Flex space UK Research | 21


2. How will landlords react?


The rise of the flexible workplace sector will act as a catalyst for landlords to change their relationship with occupiers. If landlords are slow to adapt to a consumer centric approach to leasing space, then flex space operators will step in and take a larger market share.


Landlords will have several routes to market and choosing the right vehicle for their portfolio will be more important than ever. The sector will increasingly mirror the hotel industry in terms of the focus on services but, more importantly, in the relationships between the landlord and operator. Partnerships will see significant growth, as landlords seek to gain from the upside, allowing operators to focus on their core business.


Landlords on large schemes will have to consider having a flex operator within their tenant line-up, often on the lower floors to help activate this space, but also because the majority of occupiers will demand it to provide them with future flexibility and amenity space.


Providing flexibility within a building will become the norm and we expect that around 20% of space within an office building could be allocated to flex space. This could rise to as much as 40% for landlord operated space - split between collaboration space and private offices.


Landlord operated models will continue to grow but will remain a relatively small part of the market. Few landlords will have the critical mass to really challenge flex space operators.


3. How are investors reacting?


Investors will increasingly consider buildings with an element of flex in their portfolios, but many still demonstrate a degree of caution towards investing in the sector. A lack of transparency and tenant track record will still deter some investors, who, as a result, may perceive the asset has a greater risk profile.


But the associated risk will diminish, as growth in the flex sector provides a critical mass and operators become more comfortable with the covenant of operators. Investors may focus more on real estate let to experienced operators who are well funded to reduce the risk level. They will also need to consider the various degrees of security to the lease.


The business model of short-term income verses long-term lease commitment still sits uncomfortably with investors and they are likely to seek a higher return to compensate for the risk around the security of income. But in any event, a flex centre can be let or converted for use by traditional tenants, which may mitigate the long-term risk, so the quality of the underlying real estate is key.


Investors are recognising that having an element of flex space in a building could drive rental values and boost income streams. They should not shy away from incorporating flex into their investment strategy, as a moderate exposure to the sector will complement not deflect from value.


The sector could become a separate asset class and this would support an agreed, and potentially new, approach to valuation of the sector. Valuations will become more sophisticated and will move towards a discounted cash-flow model rather than a conventional approach, potentially offering higher income returns, based on risk adjusted returns.


Investors are increasingly likely to view the sector as a longer-term investment opportunity and for many who have already invested in real estate let to the flex sector, the long-term income opportunity is on a risk adjusted basis likely to outweigh the tenant risk.


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