New Coalition Wants To End The Undervaluation Of Flex Space

The flex office sector isn’t a new phenomenon anymore, and evidence is mounting that income from well-run flex facilities is resilient, but valuers still don’t put a high rating on that income. 

For now. 

Storey’s 100 Liverpool Street outpost in the City, which the flex office division of British Land fitted out seven years ago, paints the picture.

“Occupancy sits above 95%, average occupancy is four years. How we're not getting the benefit of that extra income is beyond me,” Becky Gardiner, British Land head of Storey and managed workspaces, told the audience at Bisnow’s UK Office Conference Series: Leasing Trends And Occupier Demands event, held at Brookfield’s One Leadenhall office building in the City. 

“All of that points to this being a really secure income stream,” she added. 

Although flex offices have been around for more than two decades, there is still little data and transparency in the sector.

To change that, a group of operators have come together to form the Workplace Intelligence Network, which aims to share data on an anonymous basis and create greater transparency.

The aim is to highlight the resilience — and thus value — of flex office space. 

“What we're trying to do with the likes of us, GPE, [and] many, many other operators, is start to build up that dataset of how well-occupied buildings are, what rates people are achieving, how much churn is there in the market, so that we all can go into conversations with valuers, with investors, with partners, with more information,” Gardiner said. 

Undervaluation by appraisers and lenders has the potential to hold back the growth of the sector, panellists said.

Landlords know their tenants want flex space, but they take its depressed valuation into account when deciding how much to incorporate into their buildings, whether it is through specialist operators or their own brands.

“When we think about underwriting as it relates to flex, I think there's always that deliberation as to how much space we should commit towards the use, because there is a tipping point, typically around 20% above, that you start to hit value,” said Raj Rajput, Hines managing director of asset management, UK and Ireland. 

WeWork Regional President Luke Armstrong said larger occupiers are becoming increasingly comfortable with the fact that flex space combines all of their occupational costs. As a result, it is looking to expand its managed solution division, where it puts in place a co-terminus agreement between itself, a landlord and a tenant and operates the space on behalf of its partners. 

That kind of arrangement could entice more investors to the flex space sector, he said. 

“The core theme, I think, will be rolled-up capital,” he said. “And I think that becomes a really interesting part of the opportunity that exists for not just service providers, landlords, but new forms of capital looking to place it in the sector.”