Flex space critical for companies to remain agile
The need for agility has never been greater as workforce behaviors have been transformed during the pandemic and likely will never return to pre-pandemic norms.
Office tenants are increasingly looking to flex space as a crucial piece of their real estate strategy in the wake of COVID-19, with nearly a quarter of respondents recently surveyed by CBRE reporting having more than 10% of their portfolio in the asset class.
“The need for agility has never been greater as workforce behaviors have been transformed during the pandemic and likely will never return to pre-pandemic norms,” a new report from CBRE notes. “As occupiers plan real estate portfolios amid such uncertainty, flexible office space is becoming a useful solution for some requirements.”
CBRE notes that enterprise occupiers are also accounting for a bigger share of revenue than some of the largest flex providers. WeWork reported that nearly half its membership consists of enterprise customers, while IWG reported “unprecedented” demand and is working with more than 2 million new customers, including more than 80% of the Fortune 500.
But the demand for flex isn’t being driven solely by large companies: for small companies, flex space offers employees more choice and can solve for uncertain demand, while medium companies are turning to the strategy to help them enter new markets. CBRE says that companies’ strategies range from “testing and learning” to “strategic and scalable,” which is mostly employed by hyperscale tech companies.
The share prices of publicly traded flex operators like IWG have climbed since the pandemic’s early days, and the sector’s supply-demand drivers are pointing to even further growth post-COVID. But he challenge for landlords, according to JLL, is “how to deliver flexibility when lease duration and long-term committed cash flows have historically driven asset values, liquidity and the availability and cost of financing.”
In the future, JLL predicts investors will underwrite flex deals as they do other variable-revenue cash flows like percentage-rent retail leases – and “accept that the future of office investing will involve more volatility in net operating income.
“As the market moves toward management agreements, the investment market will need to become comfortable with assessing the potential revenue streams that can be generated from a particular building, location and operator. Investors will also be seeking greater returns as compensation for the operational risk,” the report concludes.