Landlords in recent years sprinted to deliver flexible office space in their buildings, risking irrelevancy if they didn’t deliver. For most, this meant leasing space to a specialist flex-space operator. But with COVID-19 significantly impacting the flexible-space sector, they are trying something different: partnering with specialists to deliver flex-offerings themselves.
“Larger flex operators with a growing portfolio are the ones entertaining these types of agreements,” says Tashi Dorjee, flexible space solutions lead – Australia and New Zealand, JLL. “They have the resources to propose a financially attractive business model, guide the design and build process, the capacity to train and manage on-site staff, and fill the space to generate revenue.”
Management agreements also appeal to landlords because, while they take on the initial risk of installing fit-outs, they receive a greater share of the revenue, plus the risk of leasing space to flexible space operators vulnerable to economic shocks is alleviated. The detail of running a busy, service-orientated operation is left to a contracted partner.
The management agreement is not new to real estate. It is a mainstay of the hotel industry, where many chains don’t actually own the properties, but instead operate the space, giving a percentage of revenue or profit to the landlord. In entering management agreements, the hope for landlords is that owned flexible space differentiates their building enough to attract tenants, as well as adds value to existing tenants.
“Each deal is unique in the flexible space sector and may include a flat management fee attached to experiential and commercial objectives, such as net promoter scores, tenant surveys, and profit targets,” Dorjee says.
Space can also act as an incubator, “converting tenants to long-term, conventional leases is the desired outcome,” Dorjee says.
Meanwhile, tenants are being given greater choice. “The developments that drove the explosive growth of the flexible space sector, including tenants’ need for agile office portfolios and superior workplace experience for their workers, are not only still there, but will continue to drive demand well into the future. The product just has to evolve to meet their ongoing needs,” Dorjee says.