Coworking at the crossroads

The last few years have been a time of rapid expansion for the flexible office segment. Operators such as WeWork, IWG with its Regus and Spaces brand, Brain Embassy, New Work, Business Link and many other smaller providers have experienced fivefold growth on the Warsaw market over the last five years. According to Savills, there was around 40,000 sqm of flexible space in the city five years ago, but it is projected that by the end of this year this will have shot up to close to 209,000 sqm. “The rate of the growth in flexible office space has been impressive in the 2015–2020 period, but the growth rate for 2021 is going to be relatively small,” predicts Jarosław Pilch, the office tenant representation director at Savills. In 2020 the growth in such space in Warsaw could be around 23 pct (compared to an average for the last five years of 40 pct), but in 2021 the growth rate is expected to come to barely 8.5 pct.

Slamming on the brakes

Most leasing contracts were signed by flexible office space operators before the emergence of Covid-19. “The pandemic has been quite effective so far at curbing operators on this market who want to expand, and the effects of this will become evident next year,” explains Jarosław Pilch. Indeed, over the first three quarters of the year just one new contract was signed with a flex office space operator in Warsaw (not counting three renewals): Polish operator Omnioffice leased 1,600 sqm in The Warsaw Hub at the beginning of October and will be opening an office on the 26th floor of the tower near the Rondo Daszyńskiego roundabout in the city’s Wola-Centrum business district, which was completed by Ghelamco in the summer. When it comes to the demand, the operator is rather coy, but has revealed that it doesn’t expect to have any problems filling the space due to its superb location. “It’s going to be almost another three months until we open up the offices, and the first contract’s already been signed,” reveals Piotr Woźny, the CEO of Omnioffice. Counting the three renewals, two of which were signed by Regus, a total of 8,500 sqm of flexible office space was leased in Warsaw over the period, down significantly from 33,400 sqm at the end of 2019, while in the record year of 2018 the total was as high as 108,000 sqm. However, this massive fall in tenant activity is not, as you might think, solely down to Covid-19, but also results from the saturation on the Warsaw market. In 2018, WeWork made an aggressive entrance into the market, intensifying the competition quite considerably. Prices fell and the market was able to catch its breath. “Operators were already around 70 pct less active in 2019 compared to 2018,” admits Jarosław Pilch.

Put to the test

Unofficially, it’s public knowledge that Office Hub is to disappear from the Warsaw market (three large offices in attractive locations); however, Adam Lis, a flexible office space consultant at JLL, points out that there has been no significant increase in centre closures since the outbreak of the pandemic. “In 2019, there was already an intense battle over clients, posing a major test of the soundness of the business model. You could say that in a way Covid-19 today is also putting operators’ business models to the test. Is there a healthy ratio between the cost and the pricing, and is the tenant mix a good one?” he explains. The centres that mainly attracted freelancers and startups and those that offer the most flexible terms have suffered the most. Many freelancers have no problem swapping their coworking offices for the sofa at home. “We now know that the most important factor in the stability of a flexible office space provider is having a tenant mix of small and medium-sized firms, but the companies that are the most important of all to them are the large corporates. They take up the most space, they don’t have delays with payments, and they pay even when no one is using the office space,” argues Adam Lis. It also doesn’t help that smaller operators have less diversified portfolios with fewer locations. Their own flexible contracts developed into something of a running sore at the start of the pandemic. “Those centres that were promoting contracts without fixed terms and one month’s notice at the beginning of the pandemic ended up deserted and had a higher rotation,” he adds. Maybe try it with management?

Flex offices, however, are not all run according to a single business model. This year Smart Office in the Silesia Star building in Katowice as well as Opti Office in the Renaissance Tower building on ul. Skierniewicka in Warsaw’s Wola district both closed down. Interestingly, in both these cases a new flexible office provider immediately opened up in the two addresses in September and October – Własne B. This operator doesn’t operate in the same way as most flexible offices – i.e. leasing space themselves and then subleasing it. Instead, it bases it services on management contracts, and so the building owner is, in effect, a direct investor. By quickly taking over the flexible space once the original operator had given in its notice, the company could take on the coworking tenants who had been subleasing there and offer them new direct contracts with the owner. Operating costs were also brought under control, to make these centres profitable again. “We thinned down the project, by cutting out the services that weren’t essential. As a result, there’s now no charge for such services as the reception. Couriers and the postal service are given access cards and go directly to the tenant. There are no extras, such as free breakfast, yoga classes or prosecco tastings. If this was the segment was a car, you might say it doesn’t have sprinklers for the headlights, but has got everything that’s really essential. There’s a good internet connection and there are private offices and meeting rooms – all for a very reasonable price,” explains Michał Nisengolc, the CEO of Własne B.

The chain first realised that it could operate on the basis of management contracts around two years ago: “We initially identified a problematic building on ul. Marynarska in Służewiec – a district of Warsaw that has been nicknamed ‘Mordor’. After doing our market research and analysis, we told the owner, Octava Property Trust, that if it was more flexible with the leases we could help fill the building. We presented it to them as a way to fill the vacant space,” recalls Michał Nisengolc. As a result, Własne B first advised the fund on arranging the space and then commercialised it using its own brand and marketing. It also represented the owner during the leasing process. The operator’s reward for all this was a cut of the revenues. Jerzy Węglarz of Własne B believes that the current market situation favours such a business model, not only as a remedy for office vacancy but also because it gives the owner the option of bringing a more flexible element into its office buildings.

Large operators are also looking to expand their operations through management contracts, but they are not necessarily looking for troubled properties. Mindspace is a strong international brand, but it also started moving towards a management model around a year and a half ago. “We have already signed five such agreements across the world: one in Europe, one in the US and three in Israel. We are confident that this is the right strategy for the future of Mindspace and that the world will be heading in this direction,” insists Yotam Alroy, the co-founder and CBO of Mindspace.

Offices emptied

During the first wave of the coronavirus in March, people stayed at home and this resulted in flex office centres standing empty. Operators kept their centres open and did what they could not to give companies any excuse to break their contracts. “Now the pandemic has entered its second wave, there around 30–40 pct of the usual people coming in and sometimes fewer,” points out Jarosław Bator, the managing director of CitySpace, a chain owned by Echo Investment. Generally, the employees of smaller companies tend to come into work often, while those employed by larger corporations don’t – due to international regulations obliging them to work at home.

Luckily for flex office operators, the fact that their clients aren’t coming into the office doesn’t mean that they are not getting any revenue. “If a client leases a workplace for a year, it isn’t that easy to break the contract, even if that’s what they want to do. Fortunately for operators, when clients don’t come to their offices, they still have to pay for them,” explains Jarosław Pilch. Corporate clients tend to sign twelve-month contracts. “That’s the kind of period a corporation likes, since it allows them to complete a project and it gives them a decent trial period before deciding to expand onto any given market,” says Jarosław Pilch. However, longer contracts, of two or three years, do occur on the flex office market – and these can often be large transactions for 100, 200 or even 300 workstations. “There’s already been a 400 workplace transaction here in Poland,” reveals Jarosław Pilch, who adds that up to now it has been extremely rare for clients to tear up their contracts: “In such situations, generally both sides try to come to some kind of understanding. For example, they can reduce the amount of space leased. However, as a rule, clients who are under contract have to continue to pay for their offices even when they don’t use them,” adds Jarosław Pilch.

Decisions on ice

So how have all the empty offices affected the leasing activity for these centres? “Indeed, the numbers fell, mainly during the March/April period, when many companies were a bit panicked,” says Piotr Woźny, the CEO of Omnioffice. Jerzy Węglarz of Własne B estimates that the figures fell by 20–30 pct in some centres just after the lockdown, while Robert Jarząbek, the co-owner of Chillispaces, insists that the fall seen by his chain was not less than 10 pct. “A few companies broke their contracts or reduced the size of their leases. But we treat each company individually and, when necessary, we talk to the client to find a solution,” emphasises Robert Jarząbek. Piotr Woźny, on the other hand, claims that his company managed to fill most of its vacant space by the end of the holiday period and at the beginning of October.

By the end of the holiday season, CitySpace had also increased the size of its centre in the Moje Miejsce complex in Warsaw’s Mokotów district, while on October 1st it opened a new section of its centre in the Nobilis building in Wrocław. “At the end of this year, we are also going to enlarge our CitySpace Tryton centre in Gdańsk, where we are preparing offices for an existing client and also creating a new hot desk area and event space. This is why, despite our expansion, we have been able to maintain a high leasing level,” says Jarosław Bator. However, he does admit that clients that had, in better times, been discussing leasing more space have now postponed such plans. “Most negotiations to take up flexible space – when we’re talking about 20 to 200 workspaces – have now been put on hold by our potential tenants. Today we’re seeing demand at 10–20 pct of what it was before the pandemic, but my feeling is that the need for flexible office space will soon return once the lockdown ends,” believes Jarosław Bator.

To boldly go where no flex operator...

Overall, Poland now has 270,000 sqm of flexible space, two-thirds of which can be found in Warsaw. “Compared to Warsaw, operators are a lot bolder in the regions,” claims Jarosław Pilch. The stand-out player during the pandemic has been Kraków-based Chillispaces, formerly known as Rise.pl. The company intends to increase the size of its chain by another 7,000–8,000 sqm to 25,000 sqm by opening new centres in Bydgoszcz, the TriCity, Rzeszów and Wrocław. In mid-November, the operator signed a contract for 1,600 sqm in Bydgoszcz with an option to double the space. It is looking to exploit the fact that there are no serviced offices in the city. “Our negotiations in Gdańsk are also at an advanced stage, where we are planning to open a centre of around 3,000 sqm, and it’s not going to be long before we should be signing a contract in Rzeszów for around 1,600 sqm,” reveals Robert Jarząbek, the co-owner of Chillispaces. The new centres should be opening in the spring of next year. “We are banking on all the Covid-related economic problems having been overcome by that time, by when we are going to have our services on offer in these new locations,” he explains.

CitySpace, on the other hand, is looking to open a new centre in the Face2Face building in Kraków as well as another elsewhere, but has still to release any details about this. According to the company, the pandemic has not had a major bearing on its expansion plans: “If every one of those companies that says it needs such space were to resume all their operations, then flexible space would be in demand. The winners will be those who have it now and are not going bust, as they will then be able to make it available at the right moment,” insists Jarosław Bator.

Surviving until the spring

Adgar Poland also provides flexible space in its buildings. It owns two flex office brands: Brain Embassy and Flexi Lease, and is also planning a new project, which the company hopes to launch in December in its Adgar Wave building on ul. Rzymowskiego in Warsaw’s Służewiec district. According to the developer, it will be marketed as competitively-priced classic office space separated into smaller offices, but (apparently in response to the pandemic restrictions) without any common areas. “A new set of tenants has appeared that previously used to prefer classical leases, but now, due to the uncertain situation on the market, they have become more interested in flexible leases. After the epidemic had been officially declared, we signed contracts with two corporations and leased out 300 workstations under our Flexi Lease programme,” says Monika Szelenberger, the head of leasing and management at Adgar Poland.

Yotam Alroy of Mindspace has also seen a similar development pattern. “Not making a decision is a risk, because somebody else may take the building and be present there when the coronavirus crisis has come to an end in about six months,” he cautions. Nonetheless, Mindspace is concentrating its efforts outside of Poland. In a few months, it will be opening centres in Tel Aviv and Philadelphia as well as enlarging its current centre in Berlin.

Piotr Woźny reveals that Omnioffice is also cautiously looking to expand during the Covid epidemic. “We are surveying the large regional cities and their local markets, but we haven’t made any final decisions. We certainly never want to be the first to test the waters of any given market,” he says.

Happy times still ahead of us

When it comes to the future, many in the market insist that things have to improve. “Obviously, we could see some consolidation on the market and we probably will; but, in the main, we haven’t seen any significant increase in closures since the pandemic started – and those that have closed were generally centres that had not been performing well enough before. I don’t think that the pandemic has changed things much in this respect,” argues Adam Lis of JLL. He also adds that it is unlikely that an operator who had 80 pct occupancy before Covid would have now fallen into serious difficulties as a result of the pandemic, especially when many operators have maintained high occupancy rates of around 70–80 pct.

“In my opinion, corporations, as well as their joint service centres, are increasingly going to opt for hybrid leases by leasing some space under traditional contracts along with some from flex office providers. This should allow them to reduce future risks to their businesses, their finances or their employment structure,” believes Jarosław Pilch. Piotr Woźny also feels that additional demand will come from companies that up until now have been leasing traditional office space. “Every month, traditional leasing contracts with five- to seven-year terms expire, and for each of these tenants this is an opportunity to move their workstations to flex office centres, even if it’s only a proportion of them,” suggests Piotr Woźny.

Jarosław Bator of CitySpaces is also looking very much on the bright side. Even though, in his opinion, the next two to three months will be difficult for flex office providers, the downturn should be short-lived. “In business, you have to bet on something and we are betting that the flex office market is going to grow rapidly,” he believes. Adam Lis, meanwhile, is of the opinion that the pandemic has already proven that the flex office space model is sound, since some of the tenants responded to the situation by taking advantage of the chance to quickly end their lease contracts when they needed to. He claims that the market has not suffered too much and that soon it might be traditional leases that will be facing the same problem and not the flex sector. “We’ll only find out in about a year’s time and only if we have a situation where there are tens of thousands or even hundreds of thousands of square metres of unleased new office space,” says Adam Lis. This will be determined by the current slowdown in leasing activity in the traditional office segment, and the full effects of this will only be seen in one, two or three years from now, when a lot of new office space is due to come onto the Warsaw market. “Things are different with flexible space, since the effects of a fall in demand can be seen almost instantly,” he points out. He nevertheless remains optimistic given the continuing growth of the flex office market during the pandemic and beyond. “We predicted two years ago that by 2030, 30 pct of large companies’ office space would be flexible. It could be that due to the pandemic this proportion is actually going to be higher,” suggests Adam Lis.