‘We’ve Had Outrageous Demand’: Flex Operators Benefiting From Office Market Shifts
As office real estate faces daunting questions about long-term demand and growth, one sector has remained optimistic: flex spaces.
Flexible office operators WeWork and Launch Workplaces said they experienced strong growth last year as the hybrid work shift led office tenants to seek more flexible options. Experts believe that demand will continue to surge in 2022, and they see traditional office landlords adopting some of the amenities and other offerings that have made coworking spaces popular.
Mike Kriel, CEO of Maryland-based Launch Workplaces, said he's seeing interest from plenty of first-time tenants, in addition to building owners looking to emulate the amenities and flexibility of coworking space.
"We’ve sold an office a day for the last six months, since June," Kriel said at Bisnow's Redefining the Office of the Future event in December. "We’ve had outrageous demand ... three-quarters of this are folks who have never been in a flex environment before."
The pandemic has cast coworking spaces in a new light. While overall demand for office space has been sporadic, some industry analysts believe flexible office space will see rising demand nationwide over the next few years, in part due to the uncertain nature of business in a pandemic.
"Flex providers were resilient and agile during the pandemic and will continue to shift their strategy to meet the demand for flexible space options," CBRE's report said. "Flex office supply should grow in 2022 as providers resume acquiring new locations, landlords increase their own offerings and demand from small and large business grows."
Kriel said additional factors are likely strengthening the wind behind his company's sails, including the Great Resignation and large firms warming to the idea of leasing smaller suburban office spaces as they embrace a hub-and-spoke model. Launch announced a second location in D.C. last year, but Kriel said its six Maryland locations are seeing better demand.
"The demand that we’re seeing in urban D.C. is very inconsistent," Kriel said. "We’ll get 12 leads in one month, then we’ll get two, then we’ll get 20, then we’ll get four ... suburban is coming back stronger."
Within the flex office space market, one operator looms large: WeWork. Nick DeMarinis, the Atlantic head of sales at the coworking giant, said the path to profitability would be WeWork's "north star" in 2022.
He was also encouraged by the growing business WeWork was seeing this past year: He said that WeWork operates 1% of the office supply in New York but did 10% of the city's leasing activity in November.
A WeWork spokesperson told Bisnow after publication of this story that that DeMarinis misspoke — its activity represented 20% of New York City leasing activity during the third quarter, according to WeWork’s Q3 earnings report. The spokesperson said the company doesn’t yet have numbers for November.
DeMarinis said tech firms made up a sizable proportion of WeWork's tenant base, but he was also seeing interest from other businesses who wanted to take advantage of programs like All-Access or On-Demand.
For WeWork's All Access program, a monthly membership that allows customers to use any location, the company's bookings in D.C. increased by a month-over-month average of 17% from January to December, a spokesperson said. For its On Demand program, a pay-as-you-go model that grants hourly or daily access with no monthly commitment, WeWork's bookings in D.C. increased by a month-over-month average of 24% last year.
The WeWork spokesperson also said D.C. was seeing a faster increase in bookings for those services compared to similar markets in Chicago and Atlanta.
Those programs allow WeWork to serve some tenants' hyper-specific needs, like working in multiple locations or selecting just a few days a week to go into the office, better than traditional office leases, DeMarinis said.
"With flex, it’s like this game of Tetris where you can piece it together with the right solutions, regardless of who the operator is," DeMarinis said.
Despite their successes, neither Kriel nor DeMarinis believed that flex space would gobble up all of the market's traditional office leasing demand, which has been slow to recover from the pandemic. Rather, they believed the market would eventually reach a balance between short-term flex spaces and long-term leases.
"The long-term lease is not dead, now there’s just a lot more options that a company can have in the life cycle of their organization," DeMarinis said.
On the long-term side of that life cycle, property managers are scrambling to emulate some of the amenity options that flex operators can provide.
"On almost every project I’m working on right now, anywhere in the region, it’s all about the amenities," Feldman Block said. "Before the pandemic, there was an amenity war. Covid has taken it on steroids."
Jeanette Ko, senior vice president at JLL, said she has seen the market focus in particular on areas that have amenities outside the four walls of the office in mixed-use neighborhoods like Capitol Riverfront.
Ko said areas that can provide the "18-hour workday" will attract the most attention going forward.
"The thing I hear time and time again is 'what’s going to inspire my workforce to come into the office?'" Ko said. "We have to make an environment that they prefer, frankly, to being comfortable in their sweats at home."
Kriel said Launch Workplaces has prioritized opening locations in heavily amenitized neighborhoods that can provide its tenants with a high quality of life. He anticipates coworking spaces will exist alongside traditional leased space more and more in those areas as businesses warm to flex leasing.
“The future building in my mind, the ideal building, you have to have a marriage between flexible space and long-term leases in the same building,” Kriel said.
He said tenants are looking for “nice amenities that have a soul,” and predicts many workers are itching to get back to a nice space outside of their home office.
“People just want to be seen and talked to,” Kriel said. “They don’t need the best gym or swimming pool or the best coffee in town, they just want to sit down … and have someone talk to you. It’s that simple.”
Office landlords like Hines Senior Managing Director Chuck Watters have taken notice. Watters said office space needed to provide a “value proposition” to tenants above and beyond the standard cubicle to bring workers back.
Watters said the D.C. market has long been stable, thanks to government contracting, an educated workforce and a rising tech sector. He believes the office market is slightly oversupplied, but demand for more curated, high-end office spaces will continue to grow as companies consider their full return-to-work plans.
"More of the conversations we’ve had are with major potential anchor tenants about what they’re looking for in the base building, which is different from what we’ve done in the past," Watters said. "Across the board, as we’re designing and building these buildings, there’s a lot more amenity space in those buildings than there ever had been before."
UPDATE, JAN. 7, 11:35 A.M. ET: A previous version of this story quoted WeWork's Nick DeMarinis citing a statistic that a WeWork spokesperson said is inaccurate. This story has been updated with a similar statistic from WeWork's Q3 earnings report.