Flexible workspaces won’t die out in the long term: CBRE

By Charlene Chin
/ EdgeProp Singapore |
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SINGAPORE (EDGEPROP) - As Covid-19 wreaked havoc worldwide and employees retreated to their homes to work, offices around the globe have, at one point or another, been largely empty. Undeniably, the flexible workplace sector has weathered a heavy hit, with occupancy levels at co-working spaces and serviced offices at an all-time low, and membership growth seeing a slowdown.
But despite the short-term gloom, CBRE believes that the long-term fundamentals of flexible workplaces remain sound, citing four reasons.
First, flexible workspaces will become widespread post-pandemic. Inevitably, Covid-19 “will create a more fluid workforce and lead to greater acceptance of more varied working styles and locations”, CBRE highlighted in a June report. How this is likely to play out is through the adoption of a hub-and-spoke model, says CBRE, where companies maintain a core office front in the CBD and fit out several smaller offices in further-out locations. Tenants could also adopt a “core+flex” solution, where businesses keep a core office space on a fixed, long-term lease, while satellite offices are maintained on flexible leases. Already, the two trends have been gaining traction among office occupiers, notes the real estate consultancy.
The flexible workspace industry will also be able to cater to firms’ headcount volatility, growth testing, and access to readily available space on short notice, it adds.
Second, such co-working spaces or serviced offices could be alternative offices that serve under a firm’s Business Continuity Plan. CBRE notes that it has, in fact, tracked a rise in the number of enquiries from larger occupiers who have sought alternative workspaces in China, Hong Kong and Singapore. This includes touchdown locations and locations having virtual office services such as phone-answering and communications.
Third, flexible workspaces could help office tenants evade high upfront fit-out costs as these offices are typically fully-fitted. Businesses could then utilise their capital for operational expenses instead. To this end, CBRE has observed that there have already been several recent deals involving large firms committing to long-term agreements in co-working centres in Singapore, Shanghai and Hong Kong, and it expects this trend to continue.
Fourth, flexible workspaces could emerge as one of the solutions for large occupiers seeking to accommodate social distancing protocols, which could help spread out workers in Asia Pacific’s dense office environments.
EDGEPROP SINGAPORE - Penetration of flexible workspace industry by market (Source: CBRE Research)
Penetration of flexible workspace industry by market (Source: CBRE Research)

Short-term woes

As of late May, occupancies in several major co-working centres in China and Hong Kong have “recovered considerably”, a trend CBRE expects will be replicated in other markets as restrictions are gradually lifted.
But there will be short-term pain. “Owing to social distancing guidelines and the slow acquisition of new members, co-working centres have been unable to operate at full capacity over the past few months, negatively impacting occupancy,” says CBRE. “Several operators have also put expansion plans on hold and have furloughed or laid off staff to alleviate the rising financial pressures.”
The boom in flexible workspaces was largely driven by demand from start-ups and smaller-scale occupiers. However, in a market downturn, demand from such players are more volatile. The pandemic has already caused smaller companies to relocate to cheaper or home-based locations, or forced them out of business entirely, says CBRE.
On the other hand, larger occupiers are also evaluating more cost-effective options due to budget cuts in office relocations and fit-out, further weakening demand.
As it is, the flexible workspace industry already faces a high competition for tenants as there is ample supply in the market. As at end March, the total inventory of flexible space in 18 major cities in Asia Pacific tracked by CBRE reached 71 million sq ft. Although the rate of growth has slowed to 5% in 1Q2020 from 20% y-o-y in 2019, supply has in fact risen threefold over the past five years.
CBRE, therefore, expects more M&A activity as well as further consolidation to happen among operators. “Closures of unprofitable centres will be unavoidable but surrendered or subleased space is likely to be taken up by other co-working operators that are financially sound, or by tenants seeking fully fitted-out space,” it says.
Consolidation will, however, vary market to market, with contraction to happen in cities where flexible space has been a key driver of office leasing demands, and where flexible workspaces are in an oversupply. One such example is Shanghai, where the industry has accounted for 15 to 20% of leasing demand over the past three years, points out the real estate consultancy. Shenzhen is also susceptible due to a supply peak, it adds.
Total size of flexible workspace market in Asia Pacific (Source: CBRE Research)

How operators have responded

With a few exceptions, most flexible space operators have kept their centres open throughout the pandemic, notes CBRE, unless entire buildings have been forced to close or countrywide lockdowns have been implemented.
To comply with safety precautions while keeping business running, most operators have limited guest access; reconfigured shared spaces and meeting rooms with staggered seating and buffer zones; and ramped up cleaning standards with more frequent cleaning and providing free masks to members.
Following the onset of Covid-19 in February, CBRE notes that individuals, start-ups and SMEs were quick to request relief measures from flexible space operators. In response, most operators have prioritised renewals with existing customers, while others have offered membership fee reductions. Alternatives rolled out also include fee waivers for certain periods in exchange for contract extensions, and deferment of fee payments.
In April, Singapore-based co-working operator JustCo offered 3,000 of its members across eight cities across the region a reduction of up to 30% on one month’s membership fees.
Meanwhile, flexible workspace players have turned to landlords for help to survive. Many flexible workspace operators have started to approach landlords to renegotiate and restructure leases, and request for rent abatement and fit-out subsidies, says CBRE. Many of these leases were signed at the market peak of 2018 to 2019. “Some operators are also understood to be pushing for a transition to revenue-sharing models or are entering into management agreements.”
Moving forward, flexible-space operators will focus on catering to larger companies, as big companies are less exposed to cash flow risks, says the consultancy.
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