Landlords Embrace Flexible Space Partnerships

Collaborating with Flex Operators to Adapt to the Hybrid Work Future

Amidst the evolving work landscape where people have multiple options, flexibility has become a priority for employers competing for talent. JLL's 2021 Global Flex Space Report reveals that 41% of tenants plan to increase their use of flexible space as part of their post-pandemic work strategies.

To address low occupancy rates and an uncertain market, landlords are exploring innovative ways to fill their spaces by partnering with flexible space operators. Traditional subletting or self-management of flexible spaces comes with risks, such as lack of control and operator default. Instead, landlords are turning to management agreements with flexible space operators to take over vacant coworking spaces left by providers that have either gone out of business or scaled back operations.

The adoption of management agreements is expected to increase rapidly, potentially expanding the availability of flexible space in the market. JLL predicts that by 2030, around 30% of office space will be flexible in some form.

This shift allows for quick growth of the sector, with capital requirements spread across multiple partners. Management agreements align incentives between landlords and operators, fostering mutually beneficial partnerships.

Landlords absorb the fit-out costs while receiving a greater share of the revenue and reducing the risk associated with leasing to a single tenant. Flex space operators handle the daily operations.

This new office income model resembles hotels more than traditional lease structures, with variable income streams through management agreements. Lenders will need to adjust their valuation methods, looking to the hotel industry for guidance on underwriting investments with multiple revenue-generating products.

Ultimately, the market will adapt to offer individuals more choices, driven by consumer behavior. Landlords and investors who understand this shift can shape their products and services to meet customer needs.

Real estate services companies like JLL are also taking on the responsibility of running flexible space sites, while some are acquiring stakes in coworking companies operating through management agreements with property owners. Established flex-space providers are rescuing distressed operators or taking over vacant coworking locations.

The partnership between landlords and flexible space operators allows tenants to meet their hybrid workplace needs while enabling landlords to diversify their income streams.