2022 Flex Office Changing Workplace

IN THE CHANGING WORKPLACE

JANUARY 2022

Executive Summary TRENDS IMPACTING THE FLEXIBLE OFFICE* MARKET

Short-Term Challenges to the Sector

After flying high for years, flexible office and coworking were negatively affected by the onset of the pandemic. The following report examines the current state and the expected future of the flexible office sector for landlords, occupiers and operators / providers across five themes.

Fundamentals Beginning to Look Up

Enterprise Demand Rebounding, Not Waning

The Long-Term Future of Workplace Ecosystems Includes Flexible Office

Changing Dynamics Between Landlords, Occupiers & Flexible Office Operators

*Terminology for the flexible space analyzed in this report varies across regions. This report primarily utilizes “flexible office” throughout, but occasionally refers to the term “flexible workspace” (the common term utilized in Europe) interchangeably.

The pandemic introduced a perfect storm of negative impacts on the flexible office sector.​ • Office usage cratered.​ • Social distancing—the opposite of the close- knit community much of coworking was built on— became desirable or even required.​ • Office job losses mounted suddenly.​ All of this led to reductions in memberships and increases in non-payment delinquencies. Flexible office providers have been forced to make difficult decisions to right-size their portfolios, leading to a leveling off in Europe and a decline in the U.S. inventory of flexible office and coworking​ .

SHORT-TERM CHALLENGES TO THE SECTOR

TRENDS IMPACTING THE FLEXIBLE OFFICE MARKET

Sudden Decline of In-Office Attendance 2020: A Perfect Storm of Negative Effects for Flex Office Demand

Short-Term Challenges • Health concerns sent majority of office workers home to work remotely. Almost immediate drop in U.S. office usage to 15% of pre-pandemic norm. • Government restrictions reduced activity in city centers and common spaces where significant portion of flexible office inventory is located (e.g., London and New York). • Pre-pandemic coworking space models not conducive social distancing. • Office usage is improving post-Delta at a steady, if measured, pace. Global office usage remains inconsistent, with Greater China above 90% of workers in the office, while other countries continue to lag well below 30%.

% at Office (U.S.)

100

80

60

36

40

27

20

15

0

Source: Kastle Access Control System, https://www.kastle.com/safety-wellness/getting-america-back-to-work/#. Accessed October 13, 2021.

Inventory Right-Sizing Occurring Flexible Office Inventory Continued Growth in H1 2020, but Space was Shed Over the Next Year

Changes in Inventory • The second half of the last decade saw aggressive growth in the flexible office sector and led to some over-extended expansion and unsustainable business models. Over-exposure in specific markets was a particular issue. • Since the beginning of the pandemic, some operators have been creative about shoring up their businesses. Strategies include selling off assets, focusing on core business services, walking away from underperforming locations, and/or renegotiating leases to shared-risk arrangements—i.e., profit sharing leases or management agreements. • APAC was an outlier, with growth driven by aggressive expansion in India, Australia and South Korea.

Q2 2020 - Q2 2021

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

*Off-chart: APAC coworking inventory increased by 88% between mid-2020 and mid-2021.

Asia Pacific*

Greater China

Europe

North America

Source: Cushman & Wakefield Research

Contraction of North American Markets Inventory Down 7% Across the Largest U.S. & Canadian Markets

Changes in Inventory • In the Americas, flex operators are giving back space or forcing renegotiations with landlords through bankruptcy. For example, flexible office inventory in San Francisco fell year over year (YoY) from 4.0 msf to 2.5 msf. • Impact on flexible office varies by operator and depends upon location, competition, tenant mix and average contract duration. • Those that have generally fared better include operators that own some or all of their buildings and/or operators who work on a management agreement basis. • There is consensus that the longer-term future is brighter, however.

-4%

-5% -4%

-7% -7%

-8%

-10% -9%

-12% -12% -11% -11%

-14%

-17%

-36%

Source: Cushman & Wakefield Research

Pandemic’s Impact on European Coworking Coworking Usage Down More in Larger Markets, Likely Due to More Health and Government Impacts During Pandemic

Drop Between January 2020 & November 2020

Average Occupancy Rate per Coworking Space

120%

Avg. number of contracted memberships

Avg. number of present members per working day

0%

100%

-10%

80%

-20%

60%

-30%

40%

-40%

20%

-50%

-60%

0%

Spaces that opened before 2019

Spaces that opened before 2020

-70%

All Markets

Large Markets (>1 million inhabitants)

January 2020 November 2020

Source: deskmag, European Coworking Spaces During Pandemic report

FUNDAMENTALS BEGINNING TO LOOK UP

The “COVID-19 recession” has been marked both by its severity and its brevity. After dropping 3.1% (according to IMF), global GDP growth in 2021 is expected to have matched pre-pandemic levels. Office-using employment is rebounding around the globe, having surpassed pre-pandemic levels in many markets, including Toronto, Tokyo and London. The return to office has been uneven around the globe, but by the fall of 2021, it started to accelerate in most markets. There have been delays related to the latest variant, but occupiers remain committed to bringing employees back to the office in 2022, even if it's on a more agile basis.

TRENDS IMPACTING THE FLEXIBLE OFFICE MARKET

Office-Using Employment Near Recovery Faring Better than Broader Economy, Office-Using Employment is Nearing Pre-Pandemic Levels in Many Global Markets

Global Office-Using Employment, Millions

Global Markets: Change in Office-Using Employment

Global Office-Using Employment

Forecast

Q3 2021 vs. Q1 2020 Peak-to-Trough

275

6%

Q3 2019 249

5%

3% 3%

250

1% 1% 0%

0%

Q3 2021 247

225

0% 0%

Q2 2020 237

-1% -1%

-3%

200

-5%

-4%

-4%

-5% -5%

-5% -6% -6%

-6%

-7%

175

-8%

-10%

-10%

150

-12%-12%

-15%

125

Source: Moody's Analytics Calculated and Forecasted; Brazilian Institute of Geography and Statistics; Eurostat; French National Institute of Statistics and Economic Studies ; Japan Statistics Bureau; National Bureau of Statistics of the People's Republic of China; National Institute of Statistics (Spain); Statistics Canada; Statistics Korea; U.K. Office for National Statistics

Global GDP Already Back to Pre-Pandemic Levels Real Gross Domestic Product (GDP), 100 = Q4 2019

105

100

100 = Q4 2019 GDP

95

90

85

80

75

World

Japan

United Kingdom United States

Source: Moody's Analytics Calculated and Forecasted; Economic and Social Research Institute - Japan; U.K. Office for National Statistics (ONS); U.S. Bureau of Economic Analysis (BEA)

Rebounding Interest in Sector Online Search for term Coworking Took Steep Dive Early in Pandemic, Recovering in 2021

Worldwide Search for Coworking

Select Countries (12-Month Trailing Average)

Coworking: (Worldwide)

12-Month Trailing Average

England Germany

Japan United States

100

90

80

80

70

60

60

50

40

40

20

Google Trends Interest Index (100 = peak of term popularity)

30 Google Trends Interest Index (100 = peak of term popularity)

0

20

Source: Google Trends

ENTERPRISE DEMAND REBOUNDING, NOT WANING

After steep declines in office demand at the beginning of the pandemic , interest in space accelerated in the middle of 2021. This has led to significant increases in office leasing in Q2 and Q3. However, uncertainty about the future of workplace footprint needs has led some occupiers to be hesitant to make long-term commitments. For those organizations, flexible office is a short-term (and potentially medium-term) solution to help rationalize corporate real estate portfolios until the “new normal” of office is clearer. In Australia, as an example, The Instant Group reports that flexible space interest is skewing towards enterprise users. In Q1 2021, a record 18% of all flexible space inquiries were for 10+ workstations, whereas demand for 1-2 person offices dropped by 14 percent year over year (YoY).

TRENDS IMPACTING THE FLEXIBLE OFFICE MARKET

2019: Flexible Office Demand Was Growing Despite Short-term Challenges, Long-term Opportunities Exist Occupiers’ Pre-Pandemic Plans: % of Workforce Utilizing Flexible Office / Coworking

Occupier Demand Then (2019) • Operators and the wider industry tended to believe those that could weather the short-term storm would have a more positive environment for their long-term prospects. • Sentiment was backed by many landlords and investors who were actively looking at the sector to see whether it was a good time to invest. • Prior to the pandemic, occupiers were planning on increasing their use of flexible office. The average respondent to the 2019 Cushman & Wakefield / CoreNet Global survey expected to double the proportion of employees utilizing flexible office within five years (from 12% to 24%).

30%

24%

20%

17%

15%

12%

10%

10%

5%

3%

0%

0%

2 years ago

As of 2019

In 2 years

In 5 years

Median Occupier

Average

Source: Cushman & Wakefield Research; CoreNet Global

2021: Flexible Office Demand Still Present Despite Short-term Challenges, Long-term Opportunities Exist

Occupier Demand Now (2021) • When asked during middle of 2021, nearly two-thirds of occupier end users indicate they currently use and/or are planning to grow their use of flexible office. o Current: 38% are currently end user organizations that are providing employees with access to flexible workspaces o Growth: 53% are planning to increase employees’ access to flexible office o No Usage: 37% are not currently nor plan to increase access to flexible office • Growth expectations are stronger in the Americas where 56% of end users expect to increase access to flexible office.

End Users: Outside of your core portfolio, do you provide your employees with access to flexible office / workspaces?

10%

No & NOT planning to increase

37%

25%

No, but planning to increase

Yes & planning to increase

Yes, but NOT planning to increase

28%

Source: Cushman & Wakefield Research; CoreNet Global

Does WFH Translate to Flex Demand? There is an In-Office “Premium” for Employee Experience

Flex as a Bridge for WFH

• Many workers who have worked remotely have noted benefits related to reduced commute times and greater ability to focus on certain tasks. However, mounting evidence suggests that working from home actually makes it harder to separate from one’s work and to create the desired work-life balance. o 49%: “No divide between work and home life” was the second most common complaint among employees working from home. o 14%: There is a 14% premium in employees’ work-life balance when they are frequently in the office . • Flexible office provides a “third place” for workers who want to be agile but want an alternative to their home.

14%

14%

10%

10%

Frequent Office “Premium”

Culture

Work-Life Balance

Best Work

Engagement

Source: Cushman & Wakefield XSF Survey TM

THE LONG- TERM FUTURE OF WORKPLACE ECOSYSTEMS

Because the pandemic forced work from home (WFH), it has increased workers’ desire for location flexibility . As a result, many employers have responded with changes to workplace strategy. Even before the pandemic, occupiers survey in 2019 were planning to double the number of their employees utilizing flexible workspaces over the subsequent two years. As of the middle of 2021, a third of occupier end users responding to a 2021 CoreNet Global-Cushman & Wakefield survey indicate they currently utilize flexible offices, and over half (53%) plan to increase the number of employees accessing flexible office in the future.​

INCLUDES FLEXIBLE OFFICE TRENDS IMPACTING THE FLEXIBLE OFFICE MARKET

Occupiers’ Changing Use of Flexible Space Change in Occupier Space Mix

• Prior to the pandemic, occupiers were exploring a strategy mix of core and flexible office to meet workplace needs. The most aggressive estimates were looking at a 70/30 split, with 70% of space being main corporate offices with traditional, longer-term leases and the remaining 30% leveraging flexible office space. • Post-pandemic, some occupiers may look to alter that ratio and potentially end up somewhere more like 60/40 or even 50/50.

• Traditionally, one of the ways occupiers used flex space was to fill the “spoke” locations in a hub-and-spoke model. • In the future, flex office may be part of the hub (or core office). For example: o An occupier taking space for a new headquarters could take less space and expect the landlord to offer a flexible option in the building to enable the occupier to flex up and down as needed. (A great example of this is 22 Bishopsgate in London.) o In a competitive market, an occupier with an existing headquarters which is too large for their future needs could consider flexible office as an option for any excess space . The key benefits to that approach are straightforward. It is easier for the occupier to take space back, if needed, when they need it, and the occupier may be more likely to fill the space than if they utilized a traditional sublease. Other benefits for large corporates who use this type of solution might be to encourage partners or suppliers to co-locate in their offices. Additionally, shared space could support smaller start up businesses in the occupier’s sector, giving them an early opportunity to invest in the future disruptors of their business. Example, Barclays Rise

The Future of Workplace Ecosystems Flexible Office’s Critical Role in the Future of Office

Enterprise Flexible Office • It is becoming more likely flexible office space as a sub-asset class of office will become more integrated into the overall workplace strategy of both occupiers and landlords, which could impact the following: o Flex operators adjusting their product strategies—for example, more enterprise product and new products, such as pay-as-you-go models. o Landlords executing flex office concepts without flex operators to reduce the associated flex operator risk. Landlords implement by themselves or through partnerships.

Core Office, WFH and “Third Places” Change in Occupier Space Mix

• In response to the potential

• Occupiers and employees could access flexible workspace in their current format but potentially in new locations closer to homes, major transport hubs and so forth. This provides the ability to get out of the home and access office space but without the full commute. o This enterprise flex space is “purchased” in the same manner as traditional offices, but leadership may need to give more thought to the location of employees’ homes to identify optimal locations. • Community hubs could also be a source of flexible office. These might include spaces connecting with local cafes, restaurants, gyms, community halls, retail locations and the like. • In this model, many workers are accessing the space a couple of days a week, instead of the traditional 4-5 days per week. In response, operators may consider even more flexible pricing packages.

“community hub” demand, flex operators are considering even more flexible pricing packages. For example, instead of selling monthly memberships, individuals or companies may be able to buy packages with access for a certain number of days per week or month, or time-bound approaches, such as hourly or half-day or daily passes. • In 2021, we have noted a growth in the market of pass products, which enable users to book space at any location across multiple operators on a single platform for a fixed price—essentially, an Expedia for coworking spaces.

Akin to an internet café of the 1990s, coworking can be provided by the minute, as is the case in this “anti café” in the UK.

CHANGING DYNAMICS: LANDLORDS, OCCUPIERS & OPERATORS

Flexible office providers are finding new competition—what had been primarily the purview of these providers is now being pursued by landlords and occupiers. Landlords increasingly see flexible office as a critical component of their investment portfolios. Accordingly, landlords are experimenting with providing flexible office space under their own brands. Additionally, at least in the short-term, there is amplified interest in a hospitality model of management agreements where landlords and flexible office providers partner together. Occupiers are also exploring ways to offer flexible locations either to their own employees and/or to other organizations with their underutilized leased or owned spaces.

TRENDS IMPACTING THE FLEXIBLE OFFICE MARKET

Changes in Relationships: Landlords Flex Spaces Landlords are Providing or are Considering to Offer Across their Portfolios

Who Provides the Flexibility?

• Pre-pandemic, most flexible office space was structured with providers signing long-term leases and managing the space (i.e., a rent arbitrage model). • Landlords recognize flex’s increasing importance in their portfolios and want more control over the space in their buildings. They also want to be the one building relationships with the end customers. This is encouraging them to take on the risk of “owning” the flexible office in their buildings. o Owners experimenting with becoming the providers of flexible office space through their own brands. o Landlords interested in management agreements for flexible office in their buildings (i.e., a hospitality model). It is possible this is a short-term trend.

Light touch serviced offices

25%

31%

31%

14%

Spaces with co-working features

28%

17%

42%

14%

Short lease office spaces (<1 years)

33%

17%

33%

17%

Premium serviced offices

53%

11%

19%

17%

Flexible meeting spaces

69%

11%

17%

Currently Offering

Considering offering in the next year

Considering offering in 1-5 years

Not considering

Source: Essensys

Changes in Relationships: Occupiers Flexible Office Provides Opportunity for Occupiers to Reduce Corporate Footprints

Availability of All-Access Passes • Over the past two years, flexible office providers—and pass aggregators—have increased the options for global drop-in programs. This allows enterprise clients to offer maximum flexibility to employees to access workspaces wherever and whenever desired. • A challenge for the industry is that longer-term, enterprise agreements are typically more profitable for providers. This has proven out during the economic downturn as those types of agreements have fared better and have provided income to underpin their business. • There could be an interesting dynamic with operators wanting to incentivize longer-term agreements with occupiers looking for ever-increasing flexibility.

13%

Shrink and consolidate portfolio by not renewing select site leases Expand portfolio through mixture of traditional and flex space leases Shrink and consolidate portfolio using flex space leases

27%

13%

Maintain portfolio size by shifting rigid leases to flex space leases

Expand portfolio through traditional leases

20%

27%

Source: Essensys

Employees’ Expectations Have Changed Trends Expected to Increase Post-Pandemic

Flexible Office Location Strategy • Office workers indicate less of a

willingness to commute long distances to get to the office every day. Potentially, there is an opportunity for flexible office to provide office space closer to where employees live. • To date, however, the data does not show a migration of flexible office inventory to the suburbs. • Repurposing of other space types is also a potential strategy. Owners are looking to use flex as a way to drive foot traffic in retail and mall settings, for example. • These employee preferences have given rise to “pass” products that provide access to thousands of global locations. Instead of occupiers implementing a hub-and-spoke strategy, they create hub-and-roam flexibility.

78%

73%

70%

67%

49%

17%

15%

Work near home

Number of coworking spaces

Work from home

Number of digital nomads

Number of workstations

Commercial real estate prices in my area

Number of business trips

Source: deskmag, European Coworking Spaces During Pandemic report

Changing Role of Office How do you expect the role of the office to evolve?

The Purpose of the Office • Many flexible office business models were built around community, not just providing space. This physical community has been difficult to maintain during the pandemic, and it has forced some operators to consider alternatives and to build their communities through digital channels. • The pandemic has increased reliance on technology for communication, and some changes—such as the move from voice to video conferences—are likely to be permanent. Flexible office providers will need to consider this in the design of workspaces, offices and meeting rooms. • As in the traditional office, an increasing focus on worker wellbeing will influence flexible office space location, design and services.

Most Important

Top 3

Creativity, innovation & osmosis (synergies)

32%

70%

Employees/clients can build & maintain culture

27%

70%

Meetings between employees & clients

20%

60%

Employees learn from each other

5%

42%

Meet people (internally & externally) unplanned

8%

28%

Requirement from the business to be in the office

7%

18%

Get away & have space from 'home'

12%

0% 10% 20% 30% 40% 50% 60% 70%

Source: Cushman & Wakefield Research; CoreNet Global

CONCLUDING THOUGHTS

What does this all mean? The Future of Flexible Office

• Flexible Office usage / occupancy dropped during the pandemic from 10%-50% on a location/operator basis. • Recovery started in earnest in Q2 2021 when restrictions started to ease. For example, in June 2021 WeWork reported its bests sales numbers since 2019 according to Bloomberg. • In some markets, we estimate that flexible office occupancy has already recovered 50% of losses from the pandemic. • Performance across the board is therefore projected to be back to 2019 levels within 6-12 months. • In the meantime, acquisition activity has flatlined and total flexible office stock has either remained flat or declined. • With occupiers starting to crystalize decisions on the future of their workplace, likely leading to increased demand for flexible workspaces, we could be facing insufficient supply to meet demand in the latter part of 2022, particularly for larger blocks of space. • While operators are switching their focus from survival to growth, the timing of new space coming online will likely lag. That will likely result in upward price pressure and a switch from a buyers’ market to a sellers’ market. • In parallel, while landlords are becoming increasingly eager to join the flexible workspace party, many are still grappling with the switch from lease to management agreement structures and the associated implications on investment valuation. • Therefore, the whole ecosystem needs to continue to adjust to the changes in order for the market to continue to grow and evolve that way we anticipate.

THE FUTURE OF FLEXIBLE OFFICE

RETURN TO OFFICE: Occupiers bringing their workforce back to the office over the next six months also creates demand for flexible options.

GROWTH MODE RETURNS (THOUGHTFULLY): Operators strategically expand their portfolios over the coming years to meet the potential growth in new markets and accommodate “work-near-home” demand.

DESIRABILITY OF FLEX: Historical benefits even more important post- pandemic: flexibility to occupiers, community and culture, ease of access for workers.

EVOLUTION ISN’T OVER: Landlords, occupiers and operators continue to experiment with different types of flexibility models, products, design and commercial frameworks to accommodate the agile workforce.

SUSTAINABILITY: While sustainability has not yet been a major focus of the flexible office sector, it is increasingly important to occupiers and landlords—and should be a consideration in the near-future.

IN THE CHANGING WORKPLACE JANUARY 2022

AUTHORS Norm Doucet Head of Flexible Office Services, Americas Norm.Doucet@cushwake.com David C. Smith Head of Occupier Insights, Global Research David.Smith4@cushwake.com

Emma Swinnerton International Partner,

Head of Flexible Workspace - EMEA Emma.Swinnerton@cushwake.com

DISCLAIMER: Cushman & Wakefield and our staff are not authorized or qualified to guide or influence you in the preparation of your own business continuity or preparations plans from a health and public policy perspective. While we are making efforts to ensure we are providing an up-to-date list of publicly available resources, all details on COVID-19, as well as health, economic and public policy implications, should be addressed with the advice of an independent specialist. About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in 400 offices and 60 countries. In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

Copyright © 2021 Cushman & Wakefield. All rights reserved.