Flex space in Latin America

Flex spaces are certainly not a new phenomenon in Latin America. Since 2010, the flex space market has grown 23% per year throughout the region. Currently 3.6% of the total class A and AB office stock in Latin America (or 900,000 square meters) is flex space compared to 24,500,000 square meters across the total office market.

The first phase of the flex space expansion is consistent with what we have observed in other markets globally, initially emerging through the co-working model focused on freelancers and start-ups. This service not only provided quick and flexible access to fitted space, but also a community with a professional and social network. This initial trend is changing. Flex space companies are shifting their offer from the liquid workforce, towards more traditional corporations and office users.

It is important to highlight that flexible spaces can be interpreted either as a workplace configuration or as a business model.

From a workplace perspective, it represents a multifunctional space that can allocate different work patterns within one office design. The concept of activity-based workspaces** probably best describe this approach. If implemented correctly and adjusted to the specific needs of the respective companies, flex spaces can impact employee satisfaction and improve performance. Flexible workplaces can also considerably reduce the required amount of office area by optimizing the use of existing space.

As a business model, flex spaces represent third party office operators who deliver flexible solutions across a wide range of clients’ needs. These services usually work with membership fees and include the provision of fitted workspaces as well as amenities. It is interesting to highlight the tendency to increasingly accommodate prospective tenants, especially those with large space requirements. By doing so, these companies are diversifying the range of flex space models, while at the same time, shifting the focus towards traditional corporate office occupiers.

The diversified offering of flex spaces as a business model can be categorized (1) in accordance with the setup of the players involved in the delivery of the flex space offering and (2) the workplace configuration of the flex space that is being offered.

Stakeholder structures usually have four different models. The most common is where a third-party operator leases a space from a landlord. This model currently accounts for 76% of global flex space stock. The second model involves an arm’s length agreement between the landlord and a third-party operator to manage and operate the flex space on their behalf. As the evolution of the industry has unfolded, new models have emerged that align interests between landlord and operator more closely. As a result of this we have seen the emergence of the third model with the landlord and operator collaborating to run the space, sharing both risk and profit. The “self-perform model” is the extension of this and represents the fourth stakeholder model, where the owner of an asset directly operates the flex space solution.

Three different arrangements can be described from a space configuration standpoint: “Traditional”, “Hybrid” and “Coworking”. These models describe how the area is used and distributed within a flex space solution. In other words, how many square meters are allocated to assigned offices, collaboration areas, unassigned desks, and amenities.

In a “Traditional” layout, assigned offices take up to 80% of the total area. These services usually work with a single membership option. Alternatively, in a “Hybrid” layout, less space (60-65% of the total area) is used for assigned offices. The workplace design focus is on collaborative spaces and usually works with a variety of membership models. Finally, “Coworking” represents ecosystems where no desks are assigned, and the layout is structured to maximize collaboration. It provides membership models that can start as low as hourly usage rights.

In line with global trends, flex space has experienced unprecedented growth in our region, which is evidenced in the aforementioned percentage of flexible office spaces with respect to the total office stock in Latin America (3.6%).

Flex space providers have recently shift their focus and started delivering solutions to more traditional corporate occupiers. This development responds to an increased demand from this type of user. According to JLL’s research intelligence, by 2030 up to 30% of corporate real estate portfolios will be flexible, on-demand space, thus representing a seismic change within the market.

The increased demand from corporate occupiers can be explained through different factors that affect the way people work. Millennials and centennials (the new workforce generations) are demanding companies to adopt different work arrangements, especially those that stimulate interaction. The challenge to attract and retain skilled workers, who are unlikely to value traditional office layouts, is pushing corporations to embrace these new paradigms. Another element driving these changes is technology, which enables the implementation of flexible working practices. Finally, the demand for flex spaces is also being stimulated by space optimization strategies. According to more than fifty utilization studies undertaken by JLL with corporate clients from different sectors within Latin America, the average vacancy rate in existing, more traditional offices is 40%.

It is worth noticing that some corporate users might be reluctant to move their workforce to buildings operated by flex space providers. Their main concerns include confidentiality issues, a restricted branding of the space and hence loss of corporate identity, and finally the risk of losing talent due to the strong exposure of staff to other companies (e.g. interaction with other firms within common areas). In addition, it is important to understand the financial impact of this service. In the short-run it represents less capital expenditure, but in the long-run, however, flex space memberships are more expensive when compared with traditional lease structures. In the latter arrangement, tenants benefit from a lower P&L impact after the furniture and fittings depreciate. Membership fees, on the other hand, do not amortize.

Conversely, it should be considered that all aspects that might deter corporate users from considering flex spaces are related to flex space providers and not to flex space as a workplace configuration.

In line with global trends, flex spaces have experienced an unprecedented growth in our region, evidenced by the abovementioned percentage (3.6%) of coworking space with respect to the total office stock in Latin America.

An analysis of the different markets in the countries of the region surveyed by JLL reveals that Mexico is topping flex space provision with 300,000 square meters, followed by Argentina (177,000 square meters) and Brazil (153,000 square meters). The share of flex space in relation to overall Class A and Class AB offices varies between markets, with Chile at the bottom (1.6%) and Argentina at the top. In the latter country, flex providers constitute 11% of the total office stock.

Based on the forecasted demand of corporate occupiers, JLL predicts that, on average, 15% of the total office stock in each market will be flexible space by 2030. In Latin America, two strong drivers fuel this trend:

• The avoidance of capital expenditure (in the region, offices are usually delivered core and shell); and
• Market volatility, which demands flexible solutions in relation to lease commitments, investments and capital expenditure.

Flex spaces, both as a workplace configuration and a business model, are here to stay. Providers will keep increasing their offering and playing an essential role in the corporate office space market within Latin America. In general, companies are willing to leverage the advantages that flex spaces provide.

*Markets within Latam countries surveyed by JLL: Buenos Aires, Santiago, Bogotá, Mexico City, Monterrey, Guadalajara, Lima, São Pablo, Rio de Janeiro, Medellin, Cali.

** Activity based workspaces support the premise that no employee has an assigned workstation. Rather, the broader workspace provides employees with a variety of predetermined activity areas that allow them to conduct specific tasks including learning, focusing, collaborating and socializing.