Frat Culture, Over-Supply And Recession: Why Manchester Serviced Offices Are Due A Bumpy Ride

The managing director at one of the U.K.'s leading serviced office providers, now expanding into Manchester, has warned that many flexible workspace providers will go out of business in the next 12 to 18 months as the economy, and poor business models, take their toll.

And BE Office's Jonathan Weinbrenn worries what effect an economic downturn could have on WeWork and the sector's reputation for stability.

Talking exclusively to Bisnow, Weinbrenn spoke about the "frat culture" of some coworking operators and how the sector can thrive, or simply survive.

Last week BE Offices, whose Headspace brand operates at Mount Street, Manchester, revealed their latest financials.

Overall the year ending 2017 showed a 13% uplift in turnover to £34.2M, and an EBITDA from continuing operations of more than £5M whilst increasing to 19 centres and expanding into new market sectors. At the year end BE’s flexible floorspace increased to almost 800K SF, and growing.

The figures come at the end of a year in which WeWork has galvanised the Manchester flexible workspace sector with a deal to partner with Amazon on a 92K SF Northern Quarter HQ, and their two new city centre bases settled in. The list of other coworking and serviced office providers in the city grows ever longer, prompting concern that the market is becoming "scarily" over-supplied.

BESpoke Managed Space's Weinbrenn is one of those overseeing BE's expansion out of London and into Manchester and Birmingham. He said the sector has much to thank WeWork for, and much to fear if the WeWork model cannot survive an economic downturn.

“WeWork create an amazing story for our market, but the worry is that we don’t want WeWork to go wrong. That would mean a massive hit for the serviced office sector’s reputation," he said.

“I hope it’s wrong that a downturn could be difficult for WeWork to survive. But we have been here before with Regus, who took leases on office space at the top of the market and went into Chapter 11 protection in the U.S. [in the wake of the dot-com crash], and if that happened to WeWork it would be a terrible thing. We’ve also had examples of other serviced office providers like MLS [who hit trouble as the economy turned down in 2009], things like this have a huge impact on our sector and I really hope it doesn’t happen to WeWork, because their model is not sustainable under normal circumstances although their funding model allows it."

Weinbrenn said WeWork may also have to confront some reputational issues as they turn into a mature business.

“They’ve done wonders, they have changed the conversation, but they face cultural challenges. There’s talk of the frat mentality, the free beer … when you grow a business that fast it is impossible to control standards, and that’s a problem because ultimately we’re about delivering a service. Serviced offices is all about the hospitality element, get that wrong and you’re finished,” he said.

Even so, the transformation wrought by WeWork is apparent. “Suddenly flexible workspace has become exciting. Fifteen years ago we were the office market’s sad cousin, but occupiers now demand floorspace as a service, and so they should. The result in London has been that the sub-5K SF deals market has been decimated, and that is now happening in the regions," he said.

Is Manchester heading for a "scary" level of supply of flexible workspace, as some have claimed on the strength of recent take-up figures? Weinbrenn agrees that some new entrants are destined to be but temporary visitors to the Manchester scene.

"Now everyone is opening flexible workspace, it is a valid point that it is becoming a commodity and for those who deliver floorspace acquired at the top of the market, and who don’t understand hospitality, they won’t survive. The next 12-18 months will see some operators vanish," he said.

"There is only so much space you can offer, and the big corporate landlords are now offering flexible space too, all of which is good for customers but we need to monitor supply and if you get to the stage where people are leafletting on the street to drum up coworking business, that is a sign. I also suspect the high occupancy figures that are claimed, because it is no secret that there is massive discounting going on with occupiers being offered office deals they would be mad to turn down.”

Headspace, the BE Group's coworking offer now occupies 15K SF at 2 Mount St., and Weinbrenn is confident that thoughtful operators will prosper. Today's frenzy of office space acquisitions by serviced office providers will soon become less frantic, he predicts.

“We’re down to about 20% of the office market in London, and the flexible workspace sector’s pace of floorspace acquisition will calm in Birmingham and Manchester, and the balance will be addressed. There is scope for more — the sector is not a blip or a fad, it is the result of structural change and an understanding that traditional office leases have many disadvantages.

“Don’t underestimate Birmingham and Manchester. These are exciting places with a blend of startups and corporate occupiers, there is still a lot of scope. The market for flexible workspace hasn’t peaked yet.”