Get back to work with a Propmodo membership | Use code FALL20 for 20% off →

Flex Offices Are the Biggest Winners in the Shift to Hybrid Work

Co-working and flex space operators have been the scrappy office disruptors for over a decade now, initially serving small startups and freelancers, but they’ve increasingly become mainstream. WeWork has defined the space and become a household name, despite its many troubles. Co-working is now a multibillion-dollar industry with thousands of operators worldwide, and large enterprise companies are becoming a sizable share of the customer base. WeWork claims that 22 percent of Fortune 500 companies have members working in their spaces. As co-working and flex space continues to grow, it’s time that every office landlord pays even closer attention. Landlords who don’t develop a strategy for providing co-working space now may stumble in the march toward the future of the office.

Going corporate

Co-working operators like WeWork, Industrious, Regus, and Knotel expanded rapidly in the years before the pandemic, creating a high concentration of flex spaces. In the decade leading up to COVID, the global flexible workspace sector grew at an annual average rate of 22 percent, according to JLL. Compare that to the just one percent average yearly occupancy growth for the traditional office market during the same period. At first, the pandemic put a dent in flexible workspace, as many spaces shuttered, but operators have bounced back quickly. 

WeWork finally went public in October 2021 after a SPAC merger with BowX Acquisition Corp. WeWork CEO Sandeep Mathrani projects the company will reach profitability by the end of 2022, enacting cost-cutting initiatives and gaining in revenue and occupancy, though it’s still bleeding money, according to recent reports. WeWork expects about $4 billion in revenue in 2022, a 30 percent increase from last year. The shift to hybrid and remote work has made WeWork and its competitors more relevant than ever. Demand for North American flex and coworking spaces skyrocketed by 40 percent from the third quarter to the fourth quarter of 2021, according to Upsuite, a flex office data and analysis platform. Upsuite said metro areas like Atlanta, Houston, and Los Angeles have seen the most demand, with increases of at least 91 percent in the fourth quarter of 2021. 

Co-working and flex spaces should continue to see gains because they’re so uniquely tailored for hybrid work, according to Scott Huma, Senior Director of Office Research at JLL. “I think we’ll see an increase of more creative office occupancy models in the future,” Homa said. “I think every office landlord should have some flex space strategy right now to position themselves for the future of work.” Homa said there’s a “Darwinian component” where landlords are trying to quickly adjust to new occupier demands and wrapping their heads around the co-working and flex model. Homa said getting a jump on incorporating co-working space will help office landlords survive and, eventually, thrive.

The flex office isn’t new by any stretch, but it’s undoubtedly maturing, as it garners the attention of more prominent companies. Corporate adoption of flexible space remains limited, but it’s growing. Forty-one percent of office tenants told JLL they expect to use co-working space as part of their post-pandemic strategy. The reasons are myriad, but they include cost reductions and especially agility. Occupiers have been more cautious recently in long-term planning for office needs, thanks mainly to the pandemic and rise of remote work. Acquiring co-working space allows occupiers to “buy time” as they establish growth projections for their companies and decide long-term strategies. Using flex space also lets corporate occupiers deal with ebbs and flows in employee headcounts. One of the most attractive features of flex space arrangements, as well, is having employees sharing space with other companies and freelancers. It leads to the “cross-pollination” of ideas and could help with recruiting new talent.

Larger companies experimenting with flexible space are beginning to increase as well. Standard Chartered, a British multinational banking firm, is one example. The company wanted to get employees back to the office safely during the pandemic, so it took a 12-month trial period with co-working provider IWG for its 90,000 global employees across 60 countries. Standard Chartered wanted to help staff reduce their commute times, and employees will now have the flexibility to choose from several “work-near-home” options among the IWG co-working network. Another instance occurred in London, where pharma firm GlaxoSmithKline (GSK) had a business unit expand rapidly because of COVID-19 and needed immediate space for about 80 employees for an indefinite amount of time. So, the company acquired a single floor of flexible space from The Office Group for a short, three-month period. Both the Standard Chartered and GSK examples show how the agile nature of flex space is perfect for the hybrid work model and can augment office portfolios.

Need for agility

Landlords who can provide both traditional and co-working office space will likely be the winners of the shift in the market, Homa of JLL said, but there are many unknowns. The co-working market is still in an exploratory stage, and landlords are busy figuring out how to capitalize. There’s not necessarily a template for landlords to arrange co-working spaces. Lately, more deals with flex space operators are structured like partnerships and management agreements. There’s revenue-sharing with incentives and bonuses and shared pain between the landlord and co-working provider if things don’t work out. “The traditional arms-length leases have been throttled back, and partnerships are rapidly growing,” Homa said. Some landlords also build and market their own co-working spaces, such as Boston Properties’ Flex by BXP, but it’s challenging to do and relatively rare. Most landlords don’t have the name recognition of co-working operators like WeWork, so it’s hard to compete against them.

Several companies in the co-working space make the process easier for landlords. One such company is The Instant Group, which acts as a kind of for co-working space, a real estate consultancy firm, a real estate data provider, and a procurer for flex space. The company recently merged with IWG and aims to create the world’s largest online marketplace for flex office space. The Instant Group connects tenant demand for co-working space to the landlord’s and operators’ supply. The company covers about 30,000 co-working locations and delivers millions of square feet of space worldwide. “We want to free businesses to move faster and use workspaces in a more consumable way,” Tim Rodber, CEO of The Instant Group, told me. “We believe agility helps a company’s resilience, and office tenants and their employees want more choices.”

Rodber, a former rugby union footballer, said that while many traditional offices have remained relatively empty in the past two years, flex spaces are full. He admits that it’s a bit of a generalization, but it’s mostly true. Office occupancy levels for some larger organizations are still hovering around 70 percent, Rodber noted. Still, most flex space operators are expecting occupancy rates above 81 percent or higher in the next six months, according to an Instant Group report. With hybrid work now the norm, if a company had to choose been a new 5-to-7-year lease or a much shorter solution for a co-working space, flex space seems to make more sense.

A consumable office product

Most every landlord Rodber talks to nowadays wants to capture the increased flexible space demand. Most companies will still have a head office, but they’re looking to supplement it with co-working space. Today, younger workers have different wants, needs, and lifestyles, and Rodber said he believes the office market needs to become more agile to adjust to this. An employee may want to work in the HQ office one day, stay home the next day, and work from a co-working space closer to them another day. This increased autonomy and flexibility has redefined the office, and what was once the simple procurement of office space has become a much more pressing question for CEOs and executives. Executives are asking what will happen to their company culture if everyone stays remote, so the future of the office has become a central issue for occupiers. Co-working and flex spaces are factoring into part of the solution.

But Rodber said it’s more than just providing the co-working space. It’s also about developing the mindset of the collaborative office. “Co-working in its purest form simply means a shared workspace,” he said. “Co-working is really about designing the right workplace environment. Many companies now have communal and shared spaces in their office to encourage collaboration.” The whole point of the co-working revolution is to smash the old model of the office just being a bunch of desks that employees are tied to, like some factory model from the 1920s. Now, it’s about creating dynamic environments. The office has become a more consumable product, and according to Rodber, the pandemic accelerated that change.

The recent announcements of return to office dates may add to a ‘herd mentality’ and pressure employees to come back. But while we may be returning to the office soon, how offices look and will be used has changed for good. Flex space and co-working are growing into a sizeable share of new office demand. Landlords will have to adjust accordingly because co-working and flex space isn’t just for small startups and freelancers anymore. If hybrid work is the new norm, then flex space and co-working is, too. Large enterprise companies increasingly want flexible office space, and the landlords who don’t develop a strategy now to provide it will quickly find themselves playing catch-up.

Image - Design