Partnerships prove key as flex office sector sees management agreements increase in popularity

In 2019 flexible office space was at the height of its first major growth phase with many new entrants into the market. It was also at this time that we saw We Work acquiring at pace off the back of its Softbank funding helping to push take-up to over 3 million sq ft in the UK. During this period the majority (81%) of this take up was agreed in conventional lease terms with just 9% on management agreements and 10% freehold. Fast forward to 2022 and the narrative has changed considerably with management agreements now accounting for almost half (41%) of deals and conventional leases taking 56%. So what has changed?

We know that operator occupancy levels inevitably suffered in 2020 as the world was forced to work from home which, for the flexible office market, resulted in operators halting expansions and focusing on working with customers and landlords on existing assets. Not only did we see an expected significant drop in take-up during this time, but for those deals that were being done, we also witnessed a shift towards management agreements, with this type of structure accounting for just over 30% of deals at this time. Essentially a profit share model between a landlord and operator, management agreements often gain more traction in more challenging markets typically due to it being more cost effective and reduces risk for operators. Not only did the number of management agreements increase during the pandemic, but so too did the proportion of flexible office take-up with 474,860 sq ft on management agreements in 2021, compared to 376,576 sq ft coming from conventional leases.

Interestingly, whilst we saw the flex office market bounce back in the second half of 2021 and demand has continued to remain strong throughout 2022, we have not seen any retreat in the popularity of management agreements. This could signify a fundamental shift in the acceptance of this type of structure from landlords who have historically been less in favour of them due to the perceived risk associated with not having a formal lease in place, and the subsequent impact on value. Management agreements have represented 41% of transactions this year and 52% of sq ft taken by operators, a figure we expect to increase by the year end.

Moving forward, the wider economic pressures will inevitably have an impact on the flexible office market, and as a result we are likely to see some consolidation and rationalisation. However, demand for the sector remains strong and we do expect take-up levels to continue to rise, albeit not to the levels seen in 2017 to 2019 in the short term. Another factor for operators to consider is the number of landlords looking to manage space themselves, which brings a new dynamic to the market, although it may also create opportunities for more partnerships in the market.