9 Flex Space Tips for CRE Professionals and Owners
This is a great opportunity if you can understand the changing need and modify your business model just a bit. You’ll probably increase revenue in the process.
We’ve been running coworking and flex spaces for about 14 years. We’re typically a tenant – the kind you love: long leases, stable business (well, pre-pandemic!), professional tenants who understand real estate. We then turn that space into different types of offerings for people who need smaller spaces on flexible terms that don’t require them to understand all the ins and outs of real estate.
People are working differently. How many spaces have you walked into that seem nearly empty? If it’s your property, it’s scary. You know they told you they have 1,000 employees in the 100,000 s.f. they leased from you, but only 1 in 4 desks are occupied. They aren’t going out of business – it’s just that the other employees are working from home or a coworking space or are on vacation or at a customer’s site. Your tenant – their employer – would lose their staff if they didn’t allow these flexible work arrangements.
Your tenant’s employees can access everything they need in the cloud. Their work-life requires a laptop and maybe an extra monitor. They can work anywhere, so their employer doesn’t need to provide a fixed desk for them. Hoteling of desks is fine.
Here are a few tips for landlords and property managers trying to navigate this new world:
1. You can’t ignore the trends. Whether you like it or not, flex space is here to stay. The work world is moving faster and faster. People can’t predict what their business needs are three years out, let alone ten. JLL’s highly respected analysis indicates that flex space will be 30% of commercial real estate by 2030. This is an amazing opportunity to create more stable revenue with a few tweaks to your models. Don’t think you can just wait it out.
2. There are many types of flex space, so understand what you want to do. Some people are using the term to mean short-term leases. Some mean full coworking with lots of different ways to access space. If you have a whole building, you may do well with a broad range of space offerings. It takes a lot to get a new client, so if you can hang onto them with different offerings in the same building, you may want to do so.
3. Bigger clients will still want fixed space; they will just want less of it. And they will want it on shorter terms without a full architectural specification. They’ll want you to give them move-in-ready space since they don’t plan to be there more than a few years. And they want it fast, which changes lease structures. More on that below.
4. For a lot of newer clients, though…they aren’t tenants; they’re members. This is a really important distinction in a coworking environment. Tenants have their own fixed space with a locking door. They aren’t impacted much by others in the building. And there is a large body of law built up around tenant rights and real estate that doesn’t necessarily work in your favor.
This structure doesn’t work in coworking. People from different companies are in close proximity. You have to be able to ask someone to leave if they are a problem. They need to be able to use the space 24/7, while you will probably staff during working hours. With members, it’s appropriate for them to clean up after themselves. They also need a process that goes from tour to signup to working in 15 or 20 minutes – totally unlike a lease. Which leads us to…
5. In coworking, you have membership agreements, not leases. That’s why it’s so important that you understand your users as members. A membership agreement should be no more than two pages. You need to be able to move people in without a lawyer and ask them to leave as easily. We train our Community Managers to never use the words “tenant” or “lease”. You can still offer a discount for a longer-term commitment, but all the membership rules still apply. As an owner or operator, you are much more protected and your members can have a pleasant work environment.
6. Understand that coworking means you’re in the hospitality business. Coworking operations can produce about twice as much revenue as straight real estate leases, but they have more staff, offerings, and programming. They are based around building a community, a place where people don’t have the isolation or distractions of working from home. Many people just do better work when they are around the hum of others working. Remember, people have choices. They will go to another space or work from home if there isn’t an advantage in the space you create.
7. Coworking can mean stable revenue, where no one client accounts for too much of your income. This is the essence of why you should investigate flex space and coworking operations. Instead of having 10 tenants in a given space, you will have 100 members. If one of them leaves, it has a minimal impact on your income. To do this, though, one has lots of ways for members to access space. Maybe they have a full-time office or two. Or a dedicated desk. Maybe they have a “Bucket of Hours” plan in which they prepay for 10 conference room hours, and the bucket automatically refills when used up. Or perhaps a large company wants 30 of their employees to be able to use the space, but only ten might show up on any day. All of this can be managed easily in a coworking environment. The important point is that no one member should account for more than 5 or 10% of your revenue.
8. There are a lot of good coworking operators. Consider a management agreement with one of them. If some of this sounds scary, management agreements come in all sizes and flavors. Check out some of our previous posts on these. A good operator will build up a coworking business, increasing the revenue you can make from your space, and setting the stage for members to become tenants in other parts of your building as their businesses grow. We like a structure that works something like this:
- First dollars pay outside vendors, labor, and a small operator fee
- Next dollars are split 80/20, with the landlord getting 80% until slightly below market rent
- Next split is 50/50 until landlord is getting slightly more than market rent
- Last split is 80/20 with operator getting the 80%.
9. Get good coworking management software to automate and simplify operations. Operations software should mean that you can run a 10,000 – 15,000 s.f. coworking space with just one staff person. The software needs to fully automate the space so that revenue isn’t slipping through the cracks. People should be picked up on the wifi when they walk in, so you know who’s there, from anywhere, and tracked against their plans. None of the types of plans described in #7 above should be managed manually. The software should handle all billing, communications, plan tracking, sign-ups, and reporting simply and intuitively. And, of course, it should make you look good!
All in all, adding flex space to your mix can significantly increase your revenue, while making it more stable.
Time to dip your toe in?