Flexing

Over the past couple of decades the long term office lease has become increasingly challenging for occupiers.  Demand for space has always been cyclical, rising and falling with the economy, and technology has continued to make it easier for workers to be productive from anywhere.  While shared space, or coworking solutions have been around for decades, the scale of the industry expanded rapidly during the period from 2010 to 2020, especially through the Softbank-funded expansion of WeWork.   Coworking is a form of flex leasing that is characterized mostly by spaces that are broken into component parts, offering members shared access to services and amenities.  The space between coworking and long term direct leasing of separately demised office space is a relatively new place in which a tenant can secure a flexible lease (shorter term of 6 months+) on a fully demised, prebuilt, furnished space which does not include managed services.  This is the latest and perhaps most consequential form of flex leasing.
 
As a product category, these types of flex leases have been slow to emerge primarily because of the historical financial structure of office building investment which targets long term, stable cash flows and risk avoidance - - - effectively the opposite of flex leasing.  In contrast, short term flex lease models, by design, expose the landlord/operator to ongoing risk of turnover.  Yet what is becoming more clear is occupiers are willing to pay a premium to secure flexible lease alternatives. 
 
The majority of flex space is presently controlled by third party operators, those who take a direct lease from a landlord, create the flex offering and look to sublease it to occupiers at a profit.  These operators have essentially proven the business model.  Given the high vacancy and declining rents challenging landlords today, we anticipate an acceleration in new flex space options being offered directly by landlords, sans 3rd party operators.  This will benefit occupiers in several ways.  Firstly, when there is no middleman, the cost of the flex solution will be lower.  Secondly, as more landlords enter the market, flex supply will increase.  Lastly, office buildings will become more versatile, offering occupiers a variety of leasing solutions ranging from long term, to coworking to flex.
 
This is an important time of significant change in how investors shape the office product to meet evolving occupier needs.  For the first time in the past century, companies will enjoy a broader array of leasing options, enabling them to be more targeted in their commitments.  Flexibility will be the single most important objective of nearly all companies as they craft their future workplace plans.