The office is having an “identity crisis,” and flexible space that becomes evermore agile will be key to meeting future tenants’ needs, a national expert on “occupier trends” told a Downtown Salt Lake audience this week.
Juile Whelan, a Senior Director of Research for the Americas at CBRE, said that the recent “right-sizing” of WeWork will be a blip in the sustained growth of flexible office space, which has grown 600 percent since 2010 nationwide.
Flexible office, which includes co-working, is usually defined by third-party operators (like Regus, CommonGrounds, and WeWork) renting space from landlords and offering variable arrangements to startups and freelancers.
It is growing out of that specialized niche, according to Whelan, because larger businesses are looking for space which can expand or shrink without long-term commitments and capital investment. Uncertainties in the market and the short life-cycle of many enterprises make long-term leases in fixed spaces less attractive to many prospective tenants.
The Investment Conundrum
Capital markets are traditionally wary of flexible space, because rental income is completely dependent on the third-party operator’s long-term lease. That operator usually has a limited credit profile and history. In the case of WeWork, a lack of transparency about their occupancy rates exacerbated problems with investors.
Whelan advocates moving away from the traditional model of flex space, where a third-party operator enters into a long-term lease with a landlord and assumes all risk for sub-leasing. A partnership model, where a landlord shares profit and loss with the operator, can solve some of the problems of lack of transparency for investors.
Such a partnership model, while adding stability and accountability, is also more difficult for capital markets to understand. “Only the most progressive landlords are doing this,” she says, and it will be “an iterative journey” with landlords and lenders.
Because the consumer demand for flex space continues to rise, capital markets will have to respond, Whelan contends.
The future of work
A main pillar of Whelan’s analysis is that we are changing the way we think about the office. Professionals want a choice of where and when they work. Not everyone comes into the office everyday.
In fact, “people need to be enticed to come into the office, and occupiers want really special space.”
To attract and retain talent, employers are increasingly “creating experiences” for employees. In the future, this will surpass the current trends of providing amenities like gyms, cafeterias, daycare, and play spaces. Employers in the future will have to offer workers “a network of locations” in which to work. Thus the need for increased agility on behalf of operators and landlords.
The Utah scene
Given the Wasatch Front’s high rate of start-ups and large tech talent pool, the demands for flexible space will continue to grow here. “Any environment that has smaller space requirements is going to be more ripe for this,” Whelan told Building Salt Lake.
It’s common that start-ups “burp out of their incubator space” and need a different setting that doesn’t demand long-term commitment and capital investment. Although it has doubled in the last year, Utah is currently below average for mid-size markets nationally in providing flex space.