Some of the more notable casualties in the sector included the Riveter, Breather, and some IWG and WeWork locations. Nevertheless, the level of M&A activity that we predicted in the early months of COVID-19, has taken some time to transpire.
A few reasons come to mind for this delay in flex office consolidations. First off, at the start of the pandemic, many providers and occupiers across the board were successful in negotiating rent reductions from their landlords to help weather the storm. While others were able to receive some form of financial relief through government aid programs. Capital infusion from investors provided additional runway for some fortunate providers, including the notable lifeline from Softbank to WeWork last spring.
On the leasing side of things, due to the flexible nature of coworking licence agreements, providers had to react quickly and retain as much of their existing customer base as possible. By offering aggressive renewal incentives, many flexible office operators were able to preserve some recurring income from their loyal members. We saw this element come true in the results of our global sentiment survey in Q4 2020. North America specifically showed occupancy levels at 55 percent compared to the pre-COVID levels of 80 percent.
While the pandemic has been an incredibly challenging time for the flexible office sector, it has created an opportunity for providers to streamline and restructure their portfolios. When feasible, many operators took action to transfer their traditional leases to management service agreements to reduce risk – a shift we foresee being the staple structure for operators going forward. The major form of consolidation we’ve seen thus far has been providers relinquishing various sites that are either low performing, have dated buildouts, or are near an abundance of supply. The process to get out of these leases is arduous and requires strategic negotiation, an additional contributor to the delay in consolidations. However, by taking this time to right size their portfolios, operators will be better positioned to take advantage of the market when demand returns.
At the same time, the appetite from providers to expand and capitalize on defunct coworking sites remains strong. These acquisitions have started taking place, albeit on a smaller scale than expected, likely due to the “wait and see” approach many providers are taking. As an example, in late 2020, IWG took over two former WeWork locations in New York and Hong Kong. Meanwhile Premier Workspaces was selected by landlord Douglas Emmett, to manage a serviced office space in Los Angeles left behind by Regus upon their lease expiration.
Currently, much of the pandemic-induced uncertainty remains, and providers are focused on repositioning their portfolios and stabilizing their operations as demand slowly begins to return. This said, we do expect to see an increased level of leasing activity come summer of 2021 as companies start to return to the office and corporate occupiers fully commit to implementing agility into their portfolios. In parallel, we anticipate more M&A activity across the coworking sector to take place with additional uptake of surrendered locations by providers or even traditional office landlords seeking to partake in the action.
The pandemic has created the possibility for operators to make strategic acquisitions, providing easier access to new markets, different building types and design, or even new brands and services. The most recent example of this is with CBRE’s investment arm acquiring a 35 percent stake in Industrious. As part of this transaction, CBRE’s flexible space offering, Hana, will be merged into the Industrious footprint. This includes 10 locations in the US and UK, which is an international market Industrious had been looking to tap into.
Despite all the turmoil the industry has faced this last year, it is safe to say that flexible workspace is here to stay and an essential component to the business world going forward. With the upcoming consolidations we predict and future expansion on the horizon, it will be very interesting to see how everything plays out in the flexible office sector and who the key players will be.