I think it is safe to say that the pandemic has solidified the need for flexibility when it comes to an office. Companies want an option to be able to grow, or shrink their office based on their immediate needs. Flex space currently accounts for only 5 percent of U.S. office stock, but by 2030, 30 percent of office space will include some type of flex space, according to JLL research. Flex space is growing roughly 20 percent every year. A struggling office market nearing 20 percent nationwide vacancy has office owners and managers taking a second look at flex space as a solution.
“As occupiers seek to build more flexibility into their portfolios, landlords are increasingly recognizing that real estate agility is a long-term trend. Landlords who are quick to adapt to evolving tenant expectations – for instance, by providing “core and flex” solutions – will be well positioned for the post-COVID-19 era,” CBRE’s Global A&T Agile Practice Leader Manish Kashyap said.
But creating the supply to meet this demand comes with challenges; these flexible spaces offer many more services than traditional office leases provide. Flex space needs flexible management. Building managers have to take a more hands on approach to things like visitor management, room booking, food and beverage services, and internet connectivity. Flex space is also denser than traditional office space, putting a strain on building-wide resources that may not be able to handle it.
The first step is deciding whether or not to offer flex space is deciding whether or not to manage it in-house. Because flex space requires upfront capital for build-outs, landlords are working to add it in different ways. For our latest report on the flexible workplace market we surveyed property owers to learn which path they were choosing. The majority (53 percent) of the flex space providers we surveyed are self-managing their space, 19 percent are leasing to a third party operator, and 12 percent are using a third-party management agreement.
Self-managed space offers landlords a greater share of the spoils, but managing it can be difficult. It means building out a team with office management, IT, and hospitality expertise. Landlords that want to self-manage are turning to third-party software providers to help them bring connect their systems for leasing, marketing, access control, and room booking. Even though there is help for office building managers when it comes to a tech stack, they still need to hire employees capable of running a professional office.
Management agreements are a way to preserve the upside of growing flex office market without the staffing. A management agreement cuts the landlord in, sharing profits generated by the operator and so clearly aligns incentives between the operator and the landlord. Since there is more risk for landlords of tenants ending short term leases when times get back, it makes sense that they would want additional compensation.
The last option for building owners that want to offer flexible space is to just rent to a third party operator. This was traditionally seen as the least risky option, especially since the companies doing it were getting investment funding in the billions. But, the struggles of WeWork, Knotel and others has shown that even renting to these seemingly stable companies still carries with it plenty of risk. COVID-19 has accelerated the demise of many flex space locations, seemingly tailor-made to crush office builds around dense, shared space. Dealing with a struggling flex space provider can be a major headache. Several landlords have opened lawsuits against WeWork. Knotel’s bankruptcy sent its landlords scrambling. Both make a compelling case for the advantages of landlords developing their own flex space or entering into management agreements. The pandemic has landlords cutting deals and renegotiating lease obligations with flex space firms. Many of Knotel’s and WeWork’s former spaces are already being repurposed as turn-key ready flex spaces.
“It can be difficult to propose a single answer as to whether landlords should self-manage or outsource their flex space operation, but one thing that is clear is that it is getting easier for landlords to self-manage flex via the application of tech tools purpose-built to augment the traditional landlord skillset,” CBRE Senior Vice President Eric Thomas said in the report.
The truth is not every flex space is going to be successful.
Flex space hit a bump in the road, slowed by the pandemic, but its place in the future of office space is not in doubt. Landlords who can adapt to the changing flex space landscape will be able to make great deals to either provide it themselves with the help of tools or work with a flex space provider. Knowing what you don’t know is critical in business. If managing flex space isn’t part of a teams’ core competency, there’s an increasing array of options to help bridge the gap. Flex space operators may find working deals with landlords harder now that others are figuring out to do it themselves.