The 3 ways landlords are succeeding in flex office sector

Over recent years we have seen landlords placing a greater importance on the inclusion of flex office space as they recognise the growing need to offer tenants greater choice and flexibility, writes Cal Lee, global head of Workthere, the flexible office business within Savills.

As a result we have seen a rising number of landlords looking to expand and launch their own products in past years, however this year our Landlord Flex survey found that the number willing to create their own brand has reduced from 29% down to 22% as the challenges around doing this become more apparent. As a result, it is no surprise to see within the same survey that the number of landlords open to using a management agreement structure has risen from 41% in 2020 to 46% in 2022.  With more management agreements being agreed, we have seen landlords improve their knowledge and understanding of how they work and the benefits they can bring.

There are a number of ways that landlords have entered the flex office sector with some going direct and others partnering up with an existing provider. It largely depends on what type of investor or landlord you are and what sort of investment horizon you have. Overall we see three broad approaches that have had the most success thus far:

1. REITs, long-term holders

Several REITs and those with long-term hold income strategy are the most active in developing their own brand of flexible workspace, with examples such as Storey (British Land), Myo (Landsec) and GPE. We also expect to see more examples of owners that have created their own spaces as it becomes increasingly important not only to meet demand, but also to drive income growth through the premium rents they can achieve. Many are happy to create their own brand and learn the lessons through this process on the basis it becomes such an important part of their overall offer in the long term.

2. Institutional investors, medium-term investors

There is less appetite from this investor profile to create and develop their own flex operation, however they do recognise the importance of a flex offer within a wider office or mixed-use scheme and therefore do look to partner with operators either on a lease or management agreement basis. This allows them to leverage their resource and expertise, and if a management agreement is in place, it has the extra benefit of a share in the potential increased return. A recent example is the deal between CBRE IM and Spacemade at Brindleyplace Birmingham.

3. Private equity, shorter-term holders

Private equity investors are much less likely to create their own space, or even do a management agreement where returns in a short period might not amount to what is required. Instead we’ve seen this type of investor look at purchasing actual operators and scaling via asset purchases or operational agreements. Castleforge’s creation of Clockwise as their operating model is a prime example along with Carlyle Group and Uncommon. We are aware of several PE houses seeking to grow their exposure to the sector via this type of arrangement.

Gaining traction

The increase in landlords expanding and entering the flex office market has had a direct impact on the growth in investment and co-investment across their estates and has seen the question around the influence on value gain more traction.

Can flex improve the income return and what impact might it have on yield? Our survey revealed that 61% of respondents would be comfortable letting 10-25% of a hypothetical 50,000 sq ft building to a flexible office provider. This proportion of the building let to a flexible office provider was the most popular quantum in our previous 2021 survey and has increased from 50%, underlining the importance of incorporating flex office space in a multi-let office building. Certainly anecdotally, we see income premiums being achieved for the right space in the right location, with several landlords going into flex direct benefitting from this, as well as those leveraging an operating partner via a management agreement.