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Why Landlords Will Determine The Fate Of Flexible Workspace Operators In A Recession

byCecilia Amador de San José
September 19, 2019
in Business
Reading Time: 4 mins read
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Evolving lease models are changing the risk and reward dynamics for operators and property owners.

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  • Research from CBRE shows that flexible space currently accounts for almost 2% of total U.S. office inventory, and this is expected to rise to 13% by 2030.
  • In a downturn, the fate of flexible operators will be determined by landlords, as they will choose whether or not to share the risks and rewards.
  • However, in the future this could change, as the traditional lease agreement is evolving and changing the risk and reward dynamics for operators and property owners.

CBRE recently published the report “Let’s Talk about Flex: The U.S. Flexible Office Market in 2019”. The report takes a close look at how flexible workspace offerings have caused a structural shift in the U.S. real estate industry and it also explores the potential growth opportunities of the sector, as well as how it may fare in a recession.

Flexible workspaces have become the new normal, both among companies and building owners. One of the main drivers of recent flexible workspace growth has been increased adoption of the model by enterprise clients. According to CBRE, this model is the one that will continue to drive the exponential growth of the sector in the future. 

Key Facts and Figures from the Report

  • By 2030, flexible space could account for 13% of total U.S. office supply.
  • Currently, flexible space accounts for just under 2% of total U.S. office inventory. 
  • San Francisco and Manhattan are the most penetrated office markets with flexible space, with 4% and 3.6% respectively. 
  • Most markets have higher levels of flexible space penetration in Class A buildings, and yet 38% of flexible workspace supply is found in Class B and Class C buildings. 
  • The top 10 flexible workspace markets account for 64% of the 71 million square feet of flexible space tracked by CBRE.
  • Manhattan accounts for 21% of that 64%. 
  • Since 2010, flexible workspace supply has increased by more than 600% for an average annual growth rate of 26%. 
  • The annual growth rate this year (H1) stands at 34%. 
  • The fastest growing flexible workspace providers by volume that are not among the top 10 largest operators (yet) include: CommonGrounds, Venture X, Serendipity Labs, and Common Desk. 

Towards 2030: 3 Possible Scenarios

For this report, CBRE constructed a model to predict the amount of flexible space that may be delivered to the market by 2030. The analysis presents three possible scenarios: low-growth, mid-growth, and high-growth. 

1. Low-growth

This scenario is only likely to happen in a recession and it “assumes that flexible space operators will continue to gain market share of the client base that is core to their business today.” In this scenario, flexible space would only increase a total of 6.5% by 2030. 

2. Mid-growth

This is the most feasible scenario according to CBRE. In it, flexible office space would grow to represent 13.3% of total office supply by 2020. This means that the industry would grow by 545 million square feet over the next 10 years. 

3. High-growth 

This scenario would require the industry to grow exponentially over the next 10 years, growing to represent 22.2% of total office supply by 2030. To put this in perspective, the industry would need to grow to encompass 1 billion square feet! According to CBRE, this scenario would only be possible if corporate occupiers adopt a new strategy and convert some of their traditional leased space into flexible space. 

Let’s Talk Recession

In CBRE’s words, “a recession will affect the supply-and-demand dynamics of the flexible office market just as much as it will the traditional office market.” While it will likely dampen demand for flexible space and the number of providers is likely to shrink, the industry as a whole is expected to survive. 

Some flexible workspace operators will survive and others will not, especially because profit will be harder to sustain in a market with declining rents. It will be a challenging time for operators, but the good news is that “the real estate industry’s structural shift to delivering more flexibility to tenants is here to stay, regardless of a recession.” 

To increase their chances of survival, flexible workspace operators will need to work closely with their landlords in order to correct the pricing dynamic. The landlord’s decision — either to share the risks and rewards or not — “will ultimately determine the fate of flex operators in a recession.”

Changing Winds

Two things are set to shape the future of the industry. The first is that the industry is ripe for consolidation and increasingly we will see lower-quality players disappear. 

The second is the way landlords are approaching the industry. “Although traditional leases remain most prevalent, partnership and operating agreements between landlords and third-party flex operators are growing in popularity.”


Suggested Reading: “Top 5 Ways CRE Is Crossing into the Coworking Industry”


These evolving models are changing the risk and reward dynamics for operators and property owners, and eventually “there will be far fewer traditional leases between landlords and operators with more onus on landlords to accept and manage risk.”

 

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Tags: CRE
Cecilia Amador de San José

Cecilia Amador de San José

Cecilia Amador de San José, Senior Associate Editor of Allwork.Space, is based from wherever her laptop is. She enjoys traveling and visiting new flexible workspaces.

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