Why landlords are hunting for flexible-space partners

But as workers return to the office, flex space is being buoyed by businesses deploying less capital into real estate and employees who have come to expect more choice over how and where they work.

“The issue is that office landlords want more flex space in their portfolio, but the operators aren’t willing to take on new leases,” says Ben Munn, managing director of flex space at JLL.

So instead, management agreements — whereby flexible space operators share revenues with landlords — could become far more typical. It’s still early days, but this has the potential to rapidly increase the amount of flexible space in the market, a sharp change of fortunes for a sector whose future was deeply uncertain only months ago.

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.

Real estate services companies like JLL are also taking 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.

A new mindset for landlords

“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”

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.

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 as a guide on how to underwrite assets with multiple revenue generating products.

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

“Consumer behaviours 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.”