An Oversaturated Flex Space Market Could Easily Deflate

The flex office market already looks like it will see a comeback. Indicators range from the resurrection of WeWork into a publicly held company through a SPAC to a deal with JLL to market and lease co-working spaces in 38 locations across seven U.S. cities.

A JLL survey of 2,000 office workers showed that two-thirds want to work from different locations, suggesting that after a pandemic, there may be multiple places as good as, or better sounding, than another day at home.

According to a CBRE analysis, “Occupiers are increasingly demanding flexible space options, shared meeting space, indoor air quality, connected building apps and touchless technology when considering new leases.” Flex space needs will likely increase “as occupiers shift their strategies away from long-term capital-intensive commitments.”

In addition, workers feel like they can insist on new solutions. According to the ADP Research Institute’s People at Work 2021: A Global Workforce View, two-thirds say they “feel more empowered to take advantage of flexible working arrangements,” up from 26% just before the pandemic hit.

But even if the demand is clear, there is still the question of how much inventory can the market support. “Anyone who says they know exactly what will transpire is lying through their teeth,” Charlie Morris, practice leader for the flexible solutions team at Avison Young, tells GlobeSt.com. “Every single company is different.”

About 2% of office space is currently flex in some fashion, according to Morris. “We’re talking about a 7-to 15-fold increase over the next decade,” he says.

There are a lot of players, including “thousands of different product solutions companies,” Morris says. 

Then there are the landlords. “The tenant wants less space, so landlords are going into the business either partnering with someone or doing their own flex office space,” Robert Linton, a member and real estate practice group leader at Dykema Gossett, tells GlobeSt.com. That’s particularly true as major names try to cut better deals.

“The tenants—the WeWorks and Reguses and Industriouses—are going to their landlords and saying, ‘I won’t lease it as a structured lease as a fixed rent. I want you to partner with me under management agreements,’ where the landlord gets paid a piece of the revenue the flex office space operator gets,” Linton says. “Landlords don’t like that.”

As the flex space operators and owners of office buildings, hotels, multifamilies, and anything else with dragging vacancy rates jump onto the bandwagon, there’s a “definite risk of over-supply,” according to Linton. Some recent examples: apartment REITs such as AvalonBay Communities and Equity Residential are making private spaces in their apartments available to residents as a place to work, according to a Wall Street Journal article. 

Morris sees a bifurcated immediate future. “I think that demand is going to outweigh the viable supply,” he says. “There’s a lot of supply out there and more coming.”

However, he thinks there “could be an oversaturation of the wrong product if not thought about it appropriately.”

“There are literally thousands of very sound operators in this space and most people don’t realize how many of them are actually profitable,” Morris says. “A lot of those smaller players very well may be the right company to engage with if you’re the owner or the occupier. But most people in the occupier, owner, and, candidly, brokerage world don’t understand.” The result could be space that doesn’t work for employees or employers and sits around.

“People are not stepping back and thinking about what’s the right strategy for them,” Morris says. “They’re swayed by the dynamic salespeople and providers out there.” What they need to do is stop being reactive, “which is what’s been happening for the past decade.”