Flex Space: Here Today, Booming Tomorrow?

As CRE sectors across the globe begin to find equilibrium after the disarray prompted by the pandemic, the question teasing industry stakeholders’ minds is which trends are here to stay and how will they affect the market ecosystem?  One of the pre-pandemic trends that is still setting the industry abuzz is CRE flex space.

The Flex Space Attraction for Employers is Undeniable:

● Flex space provides turn-key productive work environments that drastically cut business real estate costs while increasing agility
● Companies can operate asset-light, selecting space solutions that suit their evolving objectives
● The corporate footprint can disperse regionally to suburban areas allowing employees to work closer to home instead of commuting to headquarters in tier one cities

According to JLL, flexible workspaces grew at an average annual rate of 25% pre-pandemic. Though operators took significant hits in 2020 as offices vacated, COVID-19 may yet serve to be the catalyst for an explosion in increased adoption.

“In a revived post-pandemic market where flexibility is high on the corporate agenda and the purpose of the office centered around collaboration, flexible space should emerge stronger than ever, and growth could quickly return to its impressive pre-COVID rates.” – JLL

Post Covid-19 Workforce Impacts

COVID-19’s disruption has transformed how people, employers and institutions perceive, interact, finance, and occupy commercial real estate. Employer focus is shifting from the property asset to the workforce, relating to space as a function to facilitate and improve team dynamics, collaboration, innovation, and growth.

On the heels of embracing remote working conditions for the pandemic’s extended duration, capital once reserved for long-term lease or real estate purchase may be reevaluated and lent to other objectives as companies adopt more agile business approaches. We anticipate a growing number of companies will cut their real estate costs by adopting the flex space model, following in the footsteps of corporations such as Microsoft, IBM, and Facebook.

Agility is becoming increasingly crucial in companies’ business strategy as they look to quickly pivot and react to financial market volatility, technological advancements, fluctuations in demand, and black swan events like a pandemic. These variables are propelling the demand for flex space in the CRE market; a flexible workspace revolution is on the horizon, and the supply chain must adapt.

Time for CRE to Adapt and Adopt Change

The CRE sector is a legacy industry in which the supply chain has seen remarkably little change over the last few decades. Demand for greater flexibility in office arrangements, whether shorter lease terms or a flex space arrangement, is creating varying degrees of uncertainty for office loan providers over the future of the asset’s income generation. In a recent Occupier Survey report, “CBRE found that capital markets are cautious on buildings that dedicate more than 15% of their space to flex.” As demand for shorter and more flexible space arrangements rises, lenders will need to reexamine and amend how they perceive and value office loans for short-term leases.

In terms of valuations, lease length has traditionally been an essential consideration for valuers, with longer lease agreements perceived as more favorable, contributing to an asset’s value. Shorter lease arrangements should not be the determining factor that dictates a lower evaluation. For example, in many cases, shorter leases and flexible space arrangements come with ancillary services that generate additional income for landlords & operators.

The pandemic is accelerating the market trend towards flexibility and service-based models that have become so pervasive in other industries in the last decade. The trend is here to stay, and to grow. Forward-thinking lenders should look to flex space and leases not with uncertainty but with opportunity in mind and reevaluate their risk aversion accordingly, lest they be left behind.

March 15, 2021