Why flexible space is appearing in office investment portfolios
Investors are paying close attention to the rapid growth of the flexible space market closely.
As the popularity of flexible space (flex space) starts to shake up office markets around the world, more investors are looking for ways to capitalise on the growing corporate demand.
Flex space is basically shared office space that has been kitted out with the business basics such as wifi and furniture and increasingly, a range of services such as coffee bars and community events.
It currently represents just 1 percent of office stock in most markets. However, in some of the more mature markets in Europe, flex space has already risen rapidly to more than 5 percent – in Amsterdam, for example, flex space now accounts for 5.6 percent of its total office stock – the highest flex space concentration globally, ahead of even the most mature U.S. office markets.
Moreover, the concept itself is evolving as more operators come to the market and existing landlords adapt and implement their own flexible space solutions.
As a result, flex space could increase by more than 25 percent in 2018 after rising 29 percent in 2017 when 625,000 square metres were added to the market, according to JLL’s research.
More growth is to come further down the line too. JLL forecasts that Europe’s flexible space stock will rise by an average of 25 percent – 30 percent per year in the next five years, adding up to 7 million square metres to the market and pushing the total market size to around 10 million square metres by 2022.
“The flex space market has moved well beyond the traditional model of co-working and is now driving real and tangible change in the wider market,” says Alex Colpaert, Head of Offices Research at JLL EMEA. “As it becomes more mainstream, lenders and investors are starting to see the benefits of moderate exposure to flex space as part of a well-diversified tenant roster.”
These benefits include attracting a wide range of occupiers, reducing the amount of empty space in a building and potentially diversifying their income streams through offering ancillary services.
Furthermore, buildings with a high percentage of flexible space are increasingly seen as viable investment propositions.
The appetite for flexible space offers opportunities to fuel demand in prime locations and decrease vacancy in some weaker portfolios, says Colpaert. “With a growing demand for innovative environments and unconventional design, some secondary assets are in a prime position to be revamped – unlocking opportunities for investors.”
Challenges for investors
JLL previously forecast that up to 30 percent of corporate real estate portfolios could be co-working or flexible space by 2030, representing a seismic change within the market.
Although that remains a way off, its latest research suggests that larger corporates will increasingly embrace flexible space in the next three to five years.
As more market-leading companies incorporate flexible space, the conservative adopters are likely to follow suit.
“Many companies are in the experimental phase, actively testing how – and how far – they can integrate flexible space within their wider portfolio,” says Colpaert.
For investors, this could bring numerous challenges as the office market becomes less predictable. As more companies take space on a short-term basis rental levels, supply and vacancy levels in flex space could potentially move very quickly and get harder to measure.
Average lease-lengths will shorten as tenants focus on the shorter-term when assessing space requirements, Colpaert predicts. With companies able to find smaller spaces more easily in the flex space market, the sub-500 square meter segment will potentially become much harder to let on traditional terms, which could impact investors’ rental income streams.
A fast-changing future
With the sector evolving fast, investors are now joining occupiers in experimenting with how flex space fits within their wider strategy.
“With greater competition and new participants moving into the space, investors and developers should consider expanding their exposure to flexible space, collaborating with existing operators and looking at M&A,” says Colpaert.
Flex space is very much in flux – but it nevertheless marks a structural shift within the market that investors can’t ignore.
“The long-term impact remains to be seen but in the shorter-term, the opportunities it creates will reward those who embrace innovation, risk and change,” Colpaert concludes.