Why has major consolidation not yet happened in the flexible office market?

When we were future gazing into 2019, one of our main predictions for the flexible office sector was that we were likely to see further consolidation in 2020, predominantly as a result of companies wanting to grow their footprint within the sector, combined with some smaller scale failures as providers overstretched themselves to keep up. The expectation for consolidation within the sector for many was accelerated as a result of Covid, with the perception that there would be a larger percentage of failures across the flexible office market. However, whilst we have seen some closures such as TechHub, as well as reported building closures from IWG, WeWork and Breather, consolidation in the sector has in fact been far more muted than many anticipated or were predicting back in April this year. So why is this?

I think there are two reasons. The first being that on the failures side, many operators were able to get a rent concession from their landlord when the first lockdown came into effect, which provided more breathing space to weather the storm. Quite a few providers have also been successful in switching contracts to a management agreement, which allows them far more cash-flow flexibility. Equally, I would also argue that the sector is more robust than people might wish to give it credit for. This is reinforced by the fact that occupancy has held up well with our research showing global occupancy levels at 65% at the end of November, compared to 79% pre-Covid. The general expectation when the main lockdown and subsequent movement restrictions were imposed by the Government was that providers would lose many customers due to the flexible nature of the agreements. However, as a result of quick action by many operators seeking to work with their customers by recognising customer loyalty and offering competitive renewal packages, they have been able to retain a robust level of income.  Aside from one or two operator causalities, so far consolidation has come more in the form of operators cutting low performing sites, or sites where they’re in an agreement for lease and it is simply too risky to execute in the current market. In this respect we have seen WeWork surrender some space, albeit not vast swathes, and IWG has cut some low performing centres, whilst at the same time they remain acquisitive for better quality space. Operators have therefore used the pandemic to streamline their portfolio and re-position it to take advantage as we move into what is expected to be a more positive demand year for the sector.

The other reason stems from the fact that, due to the uncertainty that has been created by the pandemic, many businesses remain in a ‘wait and see’ mode and are less inclined to make big decisions or make dramatic changes if they don’t have to.

While this uncertainty is anticipated to continue into the beginning of next year, we are expecting a much greater level of activity in the flexible office sector during the second half of 2021 as businesses of all sizes look to add a more permanent level of flexibility and agility to their property portfolios. In line with this, we are also likely to see providers looking to expand through consolidation or mergers with others. This is unlikely to be through full-scale acquisitions, which is a more capital heavy strategy, but instead stronger providers adding strategic centres or brands that are in administration to their portfolio. For example, where an operator is struggling a larger provider, or indeed landlord active in the sector or looking to become active in the sector, may look to acquire. We are already seeing this in the case above where others have found themselves over-exposed and need to release some space.

Scale has traditionally been a key reason for consolidation, particularly in the flexible office market, with operators looking to acquire to give them access into a new market or country that they otherwise would take a while to build organically. Looking forward however, a bigger catalyst for acquisitions could come from a service / brand portfolio perspective as we start to see more brands fall under one house e.g. IWG with Clubhouse, Signature, Regus and Central Working or Business Environment Group with BE Offices, Headspace and &Offices. In addition, technology could also be a factor going forward, with those smaller brands who have invested in this area for customer apps etc, proving attractive to a larger operators who feel behind in that respect.  

Despite the predicted increase in M&A activity, we do not expect the levels of diversity and variety to be impacted. Traditional office landlords entering the flexible office sector, combined with new concepts from hotels and repurposed retail as well as the expansion of concepts such as Plus X, Venture X and X+Why, will ensure the market remains relevant and in demand.