Gradually, Then Suddenly: How Flex Grows

Ernest Hemingway, when asked about how he went bankrupt, replied, “Two ways. Gradually, then suddenly.” This concept is often applied to technology adoption. A disruptive technology meets the needs of a select few and is gradually adopted by more people until it lands on a mainstream use case. Then growth explodes.?

After attending the GWA Immersive event last week, it’s clearer to me that growth within the flexible office and coworking market will remain steady and positive, but will be unlikely to experience mass adoption and explosive growth until certain barriers are overcome. The structural relationship between landlords and operators has a few key conflicts that are unlikely to be resolved until landlords are convinced that flex products add material value to their assets. Those use cases are slowly being adopted, but need to capture much wider appeal to shift flex growth from gradual to suddenly explosive.??

My thoughts are a synthesis of many of the panels and discussions at the GWA event, but particularly a great panel led by Ben Wright (The Instant Group) with Andrew Dunn (Brookfield Properties), Kylie VanBuren (Industrious), and Kate Nelson Harper (WeWork).

Many anticipated the flexible office and coworking sector to experience explosive growth coming out of the pandemic. That growth has been stable, but in the high single digits year over year. We’re behind pace when it comes to JLL’s prediction of 30% office market penetration by 2030. It’s popular to point to macroeconomic conditions such as high interest rates or the state of the office market, with historically high vacancy rates, as the main reasons why we haven’t seen the expected growth. While those elements are real and certainly hindering growth, I’m not convinced we’d be seeing the expected growth even with perfect macroeconomics or office market conditions.?

To me, the real challenges come down to the flexible office and coworking sector working against the grain of how landlords and the industry works today. I’m not making a novel statement, but I think it’s important for us to be honest about the sector. We all want to “disrupt” the industry, but we can’t do that without understanding how the big money flows, the impact of contracts, and the market indicators that must be true for real change to happen. Let’s break down a few of the challenges.?

While most landlords are genuine in their desire to “figure out” flex, they are playing on a field with a fairly strict set of rules. The most basic rule is that Landlords and their lenders want leases (or an agreement that looks like a lease). They want this because there is security behind the revenue and term of the agreements. Commercial lenders look to real estate investing as one element of their diversified portfolio approach. Real estate tends to take on a portion of that investment strategy that is much more stable and lower risk than say, equity investments. Leases, with credit-worthy security and term commitments, make up the lower risk profile lenders are seeking. This matters for revenue recognition and agreement structure.?

1. Revenue recognition - Operational revenue, even if stable, is inherently more risky and presents challenges to landlords’ ability to take credit for that revenue. The NOI performance of a flexible office or coworking operator may be solid and intuitively attractive, but the risk profile has challenges for lenders. Often, an underwriting model will not give much or any credit to this revenue.?
2. Contract structure - Pure management agreements, while attractive for operators, present challenges for landlords. Leases are the legal structure that provides the security of the revenue and term. Industrious and others have figured out how to scale with management agreements because they have depth of data on historical performance to help mitigate some of the risks associated with operational revenue.??

If there are real challenges with revenue recognition and contract structure, then the logical solution is to position flexible office and coworking within the models that are accepted and work for landlords and lenders. This means flex products and services must be a value-add to the overall asset, driving premium rents and, or improving leasing speed (reducing down time). Flex as an asset value-add seems like the holy grail for unlocking flexible office growth.?

The problem today is that many landlords aren’t seeing enough data or use cases that prove that flexible office and coworking products drive rate and speed metrics. We need more depth and breadth to industry data to prove that flex products are causal in driving the metrics that matter most to landlords and lenders. Until then, most landlords will take a wait-and-see or test-and-learn approach.??

There are a few use cases for corporate consumption of flex products. Many companies have already adopted flexible office suites to meet specific location, market entry, or swing space needs. Others have made larger bets on flex as a structural component of their portfolio strategy to drive speed and reduce term commitments. Both of these use cases benefit the operator of the flex product, but are not necessarily accretive to the asset in which that flex product resides.?

The use cases that could contribute to lifting asset values are less common and require more adoption to capture landlord attention. Some leaseholders may see flex products in the same vein as amenities: your building better have it to be included on a short list (a statement from a head of real estate shared by Caleb Parker ). Other more progressive occupiers may see it as a strategic tool to optimize their footprint and employee experience.?

1. Occupiers often look to flex products in their leased location as a solution for unplanned changes in operations. This strategy allows a company to quickly grow without long term commitments should that growth subside. While this use case is intuitive, more data is needed to demonstrate to landlords its value as a complementary component to standard leasing strategies. It needs to become common practice for occupiers to demand the ability to grow or shrink within an asset through the use of flex products.?
2. The more sophisticated approach is best articulated by Brandon Medeiros , Co-Founder of REKalibrate . ReKalibrate helps landlords understand the utilization of their tenants to predict renewal rates and the amount of space they’ll need on renewal. They’ve observed that the companies who have designed their leasing strategy around actual utilization are much more likely to consume specialty and overflow space needs outside the extents of their lease. These companies are comfortable knowing that “peak-peak” utilization and specialty needs will be accommodated by proximate flex products (hopefully in the building).?

Occupiers must move first to signal a meaningful shift in demand. Once occupiers demonstrate durable changes in workplace strategies, landlords will follow, creating a competitive race to capture the new demand. Much of my career has been focused on studying, developing, and implementing large-scale occupier workplace strategies, and I have a strong conviction that the current adoption of return-to-office (RTO) mandates is misplaced. These mandates will likely be rolled back in the coming years—faster in some industries than others—as more advanced analytical tools, including AI, reveal opportunities to optimize workplace portfolios based on true human behavior and work outcomes.

Occupiers hold the key to initiating this transformation. As more occupiers wake up to the potential of dynamic workplace consumption and begin leveraging alternative office products, they will create the data needed to prove the durability and growth of this behavior. Early signs are emerging, such as AllState’s recent announcement of a distributed workplace model powered by LiquidSpace , which achieved a $244 million (64%) annual savings across their office portfolio. This kind of bold workplace optimization demonstrates a path for others to follow. Once enough blue-chip companies validate this approach with material cost savings and strong cultural and experience outcomes, peer CFOs will demand similar results, prompting a broader wave of change in corporate real estate.

On the supply side, landlords are hesitant to act as first movers but are equally afraid of missing out on competitive advantages. Many are already competing for the “flight to quality” by investing in amenities to attract tenant interest. However, they remain cautious about assigning long-term value to flex office products, largely due to a lack of trusted data proving the causal link between these products and asset valuation and performance. As occupiers’ strategies evolve and generate more compelling data, landlords will have the evidence needed to justify overcoming the revenue recognition and contract structure challenges they face today. They’ll be much more likely to come to the table on operational revenue and management agreement structures.?

Ultimately, once landlords see reliable data validating the durability and financial impact of flex offerings, they will pivot aggressively. Landlords will begin competing to offer the most appealing and flexible options to meet this new demand. In this way, the occupiers’ willingness to lead the charge will create a ripple effect across the entire market, aligning both sides to drive meaningful change. For now, we’ll continue to see gradual and positive growth. The explosive growth will come on the back of several strong examples of game changing costs structures achieved through progressive workplace optimization.