It’s Time to Embrace Flexibility as a Permanent Reality

reprints


I just hit a milestone birthday. It rhymes with nifty, and so far, it has been just that. To memorialize my “half-way” mark, I decided to run a half-marathon. For my training, I enrolled with a running coach who has made it abundantly clear that the key to success will ultimately depend on training and stretching because “flexibility avoids rigidity and rigidity can cause injury.”

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As a commercial real estate professional and a midlife aspiring athlete, it seems agility strategies may be the secret sauce to success in both arenas.

Here are some real-time facts that prove that it’s time to embrace flexibility as a permanent reality.

From Niche to Norm.

Historically considered a niche offering, flexible office space has become a prominent component of several real estate strategies. It is not new for freelancers, remote workers and startups; but, today, the model is also squarely related to large enterprise interest levels in speed and cost savings. This well-documented interest will drive continued exponential growth of this sector.

The Demand is Clear.

Market data provider Statista estimates that more than 1 million people in the U.S. will work out of flexible office space by 2022. There is enough demand to meet the existing supply of flexible office space, and that should continue.

Landlords are finding increased demand for flex space offerings from potential tenants. Many lease agreements between traditional landlords and flex office operators are giving way to a range of models that are changing the risk and reward dynamics for both parties, according to CBRE research. Some landlords are even introducing flex offerings under their own brands—stay tuned for more, we may be just scratching the surface here.

More Tech, Means More Flex.

Los Angeles has made great strides in establishing itself as a major tech hub, in large part due to its thriving content, media and entertainment industry. Given this fact, L.A. is now the third-largest tech talent labor pool on the West Coast, and the metro placed among the top 10 growth markets for increasing its tech occupations, according to CBRE’s annual Scoring Tech Talent Report.

That being the case, it’s not really a surprise that Los Angeles ranks second on the list of top 10 flexible space markets. The 10 largest flex office markets (which accounts for 64 percent of the 71 million square feet of flex office space tracked by CBRE) are also top tech markets and are continuing to increase their share of flex space faster than others.

Tech companies tend to be avid consumers of flex space due to the quantity of smaller players and start-ups that seek more affordability with great amenities and the exposure to coincidental collisions of talent that occur when sharing space with other likeminded companies. In L.A., the variety of flex offices also provides smaller tech companies with a more affordable way to be closer to their talent and clients that often reside in expensive neighborhoods.

Greater L.A.’s flexible office sector has grown by 264 percent since 2014, according to our research. Since 2017, tech markets increased their flex office penetration by 70 percent compared with 43 percent in other markets.

Flex space in our area is heavily concentrated in Downtown and on the west side. West L.A. accounts for nearly 40 percent of the market’s flexible space inventory. Yet submarkets including Glendale, the San Fernando and Hollywood have doubled their flex office footprint since 2014, due in part to tightening availability of office space for long-term lease there.

While the flexible space sector accounts for only 2 percent of Greater L.A.’s overall office occupancy, it is the fastest-growing market segment with a footprint of more than 5.5 million square feet.

The Occupiers Are Speaking.

According to CBRE’s 2018 Americas Occupier Survey:

75 percent of corporate occupiers anticipate including flexible space in their occupancy portfolio over the next three years.

52 percent of respondents anticipate implementing some level of unassigned seating in their workplace to promote space efficiency and space plan flexibility.

81 percent of respondents perceive amenities as integral to the employee experience and engage landlords and other service providers to enhance these offerings.

Where’s the Ceiling? Only Time Will Tell.

Under 2 percent of total U.S. office inventory is dedicated to flexible office space and there are only a handful of submarkets that have more than 5 million square feet of total office inventory with a flex-penetration rate of 5 percent or more.

CBRE has constructed a model to help predict the amount of flexible space that may be delivered to the market by 2030. These growth scenarios are likely to change to some extent as the WeWork news continue to unfold but still provide valid insight regarding the future potential of this sector.

The low and mid-growth scenarios are based on an assumed level of future flex demand that market supply growth can accommodate.

The high-growth scenario assumes a significant shift in the portfolio strategy of companies using flexible office space and a large share of office space changing into flex from rolling corporate office leases. The low growth scenario is not likely given the interest in and growth of the sector.

The mid-growth scenario—the most likely one to occur—would increase flexible office space to 13 percent of total supply by 2030. That’s notable.

The Finish Line.

In today’s fast-moving and hyper-personalized world of work, there is no one-size-fits-all-solution. While the real estate industry is rarely a first mover, the fiery growth of flexible office space runs concurrently with our dedication to stay nimble, and our collective appetite to run the race at our own pace.

DJ Sandler is Senior Director, Los Angeles of CBRE.