Article

Landlords are on the hunt for flexible-space partners

Exploring partnerships with flex operators amid empty offices and a hybrid future

March 03, 2022

Whether working from the office, home, or somewhere in between, people have more than a few options these days. In the ongoing war for talent, employers are prioritizing flexibility as part of their competitive strategy.

According to JLL’s 2021 Global Flex Space Report, 41% of tenants expect to increase their use of flex space as part of a post-pandemic work strategy.

That’s why landlords saddled with low occupancy rates exhausted by an uncertain market believe they’ve landed on an innovative way to fill space: Team up with flexible space operators.

“Office landlords are increasingly looking for ways to incorporate flex into their portfolios, but there are significant risks to subletting that space to a traditional flex operator or taking on the management of that space themselves,” says Jacob Bates, head of Americas Flex Space at JLL. “In the traditional model, there’s little to no control of the space and a significant risk of default by the operator, while the self-perform model has a higher output of capital and 100% of the risk.”

In some cases, landlords are stepping in to run the spaces under their own brands. More commonly, however, landlords are turning to management agreements with flexible space operators to take over space left by coworking providers that either went out of business or have scaled back their operations.

Instead, management agreements could become far more typical when flex-space operators share revenues with landlords. Of course, it’s still early days, but this has the potential to rapidly increase the amount of flexible space in the market.

Right now, most offices remain primarily traditional. But expectations are for flexible office space to expand rapidly over the next decade. JLL predicts 30% of office space to be flexible in some form by 2030.

“The shift to management agreements means the sector can grow quickly with the capital requirements spread across a greater set of partners,” says Ben Munn, JLL Global Flexible Space managing director and lead. “Management agreements can also align landlords and operator incentives, creating a mutually-beneficial partnership for all parties.”

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A new mindset for landlords

Although landlords will absorb the cost of fit outs, they receive a greater share of the revenue and reduce the risk of leasing to a single tenant. Daily operations are taken care of by the flex space operator.

“This office income model looks more like hotels than traditional office lease structures,” Munn says. “The income stream is variable with management agreements rather than fixed-rent leases.”

Tenants can meet their hybrid workplace needs, and landlords can diversify their income streams.

Yet the model will challenge lenders who typically value office assets based on the rent and the quality of the occupier. Again, Munn says the capital markets will look to hotels to guide how to underwrite investments with multiple revenue-generating products.

Ultimately, the market will shift to offer people more choices.

“Consumer behaviors will drive value in the flex space market,” Munn says. “And the more that landlords and investors understand that, the more they can shape their products and services to meet the needs of their customers.”

Real estate services companies like JLL also take up the mantel to run flexible space sites. Others are acquiring stakes in coworking companies that operate through management agreements with property owners.

Elsewhere, existing flex-space giants such as IWG are rescuing distressed operators from bankruptcy or taking over operations in vacant coworking locations.

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