Flex space - a landlord's delight? - Boodle Hatfield

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18 Jun 2021

Flex space – a landlord’s delight?

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3 min read

Hotel, motel, a new model is in. 

Before we get started, let's look at how hotels are (broadly) operated:

  • A landlord will either lease a hotel to an operator, or choose to enter a hotel management agreement (HMA) directly.  In an HMA, this party is generally referred to as the Owner.
  • The Owner enters into a hotel management agreement with a Hotel Manager. The Hotel Manager has expertise in managing a hotel.  It will charge a base fee and a performance fee, often a percentage of gross operating profit over a certain threshold.   
  • The Owner may also enter into a franchise agreement with a franchisor.

The key document is the hotel management agreement. This is the document which turns a hotel building into a functioning hotel. It deals with accounts, budgets, centralised services (like IT), employees, as well as fees for the manager.

And a serviced office?

Serviced offices have worked very differently, up until this point.  

In a serviced office set up, generally a landlord leases its offices to an operator, which then sublets the property to tenants on short-term contracts. If you're familiar with WeWork, this is how they do it.

Enter Covid, and the rise of flexible working. 

Covid has opened Pandora's Box for employees. They (we) are torn between realising that working from home isn’t quite the pleasure it first appeared, and also enjoying spending more time with the family.

Landlords are cottoning on to this and are now re-evaluating how their office space is used (and employers are working out what they need).   Serviced offices have long been a popular alternative to simply finding one tenant, and demand for flexible working options is only increasing.

However, many landlords have been burnt by the previous incarnation of serviced offices. By leasing a space to one operator, and relying on their ability to sublet it, landlords put all their eggs in one basket. When the music stops, landlords lose out. 

What is next?

Now is an opportune moment for landlords to take note of the hotel industry.

By entering a hotel management style agreement with flexible office operators, landlords can adopt a more collaborative, flexible approach. The 'landlord' v 'tenant' relationship can suddenly become more akin to a partnership or joint venture arrangement, and it allows landlords to de-risk their position because although landlords lose some of the security provided by one leaseholder, they diversify their assets by enabling direct access to a wider tenant mix.

However, landlords are not in the business of operating a flex/serviced-office business. That's why they are landlords, not tenants. But partnering with flexible working operators in this way enables them to be a part of their own solution - they can effectively install a serviced office business, without losing sight of who its occupiers are, and how the underlying business is operated. 

Other elements such as franchise agreements naturally follow. Operators can develop a brand, landlords know what their space will feel like, investors can back a scalable business, and employees do not need to be nervous about a poor internet connection, or bad coffee.

As occupiers seek to build more flexibility into their portfolios, landlords are increasingly recognizing that real estate agility is a long-term trend. Landlords who are quick to adapt to evolving tenant expectations – for instance, by providing “core and flex” solutions – will be well positioned for the post-COVID-19 era

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