Is The Outcome Favorable For The Flexible Office Sector?
While it is clear that in the short term the coronavirus pandemic will have a profound effect on the entire real estate sector, the flexible office market has found itself at the top of the list of exposed sectors due to the nature of the contracts. , mostly in the short term, and teleworking which now affects the majority of companies in the affected areas. We were able to interact with various providers around the world over the past week to understand their position and their plan for the future, as well as their feelings on the short and long term situation of flexible offices.
What was the immediate reaction?
In Europe and the United States, over the past three weeks, all flexible office providers have quickly focused on their customer renewal and retention strategy, making sure to work with their existing customers to help them get through. this period of uncertainty and for them to maintain a level of contractual occupancy (if not the occupancy of the building). This is what we have seen since the start of the year in Asia
In our discussions to date, providers have found that between 10% and 50% of their clients in the same building request some form of rent reduction. What are they doing to help their customers? To a large extent, it depends on their own position. So far, those with a management contract, or those who own and operate their assets, have been in a better position to offer relief to their customers. While those who paid their rent this quarter, like many others, clearly find themselves with less wiggle room to help short-term clients. Nevertheless, almost all of them make a gesture and most manage the scale of the aid on a case-by-case basis, giving priority to the companies most affected, those which could request financial aid,
So far, the different aids have taken many forms and, as noted above, are highly dependent on the position of both parties. We have seen a whole series of measures ranging from 50% rent reduction for one month, to 50% for 3 months, all the way to a free rent deferral which is then added to the next quarter. Several providers even offer their customers the possibility of reducing their workforce and therefore their surface area during this period, a strategy that is proving popular with customers.
In this context, there is a clear need for landlords to work with their operators to best assist them with their cash flow during the period, especially those who have a lease. What remains essential here is that a portion of any rent that providers “save” be passed on to the customer where possible in order to maintain occupancy, as well as the likely long-term loyalty of those they do. they were able to help. We have seen this example in Asia, where The Executive Center (TEC) has succeeded in negotiating a rent reduction with the owners of a large part of its portfolio of 135 buildings. The savings were then passed on to their customers, and in March they saw a “wave” of renewals in their wallets, especially since many customers did not want to take the risk of moving and it was therefore preferable to renew. The average tenure for members remains 37 months.
What is the impact on the occupancy rate, and therefore on the survival of service providers?
Cash and liquidity are king. COVID-19 is likely to test every provider’s business model like no other crisis before, with the simple fact that for a large portion of businesses, office space simply cannot be used in the short term as we manage the crisis. It is therefore likely that their survival will depend on their economic model and how they were in place before the crisis.
It goes without saying that for providers it is vital that they conserve their cash flow by working with their owner and with their customers in order to retain as much income as possible. Early signs are that small businesses are the hardest hit and most likely not to renew contracts, and that may well be the case. However, in our discussions with providers around the world, all types of businesses have asked for a reduction in rent, and if there is a trend, it is those that offer a more transactional line of services, and of course that sectors most affected such as tourism or leisure.