Flexible space strategies and how they stack up
Landlords are incorporating flexible space in their buildings, prioritizing it as an essential feature. By doing this, they aim to unlock more cash flow and even build a pipeline of future tenants.
In practice, landlords pursue three types of flexible space strategies: leasing space to a third party operator, partnering with operators, or self-operate.
Chart 1: Types of approaches landlords deploy when incorporating flexible space
Source: JLL Research, 2019
All three approaches have their benefits and drawbacks.
For now, leasing directly to a third party flexible space operator is the most widely adopted strategy in the market. Under a straight lease, the risk is on the operator while the landlord secures a rental guarantee, minimizing the risk.
Alternatively, some landlords have developed their own flexible space product. Although landlords need to front all of the capital expenditure, this approach maximizes their upside if a center is successful. One example is SOHO China. The China-based developer conceptualized SOHO 3Q and deployed the in-house flexible space brand across its real estate portfolio. Similarly, developers such as Lendlease and Keppel Land have started their own flexible space concept.
But from an operator’s point of view, a partnership or more commonly known as an “asset light” model is the most viable approach. It can benefit both landlords and operators, allowing them to leverage each other’s strengths. There are a number of ways to implement a partnership, with revenue shares and management contracts being the most common. Under the revenue share option, the operator pays the landlord a base rent and both parties split the upside. The management contract, however, removes the leasing risk for the operator in exchange for no profit sharing.
Both options help landlords and operators to spread the risk in operating a center while also sharing the reward. IWG has been pursuing the “asset light” model in order to decrease their rent costs while offering landlords a share of the upside. Recently, IWG sold their Japan operations signaling a shift to a franchise model for parts of the global operator’s business.
Despite the benefits of “asset light” partnerships, they are relatively less common in Asia Pacific for now. But at the current point in the real estate cycle and with ongoing geopolitical risks, landlords may become more receptive to such partnerships in the near future.