What flex needs next

COMMENT There is no denying that the UK’s flexible office sector had a particularly challenging time during the Covid-19 pandemic. But our analysis of data for the first half of 2022 shows that the recovery was faster than many of us would have hoped for, with contract occupancy in the UK now at 88%, above where it was pre-pandemic (81%), according to the Workthere Flexmark. Most importantly, though, profitability of flex is now returning, as we see prices begin to rise alongside the growth in overall demand. The next question for the sector is whether landlords’ perceptions of it have changed. Our Landlord Flex survey shows that the simple answer is that, compared with 2020, landlords are a lot less pessimistic. In 2020, there were many commentators predicting we would see a number of operator failures on the back of the pandemic, and our 2020 survey showed that 17% of landlords were either very pessimistic or more pessimistic about the sector. This is now only 8%. There is no doubt that the flex sector has been able to show resilience in the past 24 months, with most operators surviving the period, which has demonstrated its longevity. Performance data Interestingly though, landlords’ perception of the importance of flex has remained fairly consistent. Some 57% of our respondents felt flex was either nice to have, important or very important as part of a building offer, a small drop on the 62% of 2020, but still very much a majority. Key to this is no doubt a belief in the changing face of demand, with 72% of landlords believing tenants will require more flexible lease terms going forward, which is similar to 2020. Yet despite this acknowledgment, the number willing to create their own flex product has dropped from 29% down to 22% in 2022. Given the challenges of the pandemic, this comes as little surprise, with landlords at this stage selecting the easier option of partnering with an existing operator and leveraging their expertise within the space. This is reflected in the rise in the number of landlords open to a management agreement structure from 41% in 2020 to 46% in 2022. The mutual benefits for both the landlord and operators that a management agreement can provide will prove attractive as the flexibility desired from tenants continues to increase. Further, as we see more management agreements being agreed, combined with the subsequent trading of assets and hopefully more data around performance, we expect landlords will increasingly be more open to using them, especially where increased returns can be realised. As a result, the question of value is becoming more important. However, greater transparency is still needed around the operating model performance for flexible offices and the potential underlying returns for investors. Until then there is always likely to be contention on how these types of assets are valued. Clarity required We are seeing more evidence of income premiums being achieved, but this is very much reliant upon it being the right space in the right location. Although there is no doubt that the flex sector has established itself as a fundamental part of the market, for the market to mature further, the issue around clarity and operating models needs to be addressed. The increasing appetite from landlords to adopt flex structures and respond to demand by creating a flex space, or partnering with an operator, will only help to grow the underlying knowledge of the sector. From this we also expect investor confidence will increase and anticipate a greater level of transactional and performance evidence. Cal Lee is global head of Workthere and joint head of Savills Flex Photo: Savills