Is it time to explore this proven alternative office model?
After some turmoil in the property market, one concept is generating optimism among commercial landlords. It offers the prospect of 30% higher returns after CAPEX over a 10-year period compared to traditional leasing, while mitigating some of the challenges of valuations and loan-to-debt ratios. Of course, it's flex.
Incorporating a flexible workspace operating model into your portfolio can reduce void periods and release new revenue streams. Under current market conditions in both London and New York City, flexible workspaces can deliver EBITDA figures well above traditional office leasing, whether self-delivered by landlords or in partnership with a third-party operator.
Flex in action
We found that in London, the owner of a commercial office building can increase cashflow by up to 71% when assuming an average stable occupancy of 82% (The current average occupancy for a flexible workspace operator in the city is 85%.)
In New York, our model shows potential cashflow increases of up to 64%. This slightly reduced figure is explained by a lower average stable occupancy of 74% and more instability across the flexible workspace market.
Examine the detail
Of course, if you’re considering flex, you’ll need more than headline figures. It’s true that the value created by opening up part of your portfolio to a flexible workspace operator depends on some key variables, including:
- The percentage of private offices within the flex space – a higher number means more efficient space utilization and better returns.
- The average size of the occupier – depending on market conditions, larger occupiers can sometimes negotiate lower prices because of more efficient space utilization, but they also tend to look for longer terms, which reduces client churn and the associated risk.
- The average contract length – longer contracts attract higher discounts but reduce risk and cost of sale.
- The level of service in the space – higher service levels require additional OPEX but drive higher value and are associated with tenants staying longer.
- The overall size of the space – economies of scale arise from both CAPEX and OPEX costs and enable the space to provide a wider range of amenities, which creates extra value.
- The brand perception of the operator by end-user customers – this can influence ramp-up periods and the desirability of the space.
Extra benefits
However, while every office building presents a unique business case, our model shows that a service-based flexible workspace offers a range of tangible benefits: it can help you mitigate void periods, reduce lease discounting, deliver higher rates per square foot on primary rates, use space more efficiently through communal services, and unlock secondary revenue streams.
Partnering with an experienced flexible workspace provider is the likeliest route to healthy returns, but self-delivery is also a viable option that can deliver premium cash flows. Not every asset is suitable for flexible space, but if you take a mid- to long-term view, flex can turn buildings that are simply unfit for today’s traditional market into viable and sustained cashflow generators.
The Instant Group is the largest global marketplace for flexible workspaces. If you want to know more, we can help. Read our latest whitepaper, which examines the potential of alternative office models and assesses the benefits and risks based on real-world market data and revenue trends. For your free copy, please download it here.
