Flexible office space has been around since the 1960s but in the last decade the market has evolved rapidly, in response to mobile technologies, flexible employment and the Covid-19 pandemic.

Now accounting for 10% of London offices, an increasing proportion of regional office space is also being devoted to ‘flex’.

Landlords have embraced the concept, acknowledging that a flex offer can enhance an asset’s appeal as well as diversify income streams. Increasingly, landlords and investors are looking at space as a “service” rather than a straight asset, in response to occupier expectations.

As you might expect from an immature industry, a range of business models has emerged. These range from owner/operated space to managed space – via a hybrid/turnover lease, management contract or franchise. The way operators let their space also varies and includes traditional leases and licences, which for coworking offers can be month by month. As a result, there can be ambiguity regarding security of tenure and landlord/tenant rights, and income is obviously more volatile.

All this makes valuing assets that include flex office space highly complex.

The flex space industry’s relative immaturity and the lack of transparent data also add to the conundrum.

Traditional valuation methods assume perpetual fixed income capitalised by an implicit all-risks yield. But in the case of flex offices, the return is linked to the revenues and profits of the business conducted from the premises.

Whilst occupation costs (desk rates) are often available, operational data such as occupancy and retention rates, as well as profit margins, are cloaked in secrecy. Benchmarking current – let alone historic – income is therefore difficult.

Designed for conventional lease structures, traditional valuation methods also fail to capture the dynamism of the sector.

Another option in the valuer’s toolbox is discounted cashflow (DCF). This approach is arguably more appropriate, allowing the valuer to analyse the cashflow in detail, enabling the distinction between property-related income and business-related income. There is already precedent for using this method in the hotel sector, where Revenue Per Available Room (RevPAR) is one of the valuation metrics.

It’s becoming increasingly clear that new metrics and a universally adopted valuation framework are needed for the niche but increasingly important flex space sector.

Occupancy rates and service revenue data is key here. This will require landlords, operators and valuers to work together to create reliable benchmarks. Encouragingly, the creation of the Workplace Intelligence Network (WIN), founded by key flex operators in 2024, aims to share information and improve benchmarking.  The initiative marks an important step in standardising performance metrics.

There are also signs that the business model is settling down. In 2024, more than 40 per cent of deals for flexible office space were via management agreements (compared to 9% pre-pandemic). If this is – as lis ooks likely – the preferred model going forward, it will make it easier for valuers to compare apples with apples.

The RICS reissued its Insight Paper “Valuation of Flexible Workspace” (2019) as Practice Information in 2023. However, this needs updating and a guidance note would be welcome to bring some clarity to the method adopted and information required. Quite possibly this will be a combination of traditional real estate metrics, with operational performance/DCF indicators.

The UK is currently the global leader in the flex office market. My concern is that inconsistent valuation methods could put the brakes on investment. We can all point to examples of office building sales that have stalled because of the difficulty of appraising the contribution made by the flex element of the asset. I urge the RICS to take a lead on this.