Industry Experts Warn Of “Too Good To Be True” Management Agreements

• Will Kinnear, director of HEWN warns operators and owners “not to get caught up in a deal that sounds too good to be true.” 
• The warning comes amid the race for high quality space and an increased appetite for management agreements. 
• It is thought that currently less than 3% of the flexible workspace market is made up of management agreements, although HEWN predicts this to rise to 30% by 2035.

The relationship of business towards the office is changing, with the pandemic accelerating changes that have been in the works for the past decade. The office no longer serves merely as four walls to work within, a quality office is an attraction and the potential decider between an employee staying or leaving the company. There is a shift on all fronts: towards agility, ESG accountability, flexibility and services. 

With the race for high quality space and product comes an increased appetite for management agreements, of which Will Kinnear, director of HEWN warns operators and owners “not to get caught up in a deal that sounds too good to be true.” 

Recent research by Savills (October 2021) finds that 41% are open to the idea of management agreements with 54% more likely to consider a management agreement – though half the considerers feel this is ‘out of necessity’ (*29%). 

Will Kinnear, Director at HEWN comments: “Management agreements are a beast of their own; over the last decade I’ve been navigating the complexities. The pandemic has caused owners to consider them more than ever – which has huge benefits for communities and businesses – but it does come with risk if advice is poorly given. 

“There are several aspects that can cause issues, perhaps not at the outset but moving forward during the term of the agreement. It has to be remembered that these are not real estate transactions in their truest form. There is no Landlord and Tenant relationship created and it is only where a true partnership is created that a successful relationship can thrive with both parties understanding the risks and rewards. 

“I am aware of a number of recent examples where responsibility, risks and rewards aren’t equally balanced: whilst this won’t impact the short-term, these discrepancies will cause issues in long term.” 

In essence a management agreement is defined as a service agreement between a property owner and the operator; these agreements enable owners to hand over day-to-day management of these spaces to operators utilising their product, management, service and marketing. For many owners, this is ideal as considerable time and resource is required to create and run these operations. 

It is thought that currently less than 3% of the flexible workspace market is made up of management agreements, although HEWN predict this to rise to 30% by 2035. 

“The pandemic has fast forwarded the changes we were already seeing in the commercial market; the power dynamics have changed between owners and occupiers; and whilst occupiers have always demanded flexibility they are now able to find space that meets their demands. Owners need to understand that the way space is now consumed has changed, it is no longer just the case of four-walls but a quality design, hospitality and service which owners may not be able to provide,” adds Will. 

“It’s an exciting time for the sector, however, over the last 18-24 months, I’ve seen a number of operators enter into agreements that won’t work in the long run: this will be to the detriment of the sector and for owners moving forward. What’s worse, the consequences will not be seen for several years as the shortcomings can potentially be disguised as poor market conditions.”