Flexible workspace, cognitive dissonance and lessons learnt from The Shining

by • Comment, Flexible working, Property

If you were to take LinkedIn posts as a barometer of market confidence you would get the sense that flexible workspace / coworking is powering ahead. But this initial impression is simply not backed up by the statsAt the start of the Shining, the seminal horror film of the 1970s, the fantastically unsettling orchestral score provides the clue that this happy family of the opening scene is going to end very, very badly. But the key element of the film is the casting of Jack Nicholson in a kind, smiling role as a writer and loving parent – from the minute the camera settles on that jarring smile, it is obvious that something is off. And this is cognitive dissonance – Jack is being portrayed as a loving husband to Shelley Duvall with your nerves jangling and telling you that he is everything but that……

And this is the example with which I opened the GCUC conference in London a few months ago. If you were to take LinkedIn posts as a barometer of market confidence you would get the sense that flexible workspace / coworking is powering ahead. But this initial impression is simply not backed up by the stats. And it’s making some of us uneasy.

The reality of the data suggests otherwise – demand is plateauing, pricing stagnant, and the pace of supply growth is fairly anaemic. The mismatch between the upbeat predictions that are posted every week and the actual metrics creates a feeling of discomfort – like something is just a bit off, but you can’t quite put your finger on it.

Are we all just playing a role, convincing ourselves that the good times are still rolling?

 

Demand isn’t surging, it’s soft

The demand for flexible workspaces is not matching the levels that many of us expected back in the heady days of 2019.  OK, there has been a global pandemic and ensuing economic aftershocks, but the growth in hybrid working and the interminable RTO arguments was supposed to take care of that.  Demand is creeping up in single digits but when I started reporting on demand in 2014, we saw double digit growth each year like clockwork.  Yes, there is still a desire for flexibility, but the growth has been more like a slow, unsettling crawl rather than an explosive boom. It certainly doesn’t match the optimistic headlines we’ve been seeing.

 

Broking bad?

Brokers are endemic of the problem. Or maybe they are the problem.  Operators in London quote that they know deal with nearly 200 brokers for flex enquiries. With many of those enquiries duplicated from multiple sources.  The relationship between brokers and operators has moved from symbiotic to parasitic. And, in fact, I believe that this level of over competition is heating up marketing and sales costs and proving a large cause of margin erosion (more on that later).

 

Pricing: stuck in the middle with you

Pricing for flexible office space is creeping up, but not at the pace the industry would like (or needs). Operators are trying to maintain a positive exterior but the reality is that unless you are lucky enough to be in a very uncompetitive market then your margins are evaporating in the face of rising costs that are being inflicted on all businesses.

 

Supply: slowing down, not so haunting

There was a time when flexible workspace supply seemed to be increasing at breakneck speed and every commercial agent was falling over themselves to offer a prediction on the future market share of flex. But now, supply growth is slowing, and operators are becoming more cautious.

That’s not to say there aren’t high-quality spaces in demand, but the oversupply of mediocre spaces is becoming a problem. Some operators are holding back on expansion plans, focusing instead on improving their existing locations, but it’s clear that the rapid growth we saw in the early days of flex space is now a distant memory. And, yes, landlords are piling into the market too, but the type of space and experience are very different to what would have been deemed the core flex product back in 2019.

 

All work and no play makes Jack a dull boy

In the face of the steam cooker pressure of rising business costs, punitive tax regimes and nervous customers, it is understandable that the shine (if you pardon the pun) has come off the flexible workspace industry a little.  But the sense of fun that the industry used to exude needs to be recaptured if it is to face up to the market forces that are making life so hard.  This is a part of the market that has thrived by attracting entrepreneurs, community-builders, and rejects from other sectors – and that is what it made it so fascinating: it looked, felt and behaved so differently from the office market it is part of.  I am confident that it is this unusual mixture of industry experience, which will see the market evolve its way to success. But I do think that some tough conversations need to happen across the sector to get flex back to real growth.