With Flex Space Taking Over 30 Percent of Office Market, Brokers Face New Challenges

With the growing shift in the office market toward flex space, office brokers are facing a sea change that will deeply impact how they operate. Partner Insights spoke to John Arenas, CEO of flex space provider Serendipity Labs, about how brokers will have to adapt to the new office landscape, and the opportunities afforded them once they do.

 Commercial Observer: How has the emergence of flex, including work from home and hub-and-spoke, affected the broker community?

John Arenas: The major real estate brokerage firms have developed new business lines to address the emergence of flex office. They recognize that if 30 percent of all office space is going to be flex and they want to continue to participate in the fee generation and economics, they needed to invest in those business lines. This includes maintaining their tenant representation share of market and their agreements with landlords so that they’re experts in flex property management. Their fee-driven procurement and product development businesses face a potential loss of market share if they don’t create these new flex office business lines. They’ve even gone to the point of joining in as providers. CBRE did that with a product called Hana, which they ultimately merged with another flex operator. The other thing that’s interesting is that the big brokerage houses are creating technology platforms that house inventory and pricing of flex office availability, so that their brokers and customers can search, compare and book not just offices, but meeting and drop-in desk space. That’s what’s coming next.

CO: Do you see this as a fundamental change in how brokerage firms and brokers will work, or just slight adjustments to their general business approach?

JA: With 30 percent of fees up for grabs, that’s a major change, and not just for the brokerage houses. Tenant rep brokers have already begun showing flexible office alternatives to conventional office space clients without being asked by their clients because a large percentage of office space requirements are under 50 people, and that fits into the flex office model. So as a tenant representative broker, doing your job well for a client will mean understanding their business problem, and then addressing it with a workplace solution that includes an outsourced workplace as opposed to just finding them square feet in an office building. That’s a major shift in how they approach business. Instead of being the keeper of information about what’s available and what the price is and taking your clients out to tour, it’s about actually trying to understand the business objective of that client. Do they need temporary swing space? Are they trying to support a distributed work strategy? Are they making sure they have an inspiring place to attract and retain employees? All of those are well suited to a flex office operation. So, if you’re a tenant representation broker and you’re just showing square feet, you’re going to be at a big disadvantage.

CO: For veteran brokers who have always worked with conventional office, is there a new body of knowledge required for this?

JA: It’s not rocket science, but it is a whole new set of information to gather from the client and the operator. In the old days, you would ask the client how many people, how many offices and what their budget was, then look for a space and help them negotiate an agreement. Today, you need to know all that, but also what their workplace standards are, because more and more they’re looking for a compliant, outsourced, flexible workplace arrangement. The broker needs to understand which flex office providers are offering a workplace that is managed for health and safety, for technology compliance, and for service-level delivery on hospitality. Those are the important differentiators among flex providers. Also, who owns the facility? Is it a regional operator? A national operator? Serendipity Labs licenses its platform and operates on behalf of landlords, so clients are signing an agreement with a landlord-controlled entity. That’s a big difference if you’re an occupier who wants to trust the credit and financial strength of a particular flexible office operation. Knowing that it’s owned by the landlord provides a lot more comfort than if the location was owned by an independent operator, or even a venture-backed coworking company.

CO: How will these changes affect the nature of the broker-client relationship?

JA: When you think about the amount of any building now being managed by a flexible office operator, that particular inventory is no longer available to sell, because it’s being sold by the operator. However, many flexible office operators – like Serendipity Labs –  hire a real estate service/brokerage house to represent the location as an additional marketing source. And so, brokers can still participate if they win the contract to represent the coworking operator as a marketer for that facility.

CO: How does all this affect the broker’s earning potential?

JA: There used to be a sense that flexible office deals weren’t opportunities for large commissions. However, because companies are using flex office for up to 50 or even 100 workers, the economics have grown considerably. And because the flex operator pays a commission based on the contract value at a 10 percent commission rate, the flex office deal commission can be equivalent to, or greater than, a traditional sublease or conventional deal for a two-, three- or four-year term. In the U.K. market, which is a much more mature coworking market, the brokerage community has becoming incredibly attuned to how to sell flexible office. There, more than 75 percent of all flexible office transactions are brokered, whereas in the U.S. it’s still less than 20 percent. That’s the direction things are headed in the U.S. Flex will be part of the brokers’ business plan. When brokers learn how to represent the value and understand the economics, it will grow into a majority market share of all transactions happening through brokers.

CO: How does Serendipity Labs work with brokers?

JA: We have agency agreements with brokerage firms and agents to represent our locations, and they get an override on deals that are sourced from the brokerage community. If we’ve assigned a broker to our location, and a referring broker from another firm brings the deal, that referring broker gets paid the 10 percent commission, and the broker we hired to help manage our broker channel gets an override of half a commission. That gives everybody incentive to be involved.

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