Published on 16 Nov 2022

Flex offices can weather the economic downturn




 

t is safe to say that the Covid-19 pandemic was not the best of times to find yourself running a flexible office company. Yes, the government never actually stipulated that offices had to close, but the vast majority of office workers stayed at home. Moreover, flexible office occupiers are more likely than others to be set up to work from pretty much anywhere, even if in normal times they prefer an office environment to the kitchen table.

Certainly, some flex companies could not cope with the stress on the businesses and went to the wall. However, Orega weathered the storm remarkably well given the circumstances. Moreover, we now have our sights set firmly on expansion and have every reason to think that we will be successful.

As we approached the end of March 2020, just as the nationwide lockdown was declared, we were looking at the highest level of average occupancy across our portfolio that we had ever had. Undoubtedly, that helped sustain us through the year that followed. It also has to be said that the team at Orega were already set up for flexible working, so the disruption as far as we as a business were concerned was minimal.

We also continued to staff each of our sites. After all, we provide both IT and telecoms services to our customers, as well as providing a business address for a lot of companies. All those services had to be maintained. In addition, there was basic maintenance and safety checks to be undertaken. For instance, you cannot just let the water in the pipes stagnate. Everything needed to be made safe and secure. So, from both a building and business perspective, we managed to keep things ticking over throughout the worst of the pandemic.

What happened when the worst of the restrictions were lifted was remarkable. It was as if somebody had opened the gates and fired a starting gun. Enquiry volumes and occupancy levels quickly went back to pre-pandemic levels. It has been a massive turnaround, with the flexible office market bouncing back from what, at times, felt like a near-impossible situation.

Our experience is that flexible offices may ultimately benefit from the pandemic. There is now strong evidence that people would rather explore flexible options than take on a long lease. The rise in agile working, which was happening anyway but was accelerated by the events of the past two years, means that companies now require office space for fewer people at any one time. At the same time, they are willing to pay a premium for top-quality space and flexibility due to the need to attract employees back to the office for at least some of the time.

I suspect that the trend will continue. As the Bank of England makes clear, it is likely that the UK will see a long and potentially deep recession, which will make companies nervous about taking on long-term liabilities such as a traditional lease. After all, property tends to come second only to wages in terms of operating costs. Businesses such as ours are perfectly poised to provide the sort of flexibility that they are looking for.

 

While that is the big picture for the flexible office market as a whole, we also believe that Orega’s business model, developed over three downturns and 22 years of operating, is particularly robust in the current economic environment. Most flexible office companies operate on a long sell/short lease model, whereby they sign a lease with a landlord and then essentially resell the space to other companies, making a profit from the gap between the rent they pay and the rent they receive.

This has proved itself to be both a highly profitable and fast-growth model when the economy is booming. Unfortunately, the inverse is also true if demand for offices goes down, as happens in every economic cycle, when the amount flexible office companies can demand from tenants goes down too. Companies operating with the lease model can get into trouble very, very quickly, especially given the fact that tenants can easily walk away due to their lack of obligations. We have seen this happen time and time again, but the conventional real estate leasing market seems to keep walking past this reality.

Obviously, that is problematic for the flexible office company and its staff. But it is also a problem for landlords. If a flexible office company goes to the wall, then all of a sudden, the landlord does not have any tenants, as the actual occupiers of the flex space had signed contracts with the operator. That is the most dramatic scenario, but landlords can find themselves equally bereft of income if the operator decides that it no longer wants a particular building for whatever reason.

That may sound counterintuitive, since the operator will have signed a long lease in order to secure the space that it can then sell on. However, it is standard practice for operators to create individual companies (SPVs) for each building they operate. If a building is doing badly, it is relatively simple for the company to be wound up, again leaving the landlord without any income.

For all these reasons and more, we decided to do things differently at Orega. Rather than take on a lease, we look for landlord partners and enter into long-term management agreements, in much the same way as the hotels sector has operated for decades. What that means is that we share both the risks and the rewards with our partners. It is also worth noting that all our spaces operate within the same corporate structure, and we offer full transparency.

In the good times, both Orega and our landlords benefit from rising rents and healthy occupancy. Conversely, in a recession, both rents and occupancy may well go down, but at least the pain is shared and the space is still generating income. We are also highly incentivised to maximise income to the best of our ability for the benefit of our partners as well as ourselves. It is a model that works extremely well for both sides. Other flexible office companies have clearly seen the benefits and have started to adopt our model in recent years.

The model has also proved to be remarkably resilient. Orega has been consistently profitable for more than 20 years, including through the global financial crisis and more recently the pandemic. Of course, we took a hit during both periods, but we were never anything other than healthy and stable. The same cannot be said for many businesses in our sector.

Of course, some landlords may decide simply to become flexible workspace operators themselves and cut out the middleman. The problem is that it is not that simple. Landlords occupy a very different part of the property market to flexible operators and often struggle with the volume of short-term, high-churn agreements, among other challenges, including running a hospitality business.

For this reason – and to avoid getting stung by operators that have proven themselves willing to walk away from a building when the going gets tough – we find that landlords are increasingly turning to our business model. Indeed, our expectation is that we will double our footprint over the next three years. The key to both our resilience to date and achieving that level of growth is all down to building long and trusting relationships with our partners.

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