Ironically, come the other side of this new reality we're operating in, many traditional occupiers of office space will have realised how effectively their staff can work remotely and may look very seriously at how to utilise flexible office solutions to cut overheads. For those flexible office providers who have the cash reserves, or the sympathetic investors to weather the next few months (and hopefully no longer...) there could be real opportunity just round the corner. Whether WeWork will be one of them remains to be seen of course, but it cannot seriously be doubted that the flexible model has a place in the market whatever happens in the immediate future.
As for what the deals of the future might look like, over the last 12-24 months we have seen the standard covenant offer from flexible office providers comprise a property holding SPV as the tenant, backed up by a parent company guarantee which is often limited financially. Whereas for more mature providers that PCG might have been deemed acceptable, it has never actually been a particularly attractive proposition for the landlord where the parent company itself is relatively untested. After the next few months, query whether the same covenant package will still be acceptable; I suspect a number of landlords are going to be finding out how difficult it is to pursue rent arrears from an insolvent SPV and their overseas parent company over the next year or so.
Moving forwards, landlords may also consider a handful of simple lease protections if they are going to let space to flexible office providers - whether commercially they would be acceptable remains to be seen but as we are hearing a lot at the moment, there is no "market" position:
- look to get some transparency over occupancy rates and, if possible, fee income, which will act as an early warning sign that things may be going south;
- monitor the dilapidations position of a property more actively, you may find yourself pursuing a straw man for them at the end of the term;
- consider ongoing capex requirements where a significant amount of space is let to one provider; and
- if the proposed tenant is cash rich, is a rent deposit a better protection than a guarantor?
We'd slowly seen over the recent past the market swing in favour of the flexible office tenant, as the only game in town willing to take large amounts of space. Query whether that will still be the case when the dust settles...
Now, some analysts believe WeWork could become a casualty of the current crisis, hit by falling demand from tenants. In a presentation to investors on Thursday, the company said it could not reasonably estimate the impact of Covid-19 on its financial position “but we anticipate that it will likely have a negative impact”.