Is flexible space right for your asset?
It’s time for landlords to pay attention to the rising demand for flex space
Over the last decade, flexible space’s reputation has shifted from scrappy disrupter to an essential amenity expected in most traditional office buildings. As hybrid work becomes the norm, tenants flock to office spaces that rival what workers have at home and provide experiences worthy of the commute. Flex space—combined with a tenant experience strategy—can be a transformative element that lures workers back to the office.
As flex space and co-working grow into a sizeable share of new office demand, landlords must consider if it’s suitable for their asset or risk being left behind in the office building revolution.
Start with the data
Whether you’ve already identified a specific asset in your portfolio or are unsure where to start, a flex space partner can help iron out the details by conducting a portfolio analysis to review building specs, asset location and flex market demand.
If your building is located in the top 30 Metropolitan Statistical Areas (MSAs), you’re already a step ahead in assessing your asset’s flex potential because lenders are much more willing to provide financing in these larger markets.
But that’s not to say you shouldn’t consider incorporating flex if you’re outside traditional commercial hotspots. As hybrid work continues to revolutionize when and where people work, there’s increased demand in ‘lifestyle’ cities that combine unique city amenities with robust residential options (think Tampa, San Antonio or even Boise), enabling investors to test out new markets. If your asset isn’t within the top 30 MSAs, you can conduct additional research to understand the demand for flex space and ensure the market can bear it.
Here are six questions to ask when evaluating whether to add flex space to your portfolio:
1. What is your overarching portfolio strategy?
Given that the value of flex space is based on projected rather than stabilized revenue, it’s vital to showcase success and benchmarks to stakeholders. Considering that it takes about 18 months for revenue to stabilize, a long-term hold strategy is ideal when considering incorporating flex space. Holding your asset for three years or longer helps with the capital market underwriting process to showcase the asset’s track record and improve proof of concept and value.
If you’re looking to sell the building within three years, flex space could impact the valuation process as revenue and occupancy stabilize.
2. What is your overarching risk profile?
Flex and amenity improvements require an additional capital investment, so you must thoroughly examine both the risks and the rewards involved. Because core investors prioritize stable income with minimal risk exposure, it's important to find a flex partner who can determine if this is the right opportunity for you.
Value-add properties have the potential to produce a tremendous amount of cash flow once flex has been added, but there is a moderate to high risk. If you’re aligned with this asset strategy, a flex partner can assess your risk profile and help you examine the rewards involved.
Because there's usually a sizable investment going into the project, it's important to diversify what types of amenities you provide. Incorporating flex space into your asset will allow you to cater to all types of office users.
3. How much space is available for flexible space?
JLL research shows that buildings with around 30,000 square feet of unleased space provide an optimal opportunity for flex space, because it allows you to capitalize on operational efficiencies. But what if you have more, or less?
If your availability is less than 30,000 square feet, you may have a tough time realizing economies of scale with your tech stack or staffing, etc. . However, our team can help assess if a smaller footprint is right for flex.
This is the sweet spot in which you can drive interest and create an adaptive portfolio that can evolve with your tenants.
This much square footage may, in fact, saturate the building with too much flex space. According to JLL’s capital markets assessment, when the flex share of an asset’s total rentable building is over 19%, assets generally underperformed peers in terms of pricing.
4. What type of space does your asset have?
- Is the existing space spec suites, agile flex space or coworking? A flex space partner can work with what you have, advise on inefficiencies and create a budget to build the space.
- If the space is already built out, there’s minimal capital investment upfront and you’ll be able to staff and operate it relatively quickly.
First, determine what your repositioning strategy is. How much capital are you willing to expend to modify it? You’ll want to find a flex space partner that can optimize current infrastructure to transform your space into flex.
You’ll need to enlist a team of experts who work closely with occupier clients and can enhance the suite experience and sales pipeline. Find a partner that can give your asset the attention it deserves.
Vacant space provides both endless opportunity, as well as the potential for missed opportunity. The right partner can help you activate, strategize and design the space to create additional value.
5. What is the class of your asset?
Newer buildings with high-quality finishes and amenities attract and retain quality tenants. If this is your asset type, you should consider incorporating flex as part of your leasing strategy.
With the flight to quality in full force, ensuring that your building is commute-worthy is critical. Integrating flexible space into buildings creates synergies by driving foot traffic, incubating leasing prospects and providing amenities to tenants.
6. What are your expectations for the building?
If this is your number one priority, flex is probably not suitable for your asset.
Flex space can be highly profitable, but it’s crucial to understand that it takes time to stabilize revenue.
Flex arrangements foster innovation through increased employee interaction, exposure to new business concepts, and cross-pollination of ideas.
To make your building a destination, it’s essential to provide tenants with a cohesive and customized experience that drives leasing activity, ensures tenant satisfaction and lease renewal and increases asset value. The JLL Global Flex Report shows that by 2025, properties that incorporate a diverse roster of amenities will experience 12% higher demand from tenants versus their plain commodity counterparts. Whether you offer basic tenant amenities or go the extra mile with activated programming and events, adding flex space to your portfolio is an effective way to lure tenants and their employees back to the office.
Have more questions or want to explore flex opportunities? Reach out to a member of our Flex by JLL team here.