If you’re looking to join the flexible office boom or you’re sitting on 9,000 square feet or more of empty portfolio space, you’re in the right spot.
The new office real estate era has arrived. While WeWork put the world on notice with coworking, its IPO collapse was validation for most commercial real estate professionals that flex office space isn’t viable. But the world has turned on its head and last year proved there is employee demand to work closer to home and avoid long commutes. It’s now clear that WeWork’s fall wasn’t because of a lack of flex workspace demand, but should be attributed to its business model of high liability leases.
So how can landlords capitalize on the growing flex demand? One strategy that’s finding success with building owners is employing management agreements; a well seasoned and successful business model adopted from the hotel industry.
Using management agreements quickly transforms space and aligns landlord and tenant objectives. Below we discuss how agreements work in the secondary and commuter city markets.
How do flex office management agreements work?
As we mentioned above, management agreements between operators and landlords have long been a strategy in the hotel world. Boiled down, it’s a partnership between the operator and landlord where the landlord earns more profit, and the operator limits their lease liabilities. Instead of signing a 10-year lease, building owners are partners in the business and pay a flat management fee and, possibly, a profit share to the operators. Landlords are forgoing steady rent and instead, they are betting on earning higher revenue through a well-run flex workspace.
In the coworking and flex office world, building owners use these agreements to hire flex or coworking brands to provide end-to-end design and management of flex workspace – from optimizing office layouts and common area designing to the acquisition and management of tenants (or members) in the space.
We should note that agreements are bespoke to portfolios, and building owners should be leery of off-the-shelf agreements. Vet for flex brands that have experience with a mix of building types, markets, and landlords.
Why flex management agreements are better for and quicker at filling empty floors
Better for suited for 2021 and beyond
From a market perspective, traditional leases on 8,000 to 25,000 floor plans are tough to sign. This square footage range is usually too large for a growing company and too small for an established organization. In addition, companies are frightened about signing leases in the wake of covid and are looking to support their employees at smaller satellite offices.
Partnering with an operator that can optimize the floor plan based on market needs and then quickly rent those offices or suites makes a portfolio building immediately marketable.
Higher earning potential
Given limited long-term data on flex office agreements, most building owners prefer a traditional lease tenant that guarantees cash flow. However, flex businesses generate revenue that exceeds market rent and building owners also take profit at year’s end. We have seen some owners earn 40% higher than they would with a traditional lease. The obvious caveat is finding an operator that can run the business correctly and design the right product in your building.
Easier and economic floor build-outs
Operators tend to flip space quickly and depending on the state of your floor, they could start generating revenue in a few weeks. Flexible office brands modularize their furniture selections and leverage their supplier relationships to keep costs low.
Since there is a lot of market analysis prior to signing the agreement (if you’re located in secondary or commuter cities), the operator can plan around the current floor plan to generate cash flow while building on the backend. Since operators like desk have the technology to acquire members and run the space, the management implementation only takes a few days.
Be mindful that the large coworking brands require substantial build-outs and concessions. If you’re looking to transform your space without spending millions, connect with brands focused on your market and type of building.
Offloading space management
Building owners understand the value of adding flex to their portfolio but don’t want to deal with acquiring new members and managing the space. The flex model is a high churn business and operators need to have a strong pipeline and a retention management plan to be profitable. Management agreement offloads responsibilities to operators that can leverage their brand, marketing, and management playbook to ensure the space is successful. It’s also worth noting that a recognizable operating brand draws more attention from the public than owner-operated business suites. If you’re looking to sell a building in your portfolio, this could be a boost for potential buyers.
With the demand in the market, it’s no wonder landlords and investors are trying to generate more revenue through their portfolios via flex workspace. But, management agreements and even flex models aren’t always a good fit for certain portfolios and locations.
If you have commercial building space you’re looking to transform and you’re open-minded to becoming a partner, it’s worth reaching out to an operator for initial discovery. Be mindful that larger operators require heavy build-outs and concessions. Agile operators, like desk, can do market and P&L discovery before signing an agreement. We understand it’s a new model for office space and we’ll do the heavy lifting to make sure the agreement will be a success!
Reach out to desk’s management team about repurposing or adding flexible office space to your portfolio.