Partner Article

How can landlords meet increasingly flexible demand with sustainable flexible supply?

The pandemic’s legacy has significantly impacted traditional work environments. Companies are increasingly recognising the benefits of being flexible, with hybrid work policies and more fluid staffing requirements (e.g. contractors) creating agile businesses that can scale up and down as needed. Unsurprisingly, as the profile of the modern business changes, so does the demand for workspace. There is now a reduced need for permanent office space, as businesses look for flexible solutions to scale their space requirements up or down to align with their wider needs.

The pressures of high interest rates further fuel this demand. Businesses are prioritising cost efficiency, and recent changes in lease accounting regulations are influencing companies to prefer operational expenses over large capital outlays. Then there is the product itself - a desk is just a desk and, with employers looking to retain staff (and reduce the cost associated with hiring) there is a desire for premium, stimulating environments that encourage employee attendance and engagement. The way we view and use commercial real estate has changed completely, and this is reflected in the makeup of a modern office; as of writing, landlords are looking at anywhere between 10% and 30% of their portfolio being flexible workspace.

Challenges in creating flexible workspace As a landlord, you’ll be well aware of the challenges you face when trying to integrate flexible workspaces into traditional office settings. Primarily due to a significant shift in management style, the transition from conventional leasing to flexible workspace management not only involves adapting to higher tenant churn, but also managing increased administrative tasks and having a more involved approach to operational management. Historically, you may have relied on third-party operators, but they are often misaligned with the broader property strategy. I’m seeing more landlords recognise this friction, and they are now increasingly taking a direct role or forming strategic partnerships, aiming for a more seamless integration of flexible workspaces with their overall building strategy.

Operational challenges you might face include acquiring the right technology to both manage the space efficiently and determine the optimal mix of offerings to maximise revenue. These aspects highlight the complexity of creating flexible workspaces that are not only financially viable but also align with the broader objectives of the property and its tenant base. Such transitions require careful planning, a deep understanding of the market, and strategic collaborations to successfully transform traditional office spaces into dynamic, flexible work environments.

While flexible workspaces can generate higher revenue per square foot, the associated risks, such as operator inefficiency in filling the space, cannot be ignored. Recent experiences in the industry, particularly the exits of WeWork and IWG from numerous buildings, underscore the advantages of management agreements. These agreements offer greater stability during fluctuations in occupancy, such as those seen during the pandemic, where landlords still earned a significant portion of their market rent despite reduced occupancy, as opposed to being left with completely vacant spaces.

How to preserve your relationship with existing tenants Flexible workspaces offer you the advantage of a diverse tenant base. Unlike conventional leases, where a tenant’s departure can create significant vacancies, the impact in flexible workspaces is less severe. This diversity also helps mitigate risks associated with specific sector downturns; the banking crisis, for example, had a significant adverse effect on vacancy rates in hubs like Canary Wharf.

Diversification does come with a caveat; you need to balance existing tenants’ needs with the demand for flexible workspaces. However, these spaces do provide more than just office space; they offer an enriched experience with hospitality, community engagement, and amenities. Having sourced and launched a portfolio of 350 buildings in 50 markets, I’ve learned that integrating flexible workspace into the wider property strategy enriches the entire tenant experience, potentially increasing the value of other rental spaces.

Flexible workspace solutions also present a strategic advantage. Without them, you risk losing tenants to competitors when space needs change. Conversely, properties that accommodate diverse space needs can adapt with tenants over time, maintaining loyalty and business. By offering a range of solutions, you can cater to various business types; consider the journey of the 22 Vanderbilt project in New York, where strategic flexibility turned challenges into a thriving business model, reflecting a deep understanding of market dynamics and tenant desires.

Marketing and maintaining flexible workspace If you’ve now created and managed the product, how do you market flexible space? It shouldn’t stray from your overall marketing strategy, and you should merely look to broaden their tenant reach rather than reinvent their offering completely. Collaborating with brokers, listing spaces on workspace aggregators, and engaging with existing tenants can significantly increase visibility and interest.

Technology is essential in managing and optimising flexible workspaces. It streamlines processes and provides landlords with critical data for strategic planning. Advanced tech solutions cater to a younger workforce and startups, enhancing the user experience and can provide valuable insights into tenant behaviours. Emerging trends in workspace design, like the ‘hotelisation’ of office spaces, add hospitality elements to create a more welcoming environment. To stay competitive, it’s crucial that you embrace these trends and integrate effective technology solutions.

The success of landlord-operator partnerships in flexible workspaces depends on strategic lease model alignment, operational transparency, a unified marketing strategy, and redefining the relationship to true collaboration. At Vallist, the focus on aligning flexible workspaces with landlords’ broader property strategies has proven effective. This approach stems from our understanding that a flexible workspace should be an extension of your leasing team, adding value to the tenants and potentially increasing rents in the rest of the space. Decades of experience in the sector has taught me that no one knows their audience as well as you do; we can’t second guess the needs of local markets. Any flexible workspace product needs to be adaptable, and specific, to the workforce that it serves.

Landlords, to stay ahead in the contested commercial real estate market, it’s crucial to pivot towards creating flexible and sustainable workspaces. Embrace technology for efficient management and align your flexible spaces with your overall property strategy. Understand your market’s unique needs and stay adaptable to meet the changing demands of tenants. If you ensure flexibility is a key part of your approach, you’ll not only cater to current trends but also ensure your properties remain viable and competitive in the long run.

This was posted in Bdaily's Members' News section by Vallist .