How the Flex Space Business Model Will Change Next Year

Flex space will play an increasingly important role in the future of the office sector as occupiers demand more agility from physical office space, according to a new analysis from Yardi Matrix—and big changes are expected in how flex space operators earn revenue.  

“Going forward, it is less likely that flex space operators will use the revenue model common before COVID-19, where operators signed leases for high-quality space in city centers and then rented the space out to their members,” the Yardi report notes, adding that the firm’s researchers expect franchising and management agreements with revenue sharing to become more common. 

What’s more, “in management agreements, landlords will be responsible for the cost of fit-outs but are able to receive a larger share of the revenue from the operators,” the report states. “These agreements also reduce the risk of leasing to a single flex space tenant and align incentives between the operators and landlords.”

Yardi cites WeWork as an example of one of the more aggressive flex space companies exploring new revenue models; earlier this year, the company followed its IPO-via-SPAC with a partnership with Saks Fifth Avenue to convert some retail space into flex space, and it also received a $150 million investment from Cushman & Wakefield to combine its hospitality and technology services with Cushman’s asset and facilities management services. 

Other real estate service firms are taking note: in 2021, CBRE acquired a 35% stake in Industrious and Newmark purchased Knotel out of bankruptcy.

Jamie Hodari, CEO of shared office provider Industrious, told CBRE’s Spencer Levy in a podcast this summer that his company⁠ hit three times their pre-COVID sales average in June 2021, and  “I have to think we’ve hit the ceiling.” 

“There’s no way we’re going to hit four or five times, but you never know. But yes, we are in the heart of a moment right now where there’s an extraordinary rush to use flex,” Hodari said. “It’s pretty widely distributed. There are some cities that are lagging, but it’s happening all across the country. They are definitely buying flex in volumes that exceed what you saw pre COVID.”

Flex space is becoming increasingly en vogue among office occupiers: a CBRE survey of 77 global companies earlier this year reveals that 86% will include flex space as part of their real estate strategies. At the same time, only 5.6% of office buildings have a flex space within their properties, according to Yardi Matrix, and most of those buildings are “highly clustered” in just five markets: Manhattan, Los Angeles, Washington, D.C., Dallas and Boston. 

Market perception of flex office space has also improved significantly this year: a recent report from JLL notes that while investors have typically employed a more cautious approach to flex space, the share prices of publicly traded flex operators like IWG have climbed since the pandemic’s early days. (KKR and TIGA’s majority stake in TEC is one such example.)

“While there has been  much speculation as to whether remote work will become permanent, firms still need physical space for training, collaboration and culture building, and flex space is emerging as a solution,” the Yardi report notes. “In the near term, flex space can bridge the gap between an uncertain future and the needs of the present. In the long term, shared space will play a vital role in providing the flexibility that is crucial to attracting and retaining employees in a tight labor market.”

The challenge for landlords, of course, will lie in “how to deliver flexibility when lease duration and long-term committed cash flows have historically driven asset values, liquidity and the availability and cost of financing,” according to the JLL report.