Co-working caught in falling occupancy, lease crunch

Co-working space operators are rushing to offer their tenants rent holidays and suspended memberships as occupancy rates and new inquiry levels dwindle across the once-booming sector.

WOTSO has offices in Sydney and Melbourne.Credit: AFR

At the same time, the operators’ pleas to their own landlords for rent relief are largely falling on deaf ears.

“Landlords aren’t going to give them any reprieve when they are owed $500,000 a month in rent,” said Grant Philipp, founder of the co-working space broker Office Hub.

Mr Philipp said tenants now were simply upping and leaving even when they had a contract, with the operators unlikely to pursue legal recovery of relatively small amounts. In some cases, contracted tenants had done a “moonlight flit” and forfeited their bond.

Typically, 60 per cent of co-working tenants are out of contract and rolling on month by month.

“In a few months operators will find themselves with 30 to 40 per cent occupancy and on the edge of collapse,” he said.

“I don’t think they will have a single cent in rent. Why would tenants pay for something they are not going to use?”

The coronavirus-induced downturn highlights the sector’s structural shortcoming of the operators being tied to inflexible long-term leases, but with their own clients committed only to short-term contracts or free to leave at any time.

In the absence of a recession, high occupancy rates glossed over the problem but operators are now acting to avoid a full-blown disaster.

Backed by its landlord Blackwall Property Trust, Wotso Workspace is offering all members suspended memberships, with offices or desks “preserved” for when they return.

Wotso has 17 sites, ten of which are managed by Blackwall (from which Wotso demerged in January).

Blackwall joint managing director Jess Glew said Wotso had seen a 43 per cent drop in revenue across the Blackwall-controlled sites, with a 50-60 per cent decline expected “in the next month or so.”

“We jumped on the front foot. We needed to take a stance, otherwise you get inundated with requests,” she said.

Based at Sydney’s Pyrmont, Here Coworking has offered to freeze members’ fees until they can return, or else charge 50 per cent over the duration of the banishment and then half fees over a corresponding length of time when the client returns.

The company has also created a virtual channel and a “concierge team” to check on self-isolating members.

The head of JustCo’s Australian operations, Sheree McIntyre said with most clients now working remotely, foot traffic had declined across all centres in the past couple of weeks.

“We’ll continue to work with our landlords to understand available options for our members as we contend with COVID-19 and the changing challenges it presents our workforces,” she said.

“Like most businesses, we’re currently taking things one hour at a time.”

Servcorp founder Alf Moufarrige said COVID-19 was a double edged sword for the global flexible space operator, which has spent $30 million to convert serviced office space into co-working areas.

He said co-working sales have dropped 50 per cent. But sales of its virtual offices – which provide receptionist and other support to staff working from home – have increased 30 per cent.

Mr Moufarrige said Servcorp would consider “pausing” rent only for co-working clients, “depending on the individual’s position”.

As an occupier of $1.8 billion of office space, Servcorp has written to various landlords to request relief from its collective $16 million a month rent bill. “I have to say I have had anything but a positive response,” Mr Moufarrige said.

“Our landlords are holding a pretty tough line, but whether they can maintain that I don’t know.”

Blackwall meanwhile has deferred rent on its Wotso facilities, subject to monthly review. ”Anyone with a co-working space as a tenant will need to help them out, because rent is such a large expense,” Ms Glew said.