If you’ve spent any time reading my articles in the past 15 months, you’ll know I’ve spent the entire pandemic studying and speculating on the future of the flexible office space industry.
And now, we’re seeing it unfold before our eyes: Launch Workplaces has sold more offices in the past three months than we did in the previous 12 months combined.
But this uptick in demand is a double-edged sword. And if you’re not prepared for it, you’ll find yourself on the wrong edge.
Demand is Skyrocketing
Demand for flexible space is exploding. The first wave of people wanting to get back to work is happening right now.
This surge in demand is coming from every outlet:
- Individual workers are now beginning to receive per diems to find spaces to work other than their local corporate office, meaning they can choose where to work–and many are opting for locations closer to home
- Smaller companies (groups that normally executed prime leases for 2,000 to 5,000 square feet) are now shopping for smaller, more flexible options, and many are finding more convenient locations as well as more attractive terms and pricing in nonurban markets
- Enterprise clients are rolling out hub-and-spoke models and are looking for multiple smaller flexible locations in a region
In fact, GSA just awarded a $50 million contract to a group of coworking companies to further its long-term future of work strategy.
Supply is Lagging
According to a study from Upsuite, more than 700 flexible office space locations closed in the last 15 months alone. That represents a decline of more than 20% in available spaces since the start of the pandemic
The facts are now clear: COVID-19 took its toll on a lot of coworking operators.
Many single-location entities, as well as a fair amount of larger multi-location operators that had long-term leases, struggled to survive the pandemic. And it’s safe to assume that more will succumb in the coming months.
And while the supply-side depletion may be slowing, Upsuite’s report indicates that most major markets are still seeing more closures than openings.
The Resulting Effects and Opportunities
You don’t need an economics degree to understand the benefits of growing demand and shrinking supply: the markets that are experiencing this phenomenon are seeing growth in their pricing power or, at the very least, seeing a decrease in discounting.
But here’s where it gets interesting for you.
Owners and landlords are dealing with a lot right now:
- Most renewal conversations are about downsizing
- Current tenants are asking about giving back space on their leases
- The proposed terms for new prime deals are lopsided in favor of the tenant
- Construction costs are still high
So the question becomes this: when does the owner or landlord sit back and talk about their portfolio strategy?
If you ask me, I’d say hopefully very soon.
In most cases, adding a flexible component to your portfolio is not like flicking a switch. It takes time to open flexible office space. Even if you signed an agreement to build a flexible office space today, it would take you at least five months to get your doors open:
- One month to get detailed drawings
- One month, if not longer, to get a permit
- At least three months to actually build the space
So, your window is closing to get in front of this opportunity.
Consider Your Tenants, Now and Going Forward
It’s a unique time to be a building owner.
You need to take a look at your commercial office business and ask yourself some important questions:
- What kinds of deals are coming your way?
- How many solid, prime tenants are looking for 15,000, 30,000 square foot spaces for 10 years plus?
- While there is certainly room for these tenants in a building, can you afford to fill an entire building with them?
The fact is that the commercial office space is changing: the future is flexible. The pandemic is accelerating that change and it’s happening while you’re reading this.
Flexible workspace is on pace to not only rebound from pre-pandemic numbers but ultimately skyrocket past them. And as a result, a shortage is imminent. If you’d like to learn more about flexible office space and how our managed model works, you can read a bit about our management process. And if you’d like to get the conversation underway, get in touch with us today. I’d be happy to talk to you about the process and conduct an evaluation of your building.
Full disclosure: I am painting with a skinny brush (current Launch markets) and a broad brush (making national generalities). Not every market is the same; every market will recover at its own pace; and not every market will have supply issues or shortages.