Flex Space and
Coworking 2.0

Commercial real estate has been fundamentally disrupted by flexible space and coworking. What’s next for this high-profile sector?

February 04, 2020

There is no doubt that commercial real estate is undergoing a massive transformation, aided by some very noteworthy disruptors. But after a year that kept the flexible space sector in the news nearly every single day, many are wondering what the future holds. We’ve put together six key predictions for 2020. 

Below, click  the "+" to learn more about each prediction...

The falloff in WeWork’s leasing activity in the fourth quarter dragged down the average flexible space transaction size from 48,620 s.f. in Q3 2019 vs. 30,117 s.f. in Q4, a decline of 38%. WeWork’s average deal size (69,625 s.f.) is significantly larger than most other flexible space operators (21,153 s.f.), and the more conservative, moderate growth of most operators is likely to result in typical flexible space transactions spanning a single floor or less, rather than the multiple floors WeWork typically leased at a time. Additionally, investor concerns regarding the share of flexible space within an asset is likely to restrict the size of transactions – at least until there is a better understanding of the business model and investors are able to underwrite coworking leases with greater certainty.

Although JLL is tracking 950 different flexible space operators within the U.S., WeWork has accounted for 49.9% of sector leasing activity from Q1 2017 to Q3 2019. However, in Q4 2019, WeWork didn’t sign a single lease nationally, while other venture-funded groups such as Industrious, Knotel and Convene, and franchise models like Venture X and Serendipity Labs expanded significantly. The industry’s largest overall operator – Regus – also signaled their intent to growth their network via franchise agreements, a surefire way to fuel aggressive growth in the year ahead.   

In recent years, flexible space operators have departed from their previous strategy of leasing space in affordable buildings, like Class B/C office buildings and repurposed warehouses, into top-quality glass-and-steel assets. In 2018 and 2019, there was an 11% increase in the share of leasing occurring in Trophy and Class A buildings as operators attempted to lure corporate users by offering top-quality assets. Given a greater focus on conserving costs and achieving positive cash flow, flexible space operators are likely to resume leasing more space in Class B/C offices and warehouses in an effort to grow profit margins.  

Much of the criticism of the flexible space industry pertains to an inherently risky financial model of rent-arbitrage, in which there’s a mismatch in long-duration lease liabilities and short-term committed cash flows. With this inherent challenge in mind, investors and operators have explored alternative financial models that more closely resemble retail and hotel deal structures, including revenue sharing and/or fee-based management agreements. Industrious and Mindspace have built an extensive network of spaces by partnering with owners via management agreements, and other operators are quickly trying to catch up. Large landlords have also introduced a variety of self-perform concepts, such as Studio (Tishman Speyer), Flex by BXP (Boston Properties), Flex+ (Irvine Company), Space+ (Washington REIT) and Bex (Brandywine). Some flexible space operators such as Novel Coworking and Boxer Properties have had a longstanding business model built around property ownership and flexible leases. We expect continued exploration and investment from building owners into flexible space solutions, with future industry growth driven principally by self-perform and management structures rather than riskier sublet models.

Throughout history, real estate investors have preferred conventional long-term leases and predictable net operating income (NOI) over shorter-term leases and variable cash flows. The rise of management agreements and self-perform models therefore requires a leap of faith by owners that they’ll be able to incubate tenants within flexible space and convert that captive audience into conventional long-term leases and/or drive demand and retention by positioning flexible space as a building amenity.

MakeOffices, a subsidiary of DC-based landlord MRP Realty, has demonstrated strong success in generating downstream leasing in assets in which they operate their flexible leasing model. Over the past 24 months at Bethesda Crossing (an MRP property located in Suburban Maryland), MakeOffices members have graduated into 60,000 square feet of traditional office space at an average weighted lease term of 84 months. At MakeOffices’ location at 3100 Clarendon Boulevard in Arlington, Virginia, media company Axios initially took six coworking desks, and within 18 months leased a full 15,000-square-foot floor via a 10-year conventional lease in the same building. In River North (Chicago), MakeOffices’ landlord, Equity Office, makes a habit of including a stop at their flexible office centre while touring tenants through the building. One of the tenants already in their 350 N. Orleans Street building, Scientific Games, put a team in MakeOffices and grew it to 72 desks while an additional floor was built out for them. These are just some examples of the positive effect that coworking can bring to a building. In general, owners have the ability to sell the value proposition of flexible space to add speed, convenience and efficiency to the transaction process, thus serving as a catalyst for growing NOI and increasing building values. 

Although historically catering to freelancers, start-ups and small businesses, large companies have grown to account for over 40% of coworking industry revenue. Fortune 500 occupiers continue to embrace agile work, validating the demand for pre-built, flexible-term, amenity-rich spaces. Some companies have implemented internal guidelines around traditional vs. flexible leases, mandating that all space requirements shorter than two years or below a specified headcount be placed within a shared office environment. 

Most large companies have either developed programs or are actively building a framework that includes flexible space as a component of their broader CRE/portfolio/workplace strategy. We expect that corporate demand for flexible space will grow significantly in the years ahead, driven principally by the need to accommodate short-duration space needs and serve small-headcount requirements. 


Conclusion:  Flexible Space and coworking have fundamentally disrupted commercial real estate, growing at an average annual rate of 22% in the last decade. We predict pre-built spaces, agile design, technology integration, flexible lease terms and hospitality services will become the norm—making space fast, flexible and fun.

Tenants of all sizes have realized the potential benefits of leveraging flexible space arrangements to better manage their liquid workforce and optimize their real estate strategies. Strong brand awareness, aggressive adoption and forecasts of widespread future use will continue to drive the flexible space sector forward for years to come. 

Since 2010, the flexible space sector has grown at an average annual rate of 22%. Although that pace of expansion may slow in the years ahead given the disruption seen in the second half of 2019, tenant expectations have been reset in a way that will fundamentally change the way space is delivered and consumed.

Irrespective of WeWork’s path forward, the future of real estate will retain many of the key elements that helped fuel this disruption. Space will be fast, flexible and fun. Pre-built spaces, agile design, technology integration, flexible lease terms and hospitality services will become the norm and continue to transform commercial real estate from a commodity to a consumer product.


Talk to us about your office space.

How should coworking and other flexible space options be a part of your business strategy?