As COVID Persists, Flex-Space Operators Flex Their Expansion Muscles

The coronavirus pandemic continues to wreak havoc on the country’s plans to reopen, but glimmers of hope can be seen in the flexible-space market.

According to a new report from JLL, some of the larger flex-space operators are making moves to expand. Listed flex-space group IWG took over 30,000 square feet of office space in Hong Kong just this past June. That space had been previously leased by another flex operator. Both Industrious and Serendipity Labs are also potentially ready to expand, according to Ben Munn, managing director of flexible space at JLL.

Corporate demands are increasing for holistic workspace solutions, Munn says. Add the pressure legacy business models are feeling to consolidate, and interest isn’t likely to evaporate any time soon.

The market can expect smaller players to take advantage of these increasing opportunities. Even new operators may stake their claims in the market.

“For example, hotel operators will look at the flex office space market as well as new entrants from within the real estate market. The flex space industry is still in the early stages of its evolution so the landscape will look a lot different in five years’ time,” Munn says in the report.

Expansion can happen via two routes: Taking over the space from another operator, and acquiring business from struggling competitors. The former is the likelier scenario, according to Munn. ”In some cases, the previous operator has exited their lease, or in others collapsed the special purpose entity holding the lease, leaving the landlord with no recourse,” he says. “Or it may simply be that an operator presented unfavorable terms to the landlord for renegotiation and the landlord is taking the opportunity to restructure the workspace proposition in the building.”

Landlords may face some challenges during these developments. JLL is predicting 30% of all office space globally to be flexible in some form over the next decade. That will mean fewer long leases, and valuation will require some fresh thinking.

“You need valuation methodologies which account for variable performance. The traditional, long-leased office is a very simple asset by comparison and with long-accepted valuation methodologies, but also one where there is little room for management to generate outperformance. That will have to change going forward,” says Munn.

As the pandemic winds on, so does the uncertainty tenants feel about what their property needs will be. Workplace solutions are going to vary more widely than in our pre-COVID era, and corporate real estate executives will need to navigate those complexities.

“Flexibility and agility will be increasingly important going forward and the supply side of the market will have to respond to this as we are going to enter a period of oversupply,” Munn believes. ”Landlords that respond to the customer’s needs for flexibility, cost certainty, and all-inclusive workplace product and service propositions will win out.”