The flex office sector, no longer a fledgling market, is demonstrating increasing signs of income resilience and tenant demand, yet it remains undervalued by property appraisers and lenders. This gap between performance and valuation is a growing concern within the commercial real estate industry, as operators and landlords recognise the secure revenue stream that well-run flex spaces provide, but still face challenges in reflecting this value accurately in building appraisals.

A vivid example is British Land’s Storey workspace at 100 Liverpool Street in the City, which has maintained occupancy levels above 95% for an average duration of four years. Becky Gardiner, head of Storey and managed workspaces at British Land, emphasised at a recent Bisnow UK Office Conference that this steady, long-term occupancy should logically translate into higher valuations. "How we're not getting the benefit of that extra income is beyond me," she remarked, highlighting the disconnect between operational success and formal appraisal.

Despite flexible office space having existed for over two decades, industry data remains limited and opaque, impeding a clear assessment of its true market value. In response, leading operators including GPE, British Land, and WeWork have formed the Workplace Intelligence Network, aiming to compile and share anonymised data on occupancy rates, rental achievements, and market churn. Their goal is to inject transparency into the sector to better inform valuers, investors, and partners about the robustness of flexible office income streams.

Industry experts warn that the undervaluation of flex space creates a self-limiting cycle. Landlords, aware of the lower formal valuations, hesitate to allocate more than about 20% of their building space to flexible use, fearing negative impacts on overall asset value. Raj Rajput, managing director of asset management at Hines UK and Ireland, noted that in underwriting decisions, there is a prevailing caution to prevent flex space from exceeding this threshold so as not to "hit value."

Meanwhile, flexible workspace operators like WeWork are adapting with innovative models, such as expanding managed solution agreements that involve co-terminus leases between landlords, tenants, and WeWork itself. Luke Armstrong, WeWork’s Regional President, sees this as a step toward attracting new capital and investors to the flex market, moving beyond traditional service provision to integrated asset management. This evolution could help overcome some of the valuation challenges seen to date.

Supporting this perspective, research from Greenstreet underscores that well-managed flex office assets can command a valuation premium of around 10% over traditional office spaces, particularly when flex space is effectively integrated as a valued tenant amenity. By partnering with specialised third-party operators, landlords have enhanced building valuations in response to tenant demand for flexible working options, reinforcing the sector’s financial viability.

Data released by XY Sense also reveals regional variations in office occupancy that contextualise flex space demand: UK office utilisation rates stood highest at 62% in early 2023, reflecting a strong preference for flexible work environments compared to other countries where rates were much lower. Similarly, a report by OfficeRnD reinforces the stability of flex demand, showing consistent desk occupancy rates around 72.5% through 2025 and a rebound in private office usage, pointing to increasing employee and employer commitment to flexible arrangements.

In the United States, S&P Global Market Intelligence reported that publicly listed equity REITs, often inclusive of flex spaces, posted higher occupancy rates (88.1%) than the broader commercial real estate market (86.5%) at the end of 2023. However, another S&P analysis highlighted that while many REIT-owned office buildings experienced occupancy declines during the pandemic era, premier properties with flexible workspaces retained stronger occupancy levels. This contrast signals that well-managed flex spaces contribute positively to building performance even amid broader market challenges.

Additionally, CBRE’s data from 2020 shows that incorporating flexible office space up to about 30% of a building’s total area does not negatively impact overall asset valuation, reinforcing the notion that flexible working environments are not a risk factor but rather a stabilising influence on property value.

Collectively, these insights affirm the growing importance of flex office spaces as a resilient and valued component of modern real estate portfolios. The formation of coalitions like the Workplace Intelligence Network, combined with emerging data validation, is driving a more informed dialogue with valuers and investors. This evolving transparency is expected to gradually improve the valuation and acceptance of flex office income, unlocking further growth potential in a sector that is becoming an essential element of the commercial office landscape.

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Source: Noah Wire Services