CoreNet Madrid: The future of flex is related to choice

Friday, October 12 , 2018

CoreNet Madrid provided key insight into the flexible workspace market - but the key takeaway is that choice is at the forefront of it all.

CoreNet’s EMEA Summit is one of the biggest events in the workspace calendar with delegates from across the region descending on Madrid to discuss the issues dominating the office of the present and the future. This year’s event gave Instant the opportunity to lead a discussion with influential panellists to discuss the impact of flex workspace on the conventional market and the future of the market.

We brought together a panel that represented very different views of the market from WeWork, to EY and Brookfield, one of the world’s largest landlords, and from the investment side, RBC. The intention was to discuss the impact of a flexible approach to workspace from the perspective of landlords, operators and corporates and encourage a lively debate – however, there was much more common ground between the panel than we first anticipated!

Market Context

First up was setting the scene, the big picture was that the UK is amid a period of profound political challenges, something that has contributed to the nervousness of the commercial property market. For many industry commentators demand for flexible workspace has increased because of this uncertainty and the reluctance of occupiers of all sizes to sign long-term leases while the status of the UK in the EU continues to be unclear.

With this trend in mind, John Duckworth asked Andy O’Donnell – Real Estate Leader at EY if flex is a sustainable trend:

Flex is part of EY’s portfolio ‘the puzzle’ – however is not the answer for everything. Macroeconomics including, of course, Brexit will delay decisions and the impact of wider factors will lead to businesses and investors having shorter planning horizons – in the future we believe that business planning will be limited to three-year max.

Martin Wallace, Head of Leasing at Brookfield also commented:

It is all about supply and demand, but the trend of increased demand will work for some landlords and some are using 3rd parties to deliver this product. Big occupiers want Core / Flex / Super Flex but not all landlords can provide this at this current time.

However, Ronen Journo, SVP for Enterprise & Workplace Strategy at WeWork claimed that the shift was not that simple: “Fundamental change is not about macro business factors, but it is more about aggressive disruption across all industries (Pharma / Finance) and is no longer about a 5-year business plan. Real estate has taken longer to adapt to this, but as the 2nd largest cost of a business, how do I adapt to a consumption-based model? (as much as I need at any time)?


Valuing the Brave New World of Flex

As more alternatives to conventional methods of occupying space, how does the sector start to place a value on the intangible asset we call ‘service’?

Charlie Foster, Head of Real Estate Europe at Royal Bank of Canada listed several factors in the challenges to adopt a new valuation model:

  • The quality of the income stream is no longer linked to lease length exclusively
  • The dominant providers are now backed by the biggest players in the Real Estate community – Blackstone / Brookfield thereby validating its longevity
  • The thing they all have in common though, is a recognition of what quality does to enhance an asset value
  • Recurring income stream: the challenge for valuations is the perception that a long lease is a good thing VERSUS a high level of occupancy and repeat custom from a satisfied client / tenant.
  • This is far more aligned to the hospitality & consumer sectors, which is something the landlord community is slowly adapting to
  • The UK is struggling with the perception that a long lease is a good thing versus a high level of occupancy and likelihood of the customer staying within the space

Winners & Losers of Change

So, despite the slight difference in view of the macro issue behind this substantial change to the way that commercial real estate will be procured, our panellists all agreed that the changes of the past few years are here for the long-term.

The inevitable use of the term “Disruption” sprung up in the conversation and this implies that there will be winners and losers, but the panel had some interesting views on what this would mean for the sector:

Martin Wallace said that it is a longer game for landlords: “Investors still cannot get their heads around the flex model – but if this evolves and the RICS can change valuations for flex and becomes the ‘norm’ the entire industry will benefit.” He also iterated that Brookfield has already invested in US-based operator Convene but is also keen to embrace the sector by letting space to the likes of WeWork / IWG and so on. This will always be led by the client’s requirements

From the perspective of WeWork, Ronen Journo said there will not be winners & losers: “Cities are becoming denser and landlords should consider human expectations, as to how do we cope with more collaboration and less use of mass transportation – there is a need to adjust expectations of where we work.”

However, ultimately, Andy O’Donnell thinks that this will all be dictated by supply and demand: “EY is prioritising new buildings that offer Flex space because business and client alliances are so important to their business, that they must align with them and retain their own ethos. This is a challenge, but flex offers options.

The Market Challenges

One of the biggest challenges in flex space is how corporates can maintain their brand identity, individualism, and culture. WeWork think they have cracked it, with bespoke fit-outs in their private offices, but to become fully flexible, operators must have an approach that satisfies all customers and ultimately this is about CHOICE.

Andy O’Donnell was keen to discuss the collaboration across three critical strands, which will ensure enhanced environments and increased productivity: “Corporates drive the ownership of space. The culture is driven by operators. And buildings drive the communities.”

There is strong logic in this approach and allows the experts to focus on their areas of knowledge, resulting in greater efficiencies and client satisfaction. A key theme across the session was focused on differentiation and how offices can offer increased choice and superior service. Clearly the main differentiator will be service, as spaces become more and more standardised, the best service will make one operator stand out from the next.

The Future

I asked the panelists what their outlook for the future:

Ronen Journo, WeWork: “I see flex going to an extreme – a choice, the ultimate choice. The go somewhere and use it as a consumption-based model. Uber did it. And it is coming for flex workspace.

Andy O’Donnell, EY: “Choice comes from going into the wider market, and we are now at a point where there is a critical mass of choice of larger and independent operators, which can only be a good thing for the customer.

Martin Wallace, Brookfield: “Offering clients flexibility is critical. Most of our buildings in major cities have a percentage of space let to flex operators which is being driven by demand, and this will continue…”

And therefore, the future for flex is related to choice - any industry, if it doesn’t provide the customers with what they want then they will fail. It means that there will be a lot more options for customers, and this is the basis for real disruption in the commercial real estate market – a re-thinking of the product it supplies and the service it provides.


John Duckworth
A highly experienced real estate executive, John spent 18 years at JLL where he was a member of the UK Board and, amongst other responsibilities, ran their Corporate Services business. He has worked across the EMEA market in a number of roles, starting with the Tenant Representation team in Paris and latterly becoming Managing Director for JLL Central & Eastern Europe, based in Warsaw.
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