Flexible office space is poised for a comeback, a year after the COVID-19 pandemic shuttered new leasing activity and drove leasing volume down 92%, according to a new report on the state of the sector from JLL.
Flex space enjoyed a meteoric rise from 2014 to 2019, with average of 25% growth per year. In 2019, pre-COVID, it made up as much 20% of leasing activity in cities like New York and London. But what made flex space so attractive pre-pandemic would ultimately prove to be its undoing as COVID-19 swept across the country last year.
Yet there are signs the sector is digging out of its COVID hole, the most high-profile example being WeWork’s recent comeback (in the form of a merger that will take the company public via a SPAC). The deal will give the flex office provider $1.3 billion in cash to fund its growth plans after a year in which the company significantly scaled back its footprint and obligations. In 2020, WeWork executed over 100 lease amendments for rent reductions, deferrals, or tenant improvement allowances resulting in an estimated $4 billion reduction in future lease payments.
And as landlords reposition real estate strategies in light of an enduring preference for hybrid work environments, demand for flex space is expected to deepen. A recent JLL survey of 2,000 office workers revealed that two thirds want to work from different locations post-COVID, and office owners are responding by “actively increasing” the space in their buildings devoted to flex work.
“This is more meaningful than a shifting of deckchairs,” says Ben Munn, managing director of flex space at JLL, in the report. “Companies and investors are taking a different view on flex space entirely and are willing to invest because they see this as a bigger proportion of the overall office market than it is currently.”
Munn says that the flex market will return to growth in the second half of 2021. Some flex space operators will opt to share revenues with landlords via management agreements, looking to the hotel sector as a guide.
“This leaves flexible space operators free to expand without the burden of lease obligations, a model that has been validated by the hotels industry,” the report states. “Like hotels, desk space will be aggregated and technology will underpin a new, global network of managed space so users can see flexible offices near them at the touch of a button”—a phenomenon Munn calls “the future of flex.”
Investors are increasingly looking to assets with large amounts of flex space as attractive opportunities, in a “seismic shift” away from traditional thinking. But, Munn cautions, investors and office owners should be cautious and partner only with trusted, well-financed providers.
All told, Munn looks for the next year or two to be disruptive and innovative for the sector and for CRE more generally.
“I liken it to the dot-com boom,” says Munn. “We had massive amounts of capital flowing into the growth of a fast moving, but relatively small, real estate segment and some of that got blown out because of a lack of understanding and risk. But those early movers have paved the way for the sector.”