Landlords To Become “Biggest Competitor” To Flexible Space Operators

Published on August 24, 2020 - By Cecilia Amador de San José

• The virtual edition of GCUC APAC took place last week with speakers from CRE and the flexible space sector.
• The pandemic is encouraging people to reevaluate their workplace requirements, which is driving demand for flexible space.
• Among the key takeaways of the event, landlords are expected to become a major competitor — or partner — to flexible space operators.

The virtual edition of GCUC APAC kicked off last week with a session on real estate. Speakers of the event included Brad Krauskopf from Hub Australia, Ada Wong from Champion REIT, Annie Ricker from Hines, Cathy Hsieh from Swire Properties, and Jonathan Wright from Colliers International. 

The event kicked off with a discussion on the impact of flexible space on real estate. 

“Everyone is saying that they want flex space in their assets.” – Brad Krauskopf

Below you will find our key takeaways from the event. 

There’s a Need for Flex Space

If there ever was a need for flexible space, it’s now. 

24 to 36 months ago, landlords were seeing companies willing to sign long leases — but the reality has changed since the onset of the coronavirus pandemic. People are now renegotiating leases and those looking to sign new ones are looking for shorter, more flexible terms. 

This is good news for the flexible workspace industry, as it presents a new window of opportunity. 

One of which is a potential increase in management agreements. 

Management Agreements Could Become the New Norm

The office situation in Hong Kong didn’t really lend itself to management agreements, Ada Wong commented. 

“For example one of our buildings has an occupancy rate of 99%; in a building like that, you don’t really need management agreements.” 

However, this is likely to change in the near future. Because people are not as willing to sign robust leases now, the idea of a management agreement or joint venture is becoming more appealing to landlords. 

According to Annie Ricker, there is another reason why more landlords will turn to management agreements with flexible workspace operators. 

“If you consider the traditional rent arbitrage model, landlords have started to see the amount of premiums that coworking space operators are able to achieve. Landlords want an in on that. I would venture to say that the majority of deals going forward will be management agreements, joint ventures, or participation leases.” 

Landlords Will Become a Big Competitor 

“Our biggest competitors in the future will be landlords.” – Brad Krauskopf

Because landlords are becoming more aware of the premiums that coworking spaces can achieve and because tenants in general are asking for more flexibility, landlords are increasingly more inclined to offer flex space. 

While some landlords will be willing to work with existing flexible workspace operators in the form of management agreements or joint ventures, others will be more inclined to create and operate their own flexible workspace brand. 

Such is the case of Blueprint, a flexible workspace brand that is owned and operated by Swire Properties. 

Flexible Workspace: It’s about Hospitality

“One of the reasons Hines decided not to go with the self-operated coworking space was because we recognized that the management of coworking spaces is more in line with hospitality and hotel rather than traditional office property management.” – Annie Ricker 

While there are some similarities between coworking and hospitality, Ada Wong notes that there are some key differences. 

“With hotel management, you brand an entire building. The same cannot be said for a coworking space, because usually coworking space is a much smaller component of a building.”

Because the industry is still relatively nascent, the size and length of leases signed by coworking operators is still relatively small. “Once the industry matures more, I think leases for coworking spaces will more closely resemble those of hotels,” Wong noted. 

Defining Flex Space

It’s not just about the length of the lease. 

“Flex is definitely a spectrum,” Ricker mentioned. Coworking is one end of the spectrum, and within coworking there is a variety of space types and models. On the other end, you have long-term tenants that have flexible space within their floors. 

If you take that spectrum of flexibility, the percentage of flexible space that we will see in the future will surpass the 30% predicted by JLL a couple of years ago. 

“At this point, flex is what customers are demanding. But as a real estate company, we need to provide for the different product mixes that people are searching for.” – Annie Ricker 

Beyond the flexibility of lease length and type, flexible space is also about services. Flexible space typically comes with furniture, WiFi, and a variety of layered services that support the needs of different tenants. 

Does Flex Space Impact Valuation?

The jury is still out on this one. 

One of the reasons it’s hard to determine whether flexible space increases building valuation is because the capital markets are not up to speed with where the industry is. Another reason is a lack of data. 

The Challenge in APAC is Regional Expansion

“Asia is an interesting place because it’s so nuanced. It’s really hard to scale in Asia because it’s so different city to city. Hong Kong, Singapore, Sydney, Melbourne would be relatively soft landings for operators but getting into China, Seoul, Japan you need local partners in those markets to be successful.”  – Jonny Wright

With COVID-19, not many operators are looking to expand now. Cathy Hsieh also notes that because Asian cities are small, operators that want to grow and expand need to look at borders and examine their best course of action. 

Flexible Workspace Operators Need to Evolve

“Flexible workspace operators disrupted the real estate market because landlords didn’t evolve. If flexible workspace operators don’t evolve, they will be disrupted.” – Jonny Wright.  

GCUC APAC will happen throughout the course of 4 weeks, with each session taking place on Tuesdays at 8am Hong Kong Time. The three remaining sessions will cover technology, wellness, and best in class ecosystems. You can get your ticket to the upcoming sessions here.