As flexible workspace moved from niche to mainstream over the last decade, sprouting alongside were new ideas about how to fit it into the established world of commercial real estate.
Now, a recent string of high-profile mergers, successes, and restructurings have added urgency to investors’ efforts to identify which models work best.
"Right now, everyone is being forced to question which models for flex space work, especially when and why,” says Ben Munn, global head of flexible space at JLL. “They have their magnifying glasses out.”
Flexible space – a broad term for any type of real estate that provides agility in its use – largely came into the public eye through coworking, with memberships, funky fit-outs, and headline-grabbing free beer.
With the demand for flexibility proven, the concept has expanded and changed, and flexible spaces have proliferated in cities around the world.
Amid the rapid pace of growth, “investors have really sat up and taken notice,” says Munn. “The question is what comes next.”
Flex space rising
The sector itself is growing at a pace where teething troubles are inevitable.
“In every market you’ll see providers who don’t quite make it because they didn’t get their pricing or branding right,” Munn says. “It is a very competitive market, so we shouldn't be surprised to see some providers challenged.”
What’s not in question, however, is the strength of demand. In London and Amsterdam, flexible workspace providers account for up to 15 percent of office space, with even more flexible space provided by landlords outside of traditional coworking companies.
JLL research predicts 30% of the U.S. office market will comprise flexible space by 2030.
“The underlying fundamentals of demand are stronger than they've ever been,” says Munn.
This, largely, is down to uncertainty. “It’s not just a reflection of current circumstances, such as the ongoing trade war or Brexit, but the rapid shifts in business that make it hard for companies to know what they are going to look like from year to year, never mind in three-, five- or 10-years’ time.”
But while businesses are looking for space, investors are facing challenges in finding the best approach for their markets.
Modelling what works best
For instance, there’s been a push to put more rigor around valuations, taking into account the strength of the operator as well as the income premium.
Then there are operating models. Public attention may be focused on coworking, but that’s not the only one.
Listed flexible workspace group IWG, which owns the Regus brand, has typically leased office space. But it’s now seeking to expand through franchising.
Some landlords, such as Singapore’s CapitaLand, are offering flexible space in their own office buildings. In some cases, landlords are operating their own flexible workspace brands, building an in-house team to manage the space.
Other landlords are operating in partnership with flexible workspace providers. The flexible workspace element might be launched with the provider’s branding, or as “white label” space, with no provider branding, meaning the flexible workspaces appear integrated with the landlord’s offering.
Munn believes most landlords will prefer management contracts or partnerships in the future, in line with hotels. “The likelihood is that the self-operating model for landlords will be limited,” he says.
In the immediate future, expect more investor activity in the sector, says Munn. It’s not just real estate investors becoming more comfortable with flexible space, but private equity players are also assembling operating businesses.
There will be more consolidation, more global providers emerging and more competing operating models, he says.
“Even though this market has been around for decades, it’s going through a rapid evolution,” Munn says. “The momentum will continue to bring new models, players, and customers into flex space.”