge professionals to work from anywhere. The exponential growth in the number of serviced offices tracked the adoption of these technologies.

The same technologies, and in the case of the UK the achingly slow betterment of domestic internet speeds, increasingly means that the same people can now work from home (WFH). Far from being a perk, WFH looks like becoming a permanent pattern. Twitter, Facebook, and Google have all gone public suggesting as much.

It is clear they see significant opportunity in developing a distributed workforce, particularly in overheated CRE markets such as Silicon Valley. The implications extend beyond establishment costs, Facebook is openly talking about the potential to ‘localise’ salaries for example.

For many corporates WFH has proven to be a painless and cost-effective business continuity solution. Many have reported improvements in productivity and the achievement of a better work-life balance. As we move forward, corporates will be under pressure to continue to reduce costs but at the same time will find the cost of running the office increasing through the reduction in permitted staff densities combined with the far from incremental health and safety obligations.

Aside from the attendant dangers that are now strongly associated with mass transportation, employees will themselves welcome the continued savings that come with WFH. A March 2020 study from Global Workspace Analytics in the US suggested that WFH saves employees save around $4,000 a year through reduced costs for travel, food, and work clothing. Meanwhile corporates save in the region of $22,000 per employee per year.

Eventually, the world’s attention will turn back to the climate agenda. The lack of commuting during the pandemic has already led to significant, if temporary, declines in pollution levels. Corporates will come under pressure not to be the “bad guys” in re-creating a new crisis. WFH reduces everyone’s carbon footprint.

It is unsurprising therefore that we are beginning to see the emergence of a more integrated and co-ordinated corporate office strategy: smaller central hubs and enlarged provision of surrounding spoke locations offering team rooms and advanced communication technologies. WFH will be supplemented by Work Near Home (WNH).

This opens up opportunities for flexspace providers to explore new ‘ring donut’ locations near commuting hubs but remote from the centre of conurbations, flexing the offer to serve to corporate clients looking for ‘distributed’ space.

The Rise (and Rise of the (Born Again) Creative Class.
Richard Florida, the American social and economic academic, wrote a series a books at the start of the decade the best known being The Rise of the Creative Class. He asserted that metropolitan regions with high concentrations of liberally minded, highly educated, digitally native knowledge workers, “high bohemians”, would experience more significant urban regeneration and economic prosperity.

He termed this cohort the Creative Class. He later built out his thesis to identify global creative class cities. Richard Florida was describing the target audience of web, app and game development companies, the consultant army, the ‘designerati’, that WeWork was seemingly established to serve. To date, the burgeoning Creative Class have been a defining cohort rushing to fill flexible workspaces.

However, in the last two or three years we have seen a Creative Class 2.0 reach a tipping point. They work in the knowledge-based businesses emerging from the convergence of science and technology that underpins the 4th Industrial Revolution. These companies are tracked and profiled by Beauhurst. The emergence of the Creative Class 2.0 represents a rich potential client base for the next generation of workspace providers.

Unlike their predecessors who tended to bootstrap their operations and thus live a somewhat hand to mouth existence, this new wave of companies, although not all profitable, are often extremely well-funded via a regimes of grants, tax credits and early stage investment. (Beauhurst represents a very well-connected conduit to understanding and accessing these businesses.)

At the same time as, and connected to Florida’s work, there has been a structural re-shaping of the taxonomy of UK companies. In the UK over 2,000,000 new businesses have been formed since 2000. Large bumps in company formation occurred following both periods of economic hardship across the Dot Com bust at the start of the new millennium and the financial crash at the end of its first decade. If only because they are faced with fewer ‘big job’ options, it is highly likely that we will see many more company formations over the next few years.

At a time of considerable economic stress – however, V-shaped it might be – filling centres will be a challenge. Identifying and engaging these prospective customer clusters and aligning the offer to their needs could well yield dividends for flexspace providers.

PLACES
It is interesting to note that the last crisis, as now, created an uptick in the notional importance of the local. The devolution agenda and the Localism Act were the early manifestations of ‘taking back control’ from globalism. This may have run out steam not least as the globalistas 2.0 (with WeWork at the vanguard) roared by.

However, there were pre-pandemic indications that we were beginning to see the re-emergence of the local once again. A largely overlooked report from Regus from July 2019 (The Flex Economy) may prove to have been very prescient. Regus argued for the “rise of the suburban flexible workspace” in a world where “very soon, the concept of the work commute will be completely alien.” This followed a 2018 report from Cushman Wakefield in the US (CBD vs Suburbs? The Millennial Effect) which suggested a demographically driven shift from ‘downtown to our town’ working.

Since then, the globalistas (hello again WeWork) and globalism have only been seen to fail us yet again. Now all the talk is all about supply chains shortening, being on shored and localised to provide greater resilience.

Meanwhile, the huge irony is that social distancing has served to bring local communities closer together. In the States, Bisnow is reporting a significant spike in interest in what might have been previously considered secondary locations. This is to the benefit of a new wave of providers such as Industrious, Serendipity Labs and ‘mom and pop’ operators such as Hayvn. IWG, of course, is seeking to pivot into this market via their franchise model and is cited as a factor in their recent successful placing raising a war chest.

Flexspace providers have always promoted themselves as communities in the making. Observers have tended to mark this down as PR puff. That said, with the renewed focus on the importance of communities mainstreaming, those providers that can genuinely facilitate it, will have much to gain.

Civic centres.
The pandemic is acting as a major accelerant of pre-existing trends. Secondary retail locations continue to struggle, only now even more so as the travails at Intu and Hammerson testify. It has now reached a tipping point where even a traditionally conservative sector cannot keep doing the same thing and expect a different outcome.

Google, perhaps, points the way. In 2019, they leased over half a million square feet at the Westside Pavilion, a Los Angeles Mall fallen on hard times. The shopping centre will open as a business centre, albeit exclusively for use by Google, in 2021.

There is also a further agent of change at play. Several local authorities, in a desperate search for new sources of revenue to fund services, have acquired shopping centre assets, none of them particularly prime. Many commentators have questioned the wisdom of this strategy. Here too it is likely that there will have to be a major remodelling as tenants shutter stores in greater numbers and units remain empty for the long term.

In parallel, local authorities are also placing a high priority on ‘reviving the high street’ regen projects often coupled to affordable workspace commitments. This is forging (and forcing) more imaginative integrated civic centre developments where people can work, rest and play. Tikehau Capital and Areli Real Estate’s Nicholson Quarter Shopping Centre scheme in Maidenhead is an exciting and ambitious hint of the future in this regard.

Now seems the right time to explore the re-invention of the shopping centre where workspace is introduced to revive dead space. As retail rents crater and retail covenants collapse, the flexible workspace option becomes more appealing to asset managers and developers. At the same time, the planning environment is now more empathetic, with central government actively considering fast-tracking ambitious schemes.

PROPOSITIONS
To date the SPaaS package has been a cake baked from potentially very generic ingredients: contractual flexibility, ‘your business could look like an advertising agency’ environments, networking events and lashings of artisanal coffee / free beer. Suddenly this does not look like it is enough, particularly for the SME community.
The worry is that, unless the business value is demonstrable, companies will see Space as a Liability, with the consequence being a heightened price war.

CRE companies must therefore provide compelling answers to the question of why go back to any office, ever again? Creative and flexible work environments are vital but have become table stakes.

There is therefore an opportunity / obligation for workplace providers to become more proactive in supporting their customer base. For example, rather than merely providing passive and invisible facilities management services, they could co-ordinate the delivery of business advice that makes a difference to customers.

This might cover access to finance, export advice, productivity programmes and mental, social, and physical wellbeing best practice. Another strand could be the delivery of ancillary ‘back office’ overhead functions like payroll, accounting, tax planning and preparation, recruitment. Some, particularly given the impending IR35 regulations, may even consider offering co-employment or ‘professional employer organisation’ services.

The key point is the more customers thrive, the better their ability to service license fees. The more that a workspace provider can demonstrate they are a partner, the less they look like a rentier.

The price of nothing, the value of everything.
At a time when revenue generation has been strangled, many companies are looking forensically at their cost base. In the services economy this largely equates to personnel and establishment costs. Workspace providers are likely to be hit by a double whammy: many SME customers will require fewer desks and want to pay less for each one.

It could be argued that workspace providers have created a rod for their own backs by promoting a commodity market based on a ubiquitous desk rate. Price comparison is made extremely straightforward, and as a result discounting is therefore invited. Commercial people seem content to fill the desk (at any price) and seek increase it down the pike.

As the market gets tougher, providers must get smarter around pricing. Workspace providers need to be better and more creative at making the business case for their solutions. For example, ‘whole-life’ cost analysis of the proposed versus the customer’s existing office solution might be powerful. Equally, the perception of securing value for money might be enhanced by more creative “bundling” of products and services. Mobile network operators are particularly sophisticated in this respect. Perhaps there is merit in introducing pricing configuration sliders, an approach has been successful for car leasing companies amongst others.

This approach seemingly empowers the customers to define their own price they pay monthly by configuration variables around the amount of deposit they are willing to put down and the length of the agreement. Looking at applying pricing concepts such as ARPU (average revenue per use), customer yield or life-time value might help workspace providers develop alternative pricing platforms.

There is no question that FlexOffice providers face acute challenges currently. However, those who have been acquainted with the CRE sector for many years will have experienced other periods of highly volatile and cyclical boom & bust. However bleak it looks now, the core business need for flexibility has only be heightened. This means the future is still bright for those providers that can get close to their customers and clients and be sufficiently agile to take advantage of the emerging opportunities that are out there.

Nick Wright, was the Marketing Communications Director at Newable, which acquired Citibase in 2018. Nick can be contacted via n.wright7@sky.com

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