Back in January 2021, I penned an article about what you can do as a building owner if your coworking space operator is struggling.
Essentially, the three options were to:
- Shut it all down
- Run the space yourself
- Find a partner to fix it for you
As the pandemic dust settles, we’re seeing a ton of operators giving back space. And, as a result, building owners across the country are being forced to make this exact choice.
But as they do, my big worry is this: are we setting ourselves up for the next bubble?
Let me explain.
The Post-Pandemic Dilemma
I recently connected with a service that gives me access to a list of coworking spaces in the U.S. that are either already back to the owner, coming back to the owner, or the operator doesn’t want it anymore.
I have started to connect with these building owners enquiring about what they planned to do next. And based on my conversations with them, there’s an interesting dichotomy at work.
I’d estimate that one-third were willing to look at a managed model agreement–which, pre-pandemic I would’ve estimated to be only about 10 percent–in large part because the space is already built and they don’t want to deal with it on their own.
Another chunk of owners are opting to try running the space themselves. They don’t want to go back to traditional leases because they know they’ll lose out with the concessions they’d have to give up and they figure they can tackle it on their own.
And, while I personally believe that most lack the expertise to do it efficiently and effectively, I’m glad to see that building owners, en masse, are starting to acknowledge how important flex office space is going to be to their future success.
So, the good news is that we’re finally starting to see what the flexible office industry looks like in a post-pandemic world and, by and large, it’s lining up with what experts predicted.
But there’s bad news too.
My greatest concern, without a doubt, is that a ton of building owners are looking to go back to the traditional leasing route because there’s so much demand for office space right now.
And I’m worried about what that means for the future.
Is Another Office Space Bubble Forthcoming?
With so many building owners reverting from flex space back to traditional leases, I believe that we’re setting ourselves up for another punch in the mouth.
In fairness, the flexible office space industry is in its infancy, and that means we don’t know what our cycles are yet. And the thing that hurt coworking most recently wasn’t an economic cycle. It was the pandemic. It was something that’s never happened before and couldn’t have been predicted.
But let’s assume the pandemic will become endemic and won’t cause the massive disruptions that it has in the past. The big question then becomes this: what will normal economic cycles do to these people signing 10-year lease deals? What will be the effects of inflation and recessions?
In economic downcycles, the traditional office industry has experienced a flight to quality. So, would that happen with flexible office space? If so, what would it look like in our world? What would it do to you as an operator?
While it’s tough to predict the future, my worry is that every lease that’s signed slows the adoption of partnerships. And I believe this is a very short-sighted approach.
Traditional Leases Are the Wrong Solution
When I talk to building owners who are steadfast in their desire for traditional leases, I ask them two questions:
- How long have you been in commercial real estate?
- Have you ever had a lease default on you?
And the answers are illuminating.
They’ve almost all been in the industry for years or generations, and every single one of them has had a lease go bad on them.
And yet they still believe traditional leases are the foolproof way to go.
Interestingly enough, many building owners say they can’t opt for flexible office space because their financial institution doesn’t understand it and won’t underwrite it.
But that’s a cop-out: banks finance hotels that rent rooms by the night.
It’s not that your bank doesn’t get it. They just don’t want you to do it. The system is holding you back.
The key is to put it all in perspective for yourself: when we’re looking at less than 3% of your portfolio, the risk is actually minimal compared to the potential upside.
As they say, fortune favors the bold. And, if we want to avoid the next bubble in the office space industry, we’re going to need more people to make the strategic decisions to add flex.
If you want to learn more about the flexible office industry, get in touch with me today. I’d be happy to talk you through the benefits it can offer you.