Partnerships in flex: the secret to premium sustainable returns

The landlord and tenant relationship has remained largely unchanged for centuries. Tenants pay the landlord and occupy their space, only getting in touch when there are problems: job done.

With a more fragile economy and increased cost of entry into property, flex operators have demonstrated that partnership and collaboration might be the true route to achieving a premium on office space, without the landlord having to get involved in the nitty gritty of operating the space itself.

There are many ways to structure a partnership, but it will usually come down to the landlord and operator splitting capex costs, the operator covering the costs of operating the space and then a share of the profits.

The landlord might also get a priority return, so that the operator is incentivised to keep the space full and running efficiently. Sharing the risk at the outset means that the reward can also be shared, bringing an uplift to the landlord.

These partnerships exist as a preferable option for landlords when compared with management agreements, which traditionally involve operators taking a management fee before the landlord makes any return. This model doesn’t involve an operator putting any skin in the game themselves, and doesn’t incentivise them to maximise returns for the site.

We operate our sites using these partnership models and since starting our business nine years ago, landlords have become more receptive to this – seeing the benefits of higher returns long-term compared to ‘traditional’ leases.

In 2018, we partnered with GPE to provide 25,000 sq.ft. of flexible office space at New City Court, London Bridge. It was the first partnership deal GPE had done and there was some hesitation initially over the perceived risks.

The proof is in the pudding. Not only have we now expanded to 70,000 sq ft in that location, but as of September 2022, we now operate 20,000 sq ft at The Hickman, Whitechapel, a newer GPE development.

One of our major landlord partnerships is with GPE, which as part of its strategy wants to increase its flex offer significantly. Following our successful relationship in London Bridge, we were brought on board to offer further space at The Hickman, complimenting their successful fully managed office product. Within nine months, we were at 92% occupancy, which enabled GPE to get premium returns at speed.

The partnership also sees us collaborate on other aspects at The Hickman. We provide vital meeting rooms, breakout spaces and event space for the other tenants, and have assisted in bringing a sense of community to the building. We collaborate on our sales process too, including leads being shared between us if potential tenants would be more suitable for other spaces.

We’ve even had Runway East members outgrow our space and ‘graduate’ to GPE’s own Cat-A+ products. TPXImpact joined Runway East in 2021 with a team of 60. Earlier this year, its team had outgrown the space with Runway East, so it moved to GPE’s flexible space, where it took 6,750 sq ft.

Across our portfolio, we returned our landlord partners an uplift of 35% above NER last year. These are returns that traditional leases wouldn’t be able to provide and they act as a reward for the trust that landlords put in us when they invest capex in our spaces.

So much has changed in the last five years. Landlords are starting to come around to the idea of innovative deal structures in the form of these partnerships. They have seen how leases can come back to bite them and many have been exposed to the dangers of pure management agreements as well.

A significant decrease in the risk profile by sharing it with the operator is surely the best way forward for landlords and operators alike. The next five years will undoubtedly demonstrate an even greater shift to the partnership model as landlords and operators see the benefits of collaboration, providing greater returns as a result.