Landlords in recent years sprinted to offer flexible office space in their buildings, risking irrelevancy if they didn’t deliver.
For most, this meant leasing space to a specialist flex-space operator. But with COVID-19 significantly impacting the flexible-space sector, they are trying something different: partnering with specialists to deliver a flex offering themselves.
Industrious, a leading co-working firm based in New York, has formed management agreements with about 40 large office owners, according to Jeff Johnson, the company’s vice president of sales.
For London-based Knotel, management agreements account for a quarter of its portfolio, which comprise a mix of lease and revenue share deals.
“Larger flex operators with a growing portfolio are the ones entertaining these types of agreements,” says Tashi Dorjee, flexible space solutions lead – Australia and New Zealand, JLL. “They have the resources to propose a financially attractive business model, guide the design and build process, plus they have the capacity to train and manage on-site staff, and fill the space to generate revenue.”
Management agreements appeal to landlords because, while they take on the initial risk of installing fit-outs, they receive a greater share of the revenue. Plus, the risk of leasing space to flexible space operators vulnerable to economic shocks is alleviated.
The detail of running a busy, service-orientated operation is left to a contracted partner.
“The simplicity of flex leases help save tenants money, while the hospitality aspect helps attract talent,” Dorjee says. “For property owners, they see the opportunity to tailor flexible space to their building, as well as shape the experience for the tenant they want to attract.”
Tried and tested
The management agreement is not new to real estate. It is a mainstay of the hotel industry, where many chains don’t actually own the properties, but instead operate the space, giving a percentage of revenue or profit to the landlord.
“Each deal is unique in the flexible space sector, and may include a flat management fee attached to experiential and commercial objectives, such as net promoter scores, tenant surveys, and profit targets,” Dorjee says.
In entering management agreements, the hope for landlords is that owned flexible space differentiates their building enough to attract new tenants, as well as add value to existing tenants.
The space can also act as an incubator, Dorjee says.
“Converting tenants to long-term, conventional leases is a desired outcome,” he says.
Flex space evolution
This approach to operating flexible space goes some way to addressing lingering cynicism in the industry that landlords are not equipped to deliver true hospitality-driven flexible space.
Blackstone managing director in the UK, James Lock said back in 2018: “There are a lot of (property) firms potentially coming to the sector late who haven’t got the insight around how you operate and run these businesses. They (coworking spaces) are like hotel businesses. It’s about the bottom line, it’s about efficiency of management, it’s about practical management and people can get caught out,” he says in a Bisnow article.
Regardless, many owners of big office buildings have launched their own flexible space brands, bypassing management agreements. This includes GPT with its Space & Co, Dexus with SuiteX, and ISPT with Flex.
The motivation has been mainly to compete with flexible space operators for small to medium-sized clients as well as offer their regular large corporate customers an easier way to expand or contract.
Meanwhile, tenants are being given greater choice, Dorjee says.
“The developments that drove the explosive growth of the flexible space sector, including tenants’ need for agile office portfolios and a superior workplace experience for their workers, are not only still there, but will continue to drive demand well into the future. The product just has to evolve to meet their ongoing needs.”