Office buildings are valued based on the strength of their leases. As I talked about at length in my previous Metatrend essay, this has been a hurdle for the newest, fastest-growing workplace product, the flexible office. A “flexible” office is by nature one that is leased short term, as short as one day in the case of many co-working locations. These arrangements allow both large companies and small startups to grow and shirk their office footprint based on their current needs and stand in sharp contrast to the rigid, ten years leases that are the norm. Flexible offices are also able to charge a premium and can increase office density, often correlated with profitability, to a level not possible in traditional office space.
WeWork taught the world about the value of flexible office space, although it might have taught us more about the reckless exuberance about its potential. Landlords, brokers, and financers see the growth in the space and understand that it is valuable, but are not able to easily quantify it. There was one question I heard over and over when talking to people about valuing a flexible office space: If we can value hotels, which also have single-day leases, why can’t we do the same with flexible office space?
The most obvious answer is that there is no reliable source of industry data. Lease information is not public record, so you have to rely on landlords and management companies to provide the data. There are a number of companies that have been able to aggregate this kind of information from hotels, the most prominent of which is STR, which recently got acquired by commercial real estate tech company CoStar. But no company has been able to do the same for the nascent flex space industry. Without knowing things like local lease prices, vacancy rates, and amenity offerings, there is no way to really assess the risks and the rewards of the volatile demand for short-term workspaces.
After publishing my previous article I was contacted by Ben Tannenbaum. He is the co-founder of CoworkIntel, one of the companies attempting to aggregate and sell flexible office data. “We started by compiling all of the publicly available information on co-working spaces and flexible office suites,” Tannenbaum said. From there, his company will apply a model similar to CompStak’s, where users are able to access anonymized data in return for data about their own spaces.
So far CoworkIntel is only in talks with the biggest flexible office operators but Tannenbaum sees a clear need for the data set. “Landlords and lenders are interested in the space but they are sometimes still discovering this new business model,” he said. Proof of this disconnect, in Ben’s eyes, is that if one were to try and finance a property that was one hundred percent flexible office, it would be hard to find a lender without personal guarantees. “This lack of financial support has made it hard for new operators that don’t yet have a brand name or a big portfolio and has kept the sector from growing,” Tannenbaum added.
We are starting to understand what the important metrics for a flexible office might be. Tannenbaum said that he needs to see not just booking information but a location’s raw revenue data. Only then can revenue streams be separated like flexible suites versus hotdesks versus ancillary revenue from things like events. Calculating things like square foot per desk for flexible space can also be tricky. For example, since some of the area of a flexible office is shared space that area needs to be divided up and shared by the leasable space.
Right now there is very little known about any local flexible office market. But what is known is that these markets are expected to grow post-COVID. For the industry to be able to meet the demand for short-term office space, property and finance teams will have to be able to look up reliable data about its market. Eventually, a company will emerge that can fill that need and we will be able to stop talking about flexible office leases as the unwanted stepchild of the office real estate industry and instead be able to start talking about it as a distant cousin of the hospitality industry.