How Much More Will Flex Space Bend?
Dan Zakai, CEO and co-founder of Tel Aviv-based Mindspace, considers the lasting legacy of Covid-19 on the global flex space market.
It would not be an exaggeration to describe 2020 as the most turbulent year in recent history. The global economy is in a recession. The future of the physical office is uncertain. The one thing we do know for sure is that big changes lie ahead, and those of us who are prepared to be flexible, and meet them without hesitation, will be best suited to adapt and grow in the months to come.
In the next two years, the flex space market should brace for a major sector consolidation. Mergers and acquisitions will be commonplace. What once felt like a crisis will start to feel normal and no one is immune from its effects.
Well established workplace providers are more likely to survive and emerge as leaders than others. Those catering to enterprise tenants, that generated profits and had high occupancy rates going into the crisis, are in a strong position now. They should capitalize on that.
At this moment, we are all branches in a storm. The only way to survive what’s to come is to lean in and prepare to flex: Refuse to bend and you will surely break before the year is out.
In order to weather the chaos, a huge number of enterprises are going to want more adaptive offerings and different types of spaces, both to accommodate social distancing and to slash their financial risk. Traditional leases will be less desirable. Partnership-based agreements will be in higher demand. And landlords, eager to reap the benefits that this approach brings, will welcome the benefits, notably the creation of new streams of revenue and a higher utilization of their assets with lowered risks and costs.
These are my predictions. But I also spoke with some of my most respected colleagues and asked them about their thoughts for what is around the corner. Here’s what they had to say:
"The demand for agility has become a key driver for real estate requirements of all sizes and flex is particularly well suited to meet this," Lucy Watts, Executive Director, Operator & Landlord Solutions at The Instant Group, tells me. "We’re using technology and data to create solutions that work for both SMEs and corporate clients. But flex supply is still only 5 percent of commercial real estate. Flex operators are going to develop multi-brand strategies, and we’re also going to see landlords and developers build their own flex offerings within their portfolios. The property sector has valued asset management over service provision for the end user for decades - translating the value of the operator in this area is key to the transformation of the wider property sector and will become a key battleground in the months and years ahead."
Dan Brown, Co-Founder at SITUU, believes that over the next year, demand in the CBDs will dip, and veer toward regional and suburban workspaces as it mimics the residential market. He says: "A shift towards a more agile workforce was already being seen pre-Covid, with the pandemic simply accelerating this change – businesses and their people are now seeing office space as a commodity, in both how it is acquired and occupied.
"It’s not that only the strong will survive. It’s that only the smart will. “Those who do not turn from the reality of the market, but embrace the present uncertainty and realign their pre-Covid expectations on lease term & operating margin, will be the ones with us in 2022."
Michael Dubicki, Business Development Director for Flexi Offices, adds: "2020 will be remembered as the catalyst for real change in global real estate. 2021 will bring a blurring of the lines between the hitherto distinct camps of ‘conventional lease’ and ‘serviced office.’ The former will continue becoming more flexible and be delivered on more inclusive terms. The latter will keep pushing boundaries in reinventing collaborative environments to cater for the new breed of flex worker we have all become. 2021 will be the year of real estate hybridization."
Amy Taylor, a partner at the Head of Serviced Office Advisory for Cushman & Wakefield in the United Kingdom, agrees all occupiers will be looking to first and foremost slash their risk and therefore that capital expenditure will be slashed across the board in the short-term. She says: "We could be heading for a Q1 2021 price war across Central London which, in turn, delivers us an occupiers market.
"In the long term, flex space, which 10 years ago was seen as an outlier and a specialty product, might very well become an option built into all real estate strategies. This, in turn, will shift the balance between traditional leasing and serviced offices.
"The hub and spoke model looks likely to become the new revolution / buzz phrase for corporates, looking to incorporate the agile working approach across their global portfolios."
There's no playbook for the months we are about to enter. But there is, thankfully, the advice and the logic, commitment and measured predictions of experts on the ground. I will take it all in my stride and look forward to meeting the challenges and opportunities as we continue to adapt and evolve.