still the future of
office space?

Flex was the biggest disruptor to hit commercial real estate in…well, ever—and made plenty of news over the past year. Is it still relevant post-COVID?

July 24, 2020

Few things have disrupted commercial real estate like flexible space or coworking. In 2018, one could barely utter the word office without also mentioning the growing flex space market. But then came the downfall of one of coworking’s biggest operators and soon after, the coronavirus pandemic.

Is flex space still relevant in a post-COVID world? What can investors, lenders and others in the capital markets do to value properties containing flexible space?

On the heels of JLL’s latest report “The impact of COVID-19 on flexible space,” James Cook sits down to speak with JLL’s Global Flexible Space Lead, Ben Munn. The two discuss the demand for space and why the flexible space operating model may be even more popular as we enter the recovery phase. 

James Cook: [00:00:00] Flexible office coworking space. I know I like to use it myself, but I also know there's a lot more for me to learn. How is flex space changing in the face of COVID-19 and what do owners of office properties need to know about it? This is building places where we look at the world of commercial real estate through the eyes of the experts that study it every day.

[00:00:24] My name is James Cook and I researched real estate for J L L. Today, I'm making a transatlantic call to talk with flex expert Ben MUN flex expert, flex Bert.

[00:00:35] Ben Munn: [00:00:35] Hey, good morning.

[00:00:37] James Cook: [00:00:37] Hey, good morning. I'm

[00:00:39] Ben Munn: [00:00:39] Ben Mon, I head up JLL.

[00:00:42] James Cook: [00:00:42] Then I hear this term flex. I always am hearing about coworking. I know. I definitely know what that is.

[00:00:48] Are they the same thing?

[00:00:49] Ben Munn: [00:00:49] Oh, working is part of flex, but flex is a much broader spectrum of choice within how customers can buy time in space from lobby areas. Ammenities spaces, building lounges. Through more formal coworking spaces where you're paying for a membership or where you're paying for a four person office through that more traditional serviced office executives, suite up to fully service spec suites, where as a customer, you have some choice in the look and feel of the space through to expose managed spaces that can be provided by the landlord or by a provider of that spaces.

[00:01:34] For themselves. So there's really a broad range of when we think about flex. I think the, the key things to think about are typically it's a relatively simple price for the end user from free, right? Within building communities through to a kind of all inclusive price for your more bespoke managed space.

[00:01:54] So there's a certain level of clarity and certainty around price, which is really important.

[00:01:59] James Cook: [00:01:59] I'm a huge fan of coworking space. I live very far from our JLL office and so mostly work from home and, and get out of the house occasionally by going to a local coworking space. I think it's really helped my marriage.

[00:02:13] To be honest with you, Ben, it's a great thing for me to maybe be able to get out.

[00:02:18] Ben Munn: [00:02:18] I've been in the industry one way or the other pretty much a decade. And for some of that, I was working with. The largest operator in the world. So IWG so. While I was there working flexibly in flexible space was a daily thing for me.

[00:02:37] So I'm, I'm not you. I'm, I'm a big fan. I think that the world has really been an injection of energy. Into what has often been a relatively staid office market? I think one, one thing I would say about your experience is that more and more people are going to be loving flex space. The way that you are that near to home offer is going to become really important and a big part of the way.

[00:03:08] That the company has provision space for their employees in the future. I think everything that's happening in the market right now in terms of COVID pandemics, the lockdown, the consideration of how to return to work safely is accelerating some of these trends towards more choice in where people get their work done.

[00:03:29] And certainly. Greater adoption of flexible options by employers.

[00:03:35] James Cook: [00:03:35] What has the demand for flex space looked like over, say the past five or 10 years.

[00:03:42] Ben Munn: [00:03:42] Five years ago. And before that flex space was a pretty limited part of the real estate market, it was really confined primarily to spec, suite sort of push.

[00:03:58] But really it was executive three, whereas the likes of religious and thought, and that was really what flex space was and demand for that space was limited in a way by the amount of product that was available and the choice in that product. So the demand typically was. Either small companies that wanted to defray the cost or on the, on the bigger kind of corporate occupier side, it was very much about new market entry.

[00:04:28] You know, we're going to drop a team of four people in six people into this market to see how it goes, or we're going to set up a product team. It might be a project space. So professional services firms might take. It's like space for six months or a year to house, a team of 12 people or freeing space.

[00:04:47] That was really what the demand profile look like five years ago. Then what happened was scale and choice. A company called we work, came along and got a large amount of investment. You may have heard about them and they began to put products on the market at a scale that really hadn't been seen before.

[00:05:09] Um, and I mean, physical scale. So their average take of the building in terms of the amount of space that they would take were significantly higher than the market norm. Whereas the market norm was around, you know, mid-teens thousands of square feet. They will be taking 50,000. A hundred thousand, in some cases, some of the largest centers, you know, over 200,000 square feet of space that brought a lot of attention to the market.

[00:05:35] Also bought more investments at the market that translated into, I would say unleashing latent demand. That was, that were there in the market. The model shifted in the last five years to be focused on creating great design where great experience is delivered for the customer.

[00:05:54] James Cook: [00:05:54] Are you seeing different cities or countries around the world where there's more or less demand?

[00:06:01] Ben Munn: [00:06:01] The UK actually is where. Flex space is most dense as a proposition. And part of the reason for that is that the long term lease without breaks a 10 year lease was traditionally what was available on the market. And the onus was all on the. Tenant to pay the capital to get the space fitted out. So unsurprising, there were fundamental real estate market dynamics that drove the growth of flexible options in the UK market and drove it faster.

[00:06:37] And, and to a point where it's. Yeah, that's all. I had to have a presence in dentistry in the world, in Japan, in India, in America, in Hong Kong. And pretty much every market has been double digit growth pre COVID in the amount of spaces available on this kind of flexible basis.

[00:07:00] James Cook: [00:07:00] So now we hit this pandemic.

[00:07:03] Like nothing, any of us has ever seen. What is the impact of COVID on

[00:07:09] Ben Munn: [00:07:09] flex in the short term, it's been really hard for the Flector because of the way that the majority of deals are structured. You had the risk in that model. I, the lease arbitrage model really highlighted in a negative way. It means that people have been.

[00:07:29] Closing contracts as, and when they can, they've been setting up, spend in these, in these locations as they can. You've seen demand diminish very, very quickly, but you know, it's a very difficult one from the operator perspective in the near term, as we flipped to the medium term, the prospects reflects actually a very positive at that point.

[00:07:49] If you can hold on long enough. You quite well, because what's going to happen is companies are going to return their workforce is to work places in very careful ways. They are going to provide near to home options. They're going to take space on flexible terms. One of the shifts that is happening is the participation in the provision of flex products by the investor community.

[00:08:19] So in the past, the investor community, landlord, community has been somewhat arms length. If you like from providing sex options, it has been, if you want flex in your building, You will look for someone to take a lease and operate safely and provided.

[00:08:37] James Cook: [00:08:37] So for owners of office buildings, the idea here is they're not leasing them out to third party coworking groups, but they're instead doing the coworking operation themselves.

[00:08:52] Is that, is that how you think that's the future?

[00:08:55] Ben Munn: [00:08:55] So we think the feature is a little bit different from that. So we think that the vast majority of owners will have operating partners. So think along the lines of hotels, where you have a separation between I'm going to ship operator and in the hotel world, even if planned.

[00:09:17] So we think that toners are going to find partners. To run their buildings for them. You will have some of the brands we know and loved in the coworking market right now, moving towards operating businesses. You will see some of them moving towards franchise models. So where you have the, the franchise owner owns the brand, and then you have operating companies who license the use of that brand and the use of that intellectual property, et cetera, within.

[00:09:46] A building that could well be owned by someone else.

[00:09:49] James Cook: [00:09:49] So Ben, we're talking about a new model. Of flex space for investors. Doesn't that change how you value an office building? I mean, how does that change?

[00:10:02] Ben Munn: [00:10:02] That is, I would say one of the market challenges to growth, we in the industry have a traditional way of applying value to building typically based on the rent and the strength of the lease it's associated with method.

[00:10:19] This model that we're talking about is, again, A lot more like a hotel model, like where the income stream is variable, where you've got management agreements rather than leases, or you don't have a, you don't have an asset if you like in the lease itself, which you can unplug it. So what the market needs, and this is the debt markets, this is the investment markets they need.

[00:10:41] Data, they need transparency around that data and they need to accept and agree on a model for valuing that revenue stream. And so we're beginning to see the data and the evidence, if you like, that's required to build that model, but we need more of that to build the confidence of the lenders of the capital markets.

[00:11:04] So that. When flex becomes a bigger part of how an asset generates income, there is not an issue for a lender.

[00:11:14] James Cook: [00:11:14] I know your team has put together a report on this topic with a lot more details and statistics. How can folks get a copy of that?

[00:11:23] Ben Munn: [00:11:23] So that report's coming out? I mean, so I could say on 14th of July, uh, you'll be able to download that from

[00:11:31] James Cook: [00:11:31] Excellent. Ben, thank you so much for joining me today.

[00:11:34] Ben Munn: [00:11:34] Thanks James. I've really enjoyed the conversation and we'll speak to you again soon.

[00:11:38] James Cook: [00:11:38] If you've got a comment on today's episode or a question or topic you'd like for us to tackle in a future episode, you should tell us all about it. Leave a message on the podcast hotline, and we might even use your voice in an upcoming show.

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[00:12:25] And if you are someone who wants to learn more about retail real estate, you should listen to our sister show. It's called where we buy. It's a show where we talk with retail experts and we visit the places where we buy. You can find it wherever it is. You get your podcasts.