Written by Douglas Green is a director of GKRE
The growth of the flexible workspace sector is a global phenomenon. The amount of flexible workspace in the 20 largest flexible office markets grew by 30% in 2017 – equivalent to around 10.8 million sq ft.
Central London alone saw 2.5m sq ft leased to flexible workspace operators in 2017 a rise of as 190% on the previous year, putting it ahead of New York. Such growth is being driven by the changing realities of modern businesses and their need for cost efficient flexibility and scalability. Some forecasts suggest the market will continue to grow at a rate of up to 30% per year over the next five years across Europe as a whole.
Landsec, one of the UK’s largest commercial property owner recently revealed the name of its flexible workspace brand, Myo, following British Land and the Crown Estate which both launched flexible workspace propositions last year.
These developments provide further evidence that growth in the sector illustrates a structural shift in the way tenants approach the use of office space. Growth companies aiming to scale-up are increasingly looking to flexible workspace providers to facilitate their expansion. Meanwhile, where once property owners were faced with a limited choice of flexible workspace operators to partner with as the sector has flourished a greater number of operators have been established offering a greater variety of services.
Property owners now recognise offering flexible workspace is one of the best ways to attract tenants to their buildings and ‘incubate’ them for future growth. Given both the increasing demand for flexible workspace and the level of competition in the market, property owners that have yet to create a flexible offering should consider the various options available to them. In most cases this will involve working with an existing flexible workspace operator and it is the relationship with that operator that could prove crucial to a property owner’s future success.
There are four main options for a property owner looking to break into the flexible workspace market. The first option is for property owners to grant a traditional lease to flexible workspace operators. As the office will be run by the operator, the owners will have no control over service levels, client retention or indeed ownership of the clients. It is however a traditional landlord and tenant relationship that has worked for centuries.
Another option is for commercial property owners to run their own flexible workspace platforms, as has been the case for British Land, the Crown Estate and most recently Landsec. In doing this companies reap the benefits of retaining all of the profit and control but take on all the risk in a dynamic and sophisticated market.
Property owners also have the option to invest in an existing operator. This was the approach taken by Blackstone, the world’s largest real estate fund manager when it purchased a majority stake in The Office Group, valuing the operation at £500 million, or RDI REIT’s acquisition of a controlling stake in Office Space in Town’s London portfolio. Most recently Asian family office Celvam Management acquired London Executive Offices for £475m. Brockton and The Carlyle Group have also opted to ‘buy in’ knowledge and a sound business.
We believe that the middle ground is for property owners to collaborate with flexible workspace operators, through a management agreement or other forms of joint venture. Under management agreements the property owner outsources the sales and marketing of the space to a flexible workspace operator through an operating agreement. These agreements allow property owners to mitigate their risk through utilising the expertise of established flexible operators while providing returns that are often in excess of ERV.
Property owners must be clear that management agreements are not a traditional property transaction and as a result both parties must understand each other’s roles and responsibilities from the outset. Upon entering a joint venture property owners must also be realistic about their revenue expectations and time-frame whilst looking to reward the operator with a fair fee and profit share opportunities. These expectations will be crucial to the fostering of healthy relationships between property owners and flexible workspace operators.
The office sector has changed completely and the successful property owners of the future will be those that view their own office space as a service. In seeking to capitalise on the growing flexible workspace sector property owners will need to carefully consider their approach and who they partner with. For many of the larger property owners and funds, such as British Land and L&G, launching their own flexible offer makes sense. But for the majority of the mid-cap property companies partnering with a flexible workspace operator, ideally through a joint venture or management agreement, is probably the best approach.