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Any Flex Space Company Can Provide A Desk. But Can It Provide A Strategic Solution?

Serendipity Labs' Milwaukee/Wauwatosa office space in Wisconsin.

As tenants and landlords re-evaluate their approach to office leases in the wake of the coronavirus pandemic, many have turned to coworking and flexible space options as temporary solutions until life returns to normal. But is that the right way to view these alternatives to the traditional office — as just a temporary solution?

Some of the pandemic-driven changes to how we work are structural and long-lasting, suggested John Arenas, chairman and CEO of flex space provider Serendipity Labs, and they therefore require more than a temporary fix. This calls for a mindset change for both tenants and landlords who need the help of a network of flexible office providers who can do more than provide short-term solutions for their challenges.

“Flexible office providers like Serendipity Labs are really real estate service firms, helping landlords make their product better because landlords can’t do it all by themselves,” Arenas said. “We're there to make their assets more competitive and for them to serve their clients even better.”

Serendipity Labs licenses its brand, designs and coworking systems to landlords and operates office locations under a fee-based real estate service model, he said, noting that this is similar to the relationships that property management and leasing firms have with landlords. 

Rather than simply leasing desks, Serendipity Labs helps both tenants and landlords find solutions to strategic business challenges, he said. And during the pandemic, those challenges have increased in complexity, driven by tenants who expect shorter lease terms, more flexibility and full-service workplace amenities. 

Bisnow spoke about these changing expectations with Arenas, whose company oversees a location network that is expected to grow to 3M SF with nearly 60 locations in the U.S. next year. 

Bisnow: Let’s start by talking about what the workplace will look like moving forward. 

Arenas: The workplace will not be a "place"; it will be a set of options that are going to be in the hands of the consumer, which is the end user. The power has shifted to the tenant decision-maker, which forces the landlord and asset owners to adjust the product to meet new expectations. Those include flexibility and shorter terms.

Bisnow: What role does a company like Serendipity Labs play in this environment?

Arenas: We have two constituencies. One is the tenant occupier, who is trying to improve their performance as a company, retain top talent and spur innovation. We're trying to make sure the product serves them in reaching their goals as an extension of their corporate workplace. For example, multinational companies are using our network of coworking spaces to get into new markets, support worker mobility and deal with uncertainty.

The other constituency is the landlord. The role we play there is to help them unlock value in their asset and answer the question "how do I use this real estate in a way that suits the tenant and doesn't just suit the legacy financing structure of this industry, which is driven by the 10-year lease?"

Bisnow: You’re saying long-term leases are a thing of the past in the post-Covid world?

Arenas: Today’s business planning horizons are much shorter than the length of a conventional lease, and tenants don’t want to tie themselves up for five or 10 years when they have a three-year max planning horizon. 

In other words, the legacy office investment thesis is broken, and tenants, in effect, have gained the right to be wrong. That is because it's inefficient for someone to sign a long-term lease based on a headcount that may not materialize or that may grow much faster than they expected. 

The other thing that has happened is that leases are now disclosed as liabilities on the balance sheet whereas before they were an expense and hidden in footnotes. Being a publicly disclosed liability, anyone sees how efficient an organization’s real estate footprint is compared to peers in their same industry. One answer is for companies to optimize their portfolios by replacing their smaller long-term leases with cost-effective, flexible offices rather than committing to space that may become an underutilized liability on the balance sheet. 

Bisnow: How does this trend impact landlords, and how can your business model help them?

Arenas: For a landlord, the shorter traditional leases get, the more the asset owner’s investment model breaks down. That is because by the time an asset owner has paid commission to the broker, built out the space, given free rent and offered other concessions, it can be as much as four years before they're actually getting a return.  

With tenants wanting an alternative to long leases, landlords are being required to think differently. Serendipity Labs is helping them address the demand with a hospitality-driven flexible office model. We license, manage and market these locations on behalf of the landlord as part of a national network. Our scale allows us to aggregate high-credit quality tenant demand with over 80% of revenue generated by our central sales and marketing.

Bisnow: Couldn’t a landlord offer flex workspace on its own?

Arenas: Yes, but the landlords who have tried to be in this business come to realize this is more than offering pretty space and making sure the lights are on and the coffee is brewed. The most important thing for success with this model is to find high-quality tenants. This is something landlords cannot do for themselves because they don’t have a network of locations, national marketing, digital footprint and channel sales partnerships as sources of leads.

We are monetizing the real estate with the best product design in the industry for a mix of meeting space, drop-in work lounges, event space and office spaces. That's the value proposition we bring to the landlord in the role of a real estate service provider. We're helping with asset management and managing the day-to-day operation of a much faster-paced business than traditional property management and leasing firms are set up to handle.

This article was produced in collaboration between Studio B and Serendipity Labs. Bisnow news staff was not involved in the production of this content.

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