For Uncertain Office Tenants and Landlords, the Future is Flexible

Office tenants are looking for flexibility now more than ever in a post-pandemic world. This past summer, JLL predicted that flexible arrangements could account for 30% of all workspace by 2030.

That’s because many companies will likely decentralize larger headquarters and set up hub-and-spoke satellite branches, while small teams and individuals might need access to office amenities just one week of the month or several months of the year.

“Coworking” setups like those provided by WeWork are usually what comes to mind when flexible spacing is needed. But WeWork and other burgeoning coworking space providers were starting to show evidence of shaky financials even before 2020. Reliant on hot desks and worker density, the business model was essentially nulled by social distancing requirements.

So what’s next?

Unlike coworking firms that are on the defensive — trying to figure out how to restructure their existing obligations going forward — new flex space business models are pioneering “new normal” solutions, said Ryan Smith, the co-founder of one such emerging flex space provider, Ivy Offices.

Landlords presiding over coworking operators are on the outs as well, but it doesn’t have to be that way, the firms espouse. The solution, they say, is to reestablish the direct relationship between landlord and tenant and do away with the coworking middleman.

LoopNet spoke with Smith and other thought leaders to get a better idea of how flex space management can be improved to better serve both tenants and landlords.

WeWork, perhaps the most well-known “coworking” space provider, along with its contemporaries such as Convene, had been catering to an immutable need for individuals and teams to access on-demand or short-term workspace. By 2019, the business model it created was replicated in various formats by numerous operators to the point of nearly saturating the market.

Referred to as “intermediaries,” these coworking providers lease space from landlords then modify the layout to maximize revolving flex space agreements for end users. But regardless of how their agreements play out, “profitability in these types of coworking spaces is driven by high seating density and rental arbitrage,” JLL said in its July 2020 report about COVID-19’s impact on flexible space. Rental arbitrage in this case, similar to that of Airbnb-type business models, is the practice of leasing or owning space and renting it out in short-term agreements for profit. But in the age of 6-feet-apart social distancing requirements, spaces that rely on these arrangements “will record extremely low utilization rates and in some cases remain nearly empty.”

“The trend toward increased density, open workspaces, hot desks, hoteling and blending social and work spaces ended precipitously,” Boxer Property Management said in an April 2020 white paper, in which it touts its model as one that enables landlords to provide flexible workspace in an age of coronavirus and beyond “without costly and conflicted intermediaries like WeWork and Convene.”

Boxer’s solution, called Workstyle, helps landlords deal directly with short-term and intermittent office space users by designing, configuring, managing and marketing a range of modular office spaces within a building that can be upsized or downsized as needed, providing both traditional and flex tenants “flexibility as an amenity.”

And it’s not alone in this approach. Other firms, like Ivy Offices, are formulating strategies that they say both empower landlords dealing with vacancies and unlock a range of potential for users uncertain about whether they’ll need more – or less – space at any given time.

JLL referred to this type of approach as a hybrid model of coworking and traditional leasing that should be able to “withstand the storm,” more so than “pure coworking models,” which “will likely suffer from the impact of COVID-19 … and close.” As those companies fold and stop paying rent to landlords, all while the need for what JLL calls “agile space strategies” intensifies, the flexible office space segment becomes ripe for consolidation among opportunistic operators and investors.

“With the hub-and-spoke model starting to take effect, we think a lot of the suburban markets are going to be very desirable for the flex model as tenants look to decentralize their primary office locations in urban markets but seek more flexible terms, not really knowing ultimately the growth [or decline] of their individual workspace needs,” Smith explained.

“We think flex space is going to be critical for landlords to have as part of their portfolio within their office buildings, to be able to capture that tenant demand going forward,” he added. As WeWork and other coworking providers scramble to restructure and provide this space, owners of smaller, suburban offices, for instance, are better positioned to capitalize on this demand for flex solutions – and they might need to do so to survive, in some cases.

The best scenario, JLL said, is for landlords — or their property management partners – to begin to provide their own flexible space solutions. It expects a “significant shift in flexible space operating models, with investors leading the charge principally by self-performing the space with management structures,” rather than relying on riskier sublease-like models.

Many landlords, however, aren’t equipped to take this challenge on, Smith explained.

That’s where firms like Boxer and Ivy come in. While unique in several ways, both eschew intermediary leasing and instead manage flex space offerings on landlords’ behalf.

Unlike coworking space providers, both upstarts sign agreements with landlords to manage an entire property. Instead of having one team handling the building’s direct tenants and a separate one juggling licenses and flex space users all while both oversee a divided set of amenities, a single entity manages it all. “The provision of flexible space must be integrated into the operations of the entire building and be delivered by the same team handling overall property operations,” Boxer’s Head of Flexible & Innovation Space Marc El-Khouri said in the report.

Boxer designs floor space comprised of “micro offices” that can provide four walls and a door to an individual user or be combined and configured into various blocks to account for group spaces of varying sizes. As tenants’ needs change, the building’s landlord can readily provide its direct tenants additional space on a short- or long-term basis while continually reconfiguring and marketing the remaining space to accommodate freelancers, small teams and other short-term users, adding or subtracting Workstyle offices to agreements as required. It’s able to do this by making “minor up-front design concessions,” such as door placement, hallway termination and strategically placing a lounge or reception area. Similarly, Ivy hopes to establish in-house designers to help make bespoke, branded solutions for short-term clients while keeping overhead and capital expenditures at bay. Modifying spaces is expensive, Boxer says, unless changes are anticipated in the floorplan’s upfront design.

Ivy, in a similar vein, manages “the complete lifecycle” of a flex space user for a landlord by handling everything from bespoke design-build to daily operations and by working “in conjunction with the building’s leasing team to fill the space,” Smith said.

Amenities, too, become an integral part of the building ecosystem. “Once a landlord has engaged with us for their entire building, any tenant in that building becomes the beneficiary of the Ivy platform,” Smith said. That means flex users can book any available space in the building, allowing landlords to monetize underused amenities, while long-term lessees can also access the types of flex user amenities that would otherwise be confined to an intermediary’s clients.

“One of our big differentiators,” Smith said, “is that once we build out amenities – be it lounges, conference rooms, theaters or whatever the building might have on site … those spaces benefit the entire building population … and can be booked and managed through our tech platform. If there’s a conference room on the 20th floor built out as a flex space, for example, we can open that up to all other tenants of the building who may need a conference room.”

Ivy even extends this ecosystem beyond the building to any beneficiary in its network.

“Not only can those tenants in the building engage with on-site amenities, but any other tenants that are part of the Ivy network, from other buildings within the city or the country, have the ability to use amenities in other Ivy-operated buildings,” Smith explained. “You can reserve a single desk or a conference room or get a day pass for the gym, and the beauty of that is that now all of the sudden you have tenants in an Ivy building that have much broader opportunity to use resources and amenities across a big portfolio. And now, as a landlord, you can promote that to attract new tenants.”

Unlike the traditional coworking model, in which the intermediary can often end up in competition with its own landlord, Boxer’s and Ivy’s strategies remove that friction and plug the landlord more directly into the market.

“We think the [intermediary] lease model puts you in an adversarial position with your landlords, because now all of the sudden, if you lease two floors that you’re now turning into a flexible workspace, you’re competing with the same building you’re in to now go and capture those tenants,” Smith said. “So we think that’s a bad business model. We think we should partner with landlords so we’re all on the same page, and we’re trying to promote every space in the building, whether it’s under flexible lease terms or longer lease terms. We want to be mutually aligned with those landlords to bring the best solution to the property.”

Boxer also markets the building’s flexible space to all potential users – ranging from an individual who needs a single office for a week to a team that requires a longer lease and a full floor. “When a smaller user is successful and needs to ‘graduate’ to larger, more traditional space, Boxer avoids the conflicts often seen between the asset owner and the intermediary,” the firm said in the report.

Landlords and property managers aren’t often equipped with the tools and experience required to manage flex space, though. For both firms, technology is crucial.

“From a management standpoint, we have a tech platform that is able to completely digitize the entire end-to-end tenant lifecycle, so everything from signing the initial lease to tenant payments to amenity reservations can be done online and integrated into the property manager’s management software program,” Smith said.

Similarly, Boxer uses its proprietary Stemmons Enterprise software to handle its entire tenant lifecycle management. The system can conceptualize “synthetic spaces” to help market different combinations of space that could be created, the firm said. The technology is also pivotal for everything from lease and license generation, to inspections standards reporting, to customer request management, to reserving amenities and booking a caterer.

The idea of ‘flexibility as an amenity’ is likely here to stay. In the current climate, “67% of CRE decision-makers are increasing workplace mobility programs and incorporating flexible space as a central element of their agile work strategies,” JLL concluded.

“After the initial wave of uncertainty has passed, some of the larger, well-capitalized flexible space operators will restart their expansion drive, picking up assets and market share from those unable to weather the storm,” JLL said. “This is likely to be boosted by large organizations’ unwillingness to commit to large [capital expenditure] projects and therefore opt for pre-built space and lease flexibility.” Market consolidation will yield a healthier marketplace, it added.

“The genie will not go back into the bottle,” Boxer’s El-Khouri said. “Smaller, dynamic companies will continue to exist and will want short-term, ready-to-occupy spaces. Larger organizations will continue to want marginal flexibility in the form of on-demand flexible space as a supplement to their long-term commitments. In this context, the internalizing of flexible space management has turned from luxury to necessity.”