Master’s Programme in Real Estate Economics

Flexible office space platforms: investor’s

perspective

Alexander Saares

Master’s Thesis
2021
Copyright ©2021 Alexander Saares
Author Alexander Saares
Title of thesis Flexible office space platforms: investor’s perspective
Programme Real Estate Economics
Major Real Estate Economics
Thesis supervisor Prof. Seppo Junnila
Thesis advisors Annina Saari, M.Sc.; Ari Käkelä, LL.M.
Date 01.06.2021 Number of pages 51 Language English

Abstract
Nowadays, all sizes of office occupiers demand flexibility from their premises. The global
pandemic has changed the way knowledge workers work. Thus, the enormous office
investment market is changing. Platform-based solutions thrive on several industries. This
study reviews the possibilities flexible office space platforms offer landlords under the
changing market conditions. This study examines flexible office space platforms from
landlord’s perspective through a case study in addition to a literature review. The case study
showcases the economic boundaries under which a flexible office space concept is
profitable to offer through a platform.

Flexible office space platforms usually cover the management of invoicing, user
agreements, and digital infrastructure in exchange for the platform fee. Flexible office space
concept’s cash flow differs in comparison to traditional leasing. Even though flexible office
space produces uncertain cash flow, the potential yield is high. There is dissenting views on
how the presence of flexible office space concept affect the value of the premises and how
the flexible office spaces should be accounted in valuation.

The results of the study suggest that relatively high occupancy is required for the flexible
office spaces to surpass the profitability of traditionally leased spaces. As flexible space
occupiers demand high quality fitments and services, many additional costs are introduced
to asset level if operating flexible space is desired. The costs on top of the increase in
uncertainty of the cash flow make flexible office space operation costly, which landlords
require compensation for. We present that landlords are not going to offer flexible office
spaces widely if the space users are unwilling to pay considerable amount for the flexible
occupancy services.

Keywords commercial real estate, office leasing, flexible office space platform, platform-
based coworking, space-as-a-service
Tekijä Alexander Saares
Työn nimi Joustavan toimistotilan alustat: sijoittajan näkökulma
Koulutusohjelma Real Estate Economics
Pääaine Real Estate Economics
Vastuuopettaja/valvoja Professori Seppo Junnila
Työn ohjaajat DI Anniina Saari, OTM Ari Käkelä
Päivämäärä 01.06.2021 Sivumäärä 51 Kieli Englanti

Tiivistelmä
Nykyään kaikenkokoiset tilankäyttäjät vaativat joustoa toimistotiloiltaan.
Maailmanlaajuinen pandemia on muuttanut tietotyöläisten työskentelytapoja. Täten
valtava toimistosijoitusmarkkinakin muuttuu. Alustapohjaiset ratkaisut ovat menestyneet
monilla markkinoilla. Tämä tutkimus arvioi mahdollisuuksia, mitä joustavan toimistotilan
alustat tarjoavat kiinteistönomistajille muuttuvissa markkinaolosuhteissa. Tutkimus
tarkastelee joustavan toimistotilan alustoja kiinteistönomistajan näkökulmasta
kirjallisuustutkimuksen ja case-tutkimuksen avulla. Case-tutkimus esittelee taloudellisia
reunaehtoja, joiden vallitessa on kannattavaa tarjota joustavaa toimistotilaa alustan kautta.

Tavallisesti joustavan toimistotilan alusta tarjoaa laskutuksen, käyttösopimusten

hallinnan ja digitaalisen infrastruktuurin vastineeksi alustamaksusta. Joustavan
toimistotilakonseptin kassavirta eroaa verrattuna perinteiseen vuokraukseen. Vaikka
joustavan toimistotilan kassavirta on epävarmaa, on sen potentiaalinen tuotto korkea.
Alalla esiintyy eriäviä näkemyksiä siitä, miten joustavan toimistotilakonseptin läsnäolo
toimistokohteessa vaikuttaa kohteen arvoon ja miten joustavien toimistotilojen arvoa tulisi
arvioida.

Tutkimuksen tulokset esittävät, että suhteellisen korkea käyttöaste on saavutettava,

jotta joustava toimistotilakonsepti on tuottavampi kuin tavallisesti vuokrattu tila.
Joustavan toimistotilan käyttäjät vaativat korkealaatuisia puitteita ja palveluita, jotka
lisäävät tilan ylläpitokustannuksia. Koska tilan kokonaiskulut ovat korkeat ja kassavirta on
epävarmaa, tulevat kiinteistönomistajat vaatimaan tilojenkäytöstä riittävää korvausta.
Esitämme, että kiinteistönomistajat eivät tule tarjoamaan joustavaa toimistotilaa
laajemmin, mikäli tilankäyttäjät eivät ole valmiita maksamaan palveluistaan korkeaa
hintaa.

Avainsanat kiinteistösijoittaminen, toimistovuokraus, joustava toimistotila, platform,

alusta, coworking
Preface
One era of my real estate career is coming to an end as graduation is approaching. The journey on my
master’s thesis has offered me a mighty opportunity to enter a highly topical subject to learn and grow
as a member of the academic community and as a person.
Many thanks to LL.M Ari Käkelä for helping me find such an interesting topic for my thesis. I am
extremely grateful to M.Sc. Anniina Saari for inspirational advising. I would like to thank Prof. Seppo
Junnila for supervising my thesis. Thanks also to Eetu, Jussi and Jaakko.
I would like to thank my family for support. Special thanks to Taru.
In Helsinki 1.6.2021

Alexander Saares
Symbols and abbreviations
DCF Discounted Cash Flow

EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization

EUR Euro(s)

GLA Gross Leasable Area

NOI Net Operating Income

REIT Real Estate Investment Trust

USD United States Dollar(s)

VAT Value Added Tax

Contents
1 Introduction ................................................................................................................. 1
1.1 Background............................................................................................................. 1
1.2 Objectives ............................................................................................................... 3
1.2.1 Research gap .................................................................................................... 3
1.2.2 Research questions........................................................................................... 4
1.3 Methodology ........................................................................................................... 4
2 Literature review .......................................................................................................... 6
2.1 Traditional coworking............................................................................................. 6
2.2 Flexible office space ................................................................................................8
2.2.1 Outlook for flexible office space ....................................................................... 9
2.2.2 Sources of flexible office space demand.......................................................... 10
2.2.3 Knowledge spillover in Coworking .................................................................. 11
2.2.4 Operating flexible office space ......................................................................... 11
2.2.5 Lease arbitrage of flexible space concepts ...................................................... 13
2.2.6 The location of flexible office spaces............................................................... 14
2.3 Platform-model .................................................................................................... 14
2.4 Flexible office space platform ............................................................................... 15
2.4.1 Platform-based office space network of WeWork ........................................... 16
2.4.2 Scandic Hotels, platform-based office space network in the Nordics ............. 17
2.4.3 Flexible office space platform of Spacent ....................................................... 17
2.4.4 Flexible office space platform of LiquidSpace ................................................ 18
2.4.5 Typology of flexible office space platform operation models .......................... 18
2.4.6 Flexible office space in the microeconomic framework ................................. 20
2.5 Real property as an investment............................................................................. 21
2.5.1 Income method .............................................................................................. 21
2.5.2 Characteristics of real property investment .................................................... 22
3 Investor’s perspective on flexible office space platforms ............................................. 24
3.1.1 Disruptive innovation .................................................................................... 24
3.2 Risks and returns of platform-asset ...................................................................... 25
3.3 Valuation of platform-asset .................................................................................. 26
3.4 How could investor utilize a flexible office space platform? .................................. 26
3.4.1 Participation in hot desk platform membership ............................................. 27
3.4.2 Flexible office space occupied solely through the platform.............................28
 3.4.3 Theoretical framework ................................................................................... 29
4 Case study ...................................................................................................................30
4.1 About the case study .............................................................................................30
4.2 Valuation method ................................................................................................. 31
4.3 Parameters............................................................................................................ 31
4.3.1 Benchmark ..................................................................................................... 31
4.3.2 The Case parameters ...................................................................................... 32
4.4 The final Case space .............................................................................................. 37
4.4.1 Parameters ..................................................................................................... 37
4.4.2 Results ........................................................................................................... 39
4.4.3 Sensitivity analysis ........................................................................................ 40
4.5 Valuation of the final Case .................................................................................... 41
4.5.1 Valuation ........................................................................................................ 41
4.5.2 Sensitivity analysis of the final Case asset ...................................................... 41
4.5.3 Capitalization rate and break-even revenue of the final Case ......................... 43
4.6 Review of the results ............................................................................................. 44
4.6.1 The final Case space ....................................................................................... 44
4.6.2 The final Case asset valuation ........................................................................ 45
5 Discussion and conclusions ........................................................................................ 46
5.1 The price of flexibility ........................................................................................... 46
5.2 The future of flexible office space .......................................................................... 47
5.3 Conclusions .......................................................................................................... 47
6 References ..................................................................................................................48
1 Introduction
The working customs of knowledge workers continue to change while technological development
progresses further (Sankari 2019 p. 1). Alongside traditional coworking, many flexible models of
occupying office space have emerged. For varying lengths, flexible space concepts typically offer
coworking spaces, private offices of different sizes, and meeting rooms.
The Coronavirus outbreak made an impact on how office occupiers utilize space and remote working.
Newsec (2020 p. 7) and KTI (2020b p. 14) state that the currently happening remote working trial
initiated by the coronavirus will affect the future of working. Satya Nadella, The CEO of Microsoft,
presents that during the pandemic, 2 years of digitalization happened in 2 months (Motamed &
Shirvanimoghaddam 2021 p. 2).
Nowadays, office occupiers demand flexibility. Newsec (2020 p. 5) presents that the pandemic has
accelerated the trend of multi-locality of work which was already relevant in the pre-pandemic era.
All sizes of companies demand more flexibility from their premises (Baum et al. 2020 p. 74). JLL
predicted in 2019 that 30% of office space in the United States is operated by a space-as-a-service
model in 2030 (Baum et al. 2020 p. 75).
The demand for flexible office space is predicted to increase rapidly during the next years. In the
2020 occupier survey by CBRE, as high as 86% of surveyed occupiers see flexible office premises
as a key component of future real estate strategies (CBRE 2020 p. 5). At the beginning of 2021, PwC
(2021) presented that in the United States, 87% of executives expect to make changes to their real
estate strategy during the year. The changes include opening more satellite offices and/or acquiring
premier location office space (PwC 2021). According to CBRE (2020 p. 10), the future of flexible
office space seems promising. Especially traditional corporate office users are interested in flexible
office space even though the demand for flexible office space fell during the pandemic (CBRE 2020
p. 10).
It is reasonable to suppose that the lease terms on average will shorten in the office field as occupiers’
demand for flexibility is strengthening, especially due to the additional uncertainty generated by the
pandemic.
The office investment market is enormous. Poleg (2020 p. 62) presents that office is the largest
institutional real estate category measured by its value. The largest investor portfolios tend to be
underpinned by office properties (Poleg 2020 p. 62). In the past, the steady and predictable cash flow
the office properties generate was one of the primary elements that attracted investors (Poleg 2020 p.
105). The shift towards more flexible occupying changes the predictability of the cash flow. The
essential change within the utilization of the largest real estate category is going to affect the investors.
The increased demand for flexible office space offers an opportunity for property investors to
capitalize on. An investor can gain a comparative advantage by being able to efficiently satisfy the
changing needs of the office occupiers.
Within many markets, platforms and their easy-to-use applications have been utilized. How are
platforms utilized on office premises? Currently, participating in a flexible office space platform is
one option for an investor to offer flexible office spaces and gain exposure to the trend.
1.1 Background
Property investors will be affected by the increasing portion of space users that demand more flexible
occupancy instead of traditional leases lasting for years. This chapter presents drivers for the flexible

1
office space phenomena, which reason that a real estate investor must renew their customs to remain
competent within the field.
Time used on commuting can be significant. In 2019, the daily time used on commuting within the
Helsinki Metropolitan Area was almost 60 minutes on average (OSF 2020 p. 2). The daily time used
on commuting can easily exceed 90 minutes in the largest cities in the world, while New Yorkers
spend even as high as 120 minutes on daily commuting on average. Studies suggest that long-duration
commuting has negative impacts on physical and mental health in addition to negative impacts on
working efficiency. Noise, congestion, and weather conditions can impact health as well. (Motamed
& Shirvanimoghaddam 2021 p. 1, 2) Based on these commuting characteristics, utilization of flexible
ways of working that decrease commuting can result in a more efficient workforce and increased
welfare among employees, thus possibly increasing the demand for flexible office space concepts
from the occupiers.
The pandemic forced many office workers to work from home, which has convinced many resistant
employers that many jobs can be successfully carried out from home (Anderson & Kelliher p. 681).
PwC (2021) presents that remote work has been an overwhelming success for both, employees, and
employers. According to the survey conducted in December 2020, over 80% of the surveyed
employers in the United States say that the shift to remote work has been successful (PwC 2021).
Companies are often forced to acquire multiple office locations as they struggle to accommodate all
the talent needed in one, single location (Poleg 2020 p. 95). Poleg (2020 p. 95) asks, if collaboration
between offices is possible for the employees, why do they need to be in the office at all?
Although working from home has been a success, home as a workplace is not primarily designed for
working. Concentration on self-control consumes energy, which impacts negatively on wellbeing.
Issues such as less social interaction, social isolation, poor ergonomics, or missing workplace
facilities tend to emerge. (Motamed & Shirvanimoghaddam 2021 p. 3) Flexible space solutions may
solve most of these issues while maintaining the decrease of commuting effort. Motamed &
Shirvanimoghaddam (2021) present that a local coworking hub within “15–20 min neighborhood”
could solve problematics regarding working in a traditional office or home. For an employee, a local
flexible space concept could bring out the best characteristics from each extreme.
Even though the possibility of having flexibility on working customs seems to be very desirable for
employees, the employing companies make the final decisions regarding workspaces. The employer
must benefit from the implementation of flexible office space solutions to adopt it. Even though the
welfare of employees benefits the employer as well, a hybrid workplace model introduces its
challenges. For example, some managers struggle to manage people working from home, while some
employees feel untrusted and micromanaged (Parker et al. 2020 p. 12).
In addition to a more efficient, healthier workforce, remote working and flexible working habits can
benefit companies financially in other ways as well. Global Workplace Analytics estimates that a
typical employer can save over ten thousand USD per year per person working remotely half of the
time (Motamed & Shirvanimoghaddam 2021 p. 3). Colliers (2020 p. 4) presents that by outsourcing
flexible workspace a company can reduce capital expenses (Colliers 2020).
Antti Tuomela, the managing director of Spacent Ltd., argues that the field of real estate is stuck with
measuring everything with square meters (Puheenaihe 2020). Many can agree as the actual utilization
of a space has many other essential components in addition to acreage. The evolution of flexible
occupying is constantly participating in changing the way we comprehend space within the industry.

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1.2 Objectives
The objective of this study is to understand in which circumstances is it desirable for an investor to
participate in a flexible office space platform in the present or within the next five years. The study
focuses on the investor’s perspective. In this study, the investor is defined as a profit-seeking property
owner.
Sankari (2019 p. 50, 77) describes coworking hotel as a concept which, by short leases, offers shared
office spaces with added service package. In this study, flexible office space concept is defined
similarly, but the offered spaces do not limit to traditional coworking. Thus, in this study, the flexible
office space concept is a concept that offers different office spaces by short leases with an added
service package. The offered spaces can be but do not limit to e.g., undedicated desks, fixed desks,
private offices of different sizes, and meeting rooms. The service package within the concept
comprises, e.g., coffee, printing, internet, and reception.
In this study, the flexible office space platform denotes a platform-based network of the above-
defined flexible office space concepts.
In this study, traditional leasing denotes the model in which the tenant utilizes the space under an
ordinary lease agreement signed with the landlord with no other contractual parties present.
This study considers the operation of flexible space as real estate, not as a business of its own. Thus,
the occupying models and the platform-based network are viewed in the context of real estate. The
phenomenon is mainly evaluated in the context of Finnish real estate while not limiting to it.
Non-profit concepts are omitted from this study. Elements of, e.g., external operator’s perspective,
user’s perspective, or the platform-based network itself that are irrelevant to the investor are
overridden.
Based on the drivers introduced previously, it is reasonable to suppose that tenants are unwilling to
commit to longer leases the same way as before. Thus, this study is based on the supposition that the
weighted average lease terms of office leases are supposed to shorten during the next five years.
Practically the results of the study attempt to present information on whether participation in a flexible
space office platform offers a suitable solution for a property investor to compete within the new,
supposed market conditions.

1.2.1 Research gap

The components of the entirety of real estate, including technology, investors, operators, and users,
show signs that a platform model of flexible office space is now more relevant to each stakeholder
than ever before.
Studies from investor’s perspective of coworking spaces have been conducted. Even though
coworking spaces are widely present on the media, there is a lot of room left for scientific research,
as coworking is a new phenomenon and has a lot of variety (Akhavan et al. 2020 p. 2). However, a
flexible office space platform is an extension of coworking comprising other office spaces and
utilizing the idea of platform value creation model.
Although there is some demand from the space users and some supply from investor-operated spaces,
the investors still have their doubts about flexible office space.
Flexible space platforms as an institution have advanced a lot during the previous years. Even though
the phenomenon is sincerely topical, very little to none research specifically is conducted on
investor’s perspective of flexible office space platforms. As the technology utilized in the model is

3
new while the customs of the occupiers continue to change at a high pace, there is a research gap on
the investor’s perspective of flexible office space platforms.

1.2.2 Research questions

The objectives of this study condense to a primary research question and a sub-question, both
introduced below. As introduced above, the study is based on the supposition that the average lease
maturity will shorten in the medium and long run. The research questions are evaluated under this
supposition.
The primary objective of this study is to understand in which circumstances is it desirable to
participate in a flexible office space platform with a part of an asset.
RQ1 In which circumstances is it desirable for an investor to add a part of an asset to a flexible
office space platform?
To answer the primary research question, we acquire an extensive understanding of how the platform
affects the asset’s income-producing characteristics.
RQ1.1 Within what economic boundaries is platform participation profitable in comparison
to traditional leasing?
The sub-question is particularly reviewed through a case study in a more quantitative manner. By
evaluating the results of the quantitative section in addition to the literature review, we try to
acquire a comprehensive answer for the primary research question.
By combining the qualitative understanding of the topic with the results of the quantitative case
study, a qualitative answer for the primary research question is attempted to achieve.
1.3 Methodology
Literature review starts from the evaluation of flexible office spaces and platform solutions
independently. Thereafter the evaluation of the flexible office space platform begins. The investor’s
perspective is carried throughout the study.
As the subject of the study is relatively new, the existence and availability of data used quantitatively
is very limited. In addition to the literature review, a case study is conducted.
A literature review is crucial in any form of research as it reveals what is already studied within the
field and helps the researcher gain an own idea of the object of the study. It allows the researcher to
select methodology as it forms an idea of what others’ ideas are and what methodologies are used.
Thus, in a case study, a literature review is especially important. (Thomas 2021 p. 30–31)
Compared to other inquiry methods, a case study investigates only a small number of cases. Instead
of analyzing few features of many cases, a case study concentrates on a larger number of features of
few cases. A case study is not considered a method itself, as the basis for the study is the case, not a
single methodology. The case is investigated by whatever methods and data sources available. A case
study is an analysis of a phenomenon that aims to illuminate and explicate some analytical theme.
(Thomas 2021 p. 9, 11, 12)
In the case study, The Case is an imagined asset, which premises are partly utilized through listing
them on a flexible office space platform. The performance of The Case is evaluated by comparing it
to a benchmark. Valuation of The Case is based on the income method. Concluding, different
simulated scenarios of an imagined asset are compared in the case study.

4
Picture 1. Stylized research structure of the study.

5
2 Literature review
In the first section of the literature review, the fundaments of flexible office spaces and platform-
model are considered separately. The second section broadly covers relevant topics of property
investing in general. The general property investment concepts considered limit to relevant ones
regarding the subject of the study.
The last section of literature review compounds the comprehension of the theoretical fundaments into
a broad idea of flexible office space platforms.
It should be noted that in the context of offices, the terms of coworking, flexible space, and space-as-
a-service are used in different ways in the reviewed literature. The presented terms all broadly denote
some sort of occupancy model other than traditional leasing or owner occupancy, which is disposed
by user or service agreements.
2.1 Traditional coworking
In this chapter, traditional coworking is reviewed. In this study, traditional coworking denotes
utilization of a model where a coworking operator acquires control of space and offers an open space
for end-users by user agreements. In addition to hot desks, e.g., fixed desks, smaller, individual offices
or meeting rooms are typically offered by the coworking operators. In this study, a hot desk denotes
an undedicated desk within a flexible office space.
Coworking concepts appearing on the market vary, although main characteristics remain the same.
Coworking space can be described as a physical, shared space where heterogenous individuals from
different backgrounds work (Sankari 2019). Coworking space offers workers from different
companies to share a workspace to reach flexible occupancy. Sankari (2019 p. 62) presents that in
addition to high accessibility, a coworking space must be an attractive workplace.
The sizes of the coworking spaces vary. According to Coworking Survey Europe, 62% of the
coworking concepts are under 500m2, 20% are between 500m2 and 1000m2 and the rest is over
1000m2 (Deskmag 2020 p. 123). Worldwide, Global Coworking Study 2020 presents that average
space capacity of a coworking space is 83 people while the average space size is around 680m2
(Coworker & CoworkingResources 2020).
The actual utilization of the space can be higher in coworking in comparison to traditional single-
tenant offices. Office properties tend to suffer from underutilization, as most seats of certain offices
remain empty during the evenings and nights or even throughout the day. Fundamentally, the
coworking idea targets to lessen underutilization of the space (Wheaton & Krasikov 2019 p. 2).
High occupancy or high occupancy costs do not necessarily mean high utilization. For example, in
Central London, the average desk utilization percentage is less than 50%, while the annual cost for a
workstation is close to EUR 20 000 (Baum et al. 2020 p. 50). The values show that even a relatively
low increase in utilization could potentially save a significant amount of money. Even though
underutilization of tenants’ premises does not directly affect the investor, the investor might be able
to financially benefit by producing more efficient solutions for the occupiers and end-users.
In some areas, there is a confirmed correlation between vacancy rate and coworking percentage. For
instance, in the United States, the trend seems clear: the lower the city’s vacancy rate is, the higher
the percentage of coworkers of the population is. For example, the vacancy and coworking percent
of Manhattan is around 7% and 1,8%, while the corresponding values of Phoenix are around 20%
and 0,8% (Baum et al. 2020 p. 73). Moreover, the larger the occupancy cost, the larger the absolute
cost savings are, which hypothetically leads to the coworking model being most favorable in cities
6
where occupancy costs are higher, resulting in higher absolute savings. Investor aims to have as high
occupancy as possible, as occupancies provide revenue for the investor.
Coworking and multi-tenant concepts offer features which provide efficiency for the users. The
spaces tend to have flexible opening hours and an efficient location in terms of essential places such
as amenities, restaurants, homes, or clients (Sankari 2019 p. 76). Flexibility for the occupiers in
practice result in an opportunity for smaller companies to occupy office space or for larger companies
to expand the working possibilities for their employees.
Coworking concepts typically target small occupiers. According to Coworking Survey Europe, 78%
of the surveyed coworking spaces present that individual customers are targeted with strong focus
and 58% present that companies with under ten employees are targeted on strong focus as well
(Deskmag 2020 p. 128).
Sankari (2019 p. 76) presents that coworking spaces try to create a collaborative atmosphere among
the end-users. Agglomeration benefits of the workplace might also appear in the coworking spaces
as people socialize within the workday, resulting in sharing information and ideas.
Coworking business can be sustainable on many levels. Shared spaces can deliver sustainability as
the equipment is shared (Sankari 2019 p. 76). Because coworking spaces contribute to reaching better
economic and social results, coworking operating can be classified as a conscious business (Orel &
Kubátová 2019). As companies and individuals value sustainability, the image of sustainability linked
to investor’s premises can be considered desirable from the investor’s perspective.
An imbalance between acquired space and active users can make operating coworking space
challenging. Compared to traditional office leasing, the burden of obligations is substantially different
for the end-user in the coworking model (Baum et al. 2020 p. 74). While the landlords offer
traditional, longer leases to coworking operators, the space users appreciate and demand flexibility.
Short termination periods on coworking subscriptions seem to be an industry standard at this point.
Shorter occupancies and harder predictability are fundamentally not ideal for the landlord of a
coworking operator. However, the market participants seem to agree on the arrangement, which has
changed the commercial real estate market (Baum et al. 2020 p. 74).
As office leasing continues to change, the coworking phenomenon has made it possible for space
operators to specialize in coworking and turn it into a commercial product (Chegut & Langen 2019
p. 21). Even if investors could solve the challenges of the changes by simply leasing the space to a
coworking space operating specialist, the new fundamentals of the field of office leasing remain
present. In practice, the change of the fundamentals requires actions from the property investors to
remain competent (Clayton et al. 2019 p. 19).
Coworking operators tend to offer other flexible office spaces as well. Even though the coworking
concepts differ, the operators usually offer e.g., private office and meeting rooms in addition to
traditional hot desk coworking while still experiencing oneself as a coworking provider. According
to Coworking Survey Europe, 41% of the surveyed coworking concepts answered that their largest
revenue stream comes from renting private offices while 37% of the concepts present that the largest
revenue stream comes from desk memberships (Deskmag 2020 p. 130). A large share of coworking
concepts receive the largest part of their revenue from private offices, signifying the extension of the
term coworking. Concluding, we state that the term coworking is not used in a very consistent manner
across the field, rather in many ways.

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2.2 Flexible office space
Hitherto, the literature review has mainly considered and reviewed traditional coworking. However,
traditional coworking is only a segment of flexible office spaces. Currently it seems that a fair amount
of the spaces considered flexible office spaces in Helsinki Metropolitan Area are traditional
coworking spaces. This chapter broadly introduces flexible office space in general.
Like traditional coworking, other flexible office spaces are offered through user agreements to end-
users. Instead of the target being an undedicated hot desk, the commodity is, e.g., a private office of
some sort, usually for a single person or a smaller team. In terms of flexibility, a hot desk coworking
subscription is one of the most flexible models to occupy office space. Private office solutions are a
little more inflexible in comparison to on-demand services or monthly memberships, as the private
offices are typically signed at least for months. However, we could interpret that everything besides
traditional leasing or owner occupying is flexible office space in the real estate context.
Flexible office space as an institution is increasing its relevancy within occupiers and landlords.
CBRE (2020 p. 2) states that flexible office space is no longer considered a niche sector, rather being
a solution for a broader range of occupiers. Alliances between flexible office space operators and
landlords are emerging in addition to new business models being developed (CBRE 2020 p. 2). JLL
(2020 p. 8) presents that flexible office space has evolved into a spectrum of options that offer, in the
context of real estate, different levels of flexibility, choice, and experience for tenants and investors
alike.
CBRE (2020 p. 36) presents that instead of pure coworking, many flexible office providers offer
private office solutions especially to enterprise tenants demanding more privacy and security. The
reconfigurability of the spaces offer some substitution to limited customizability while occupying
terms are flexible (CBRE 2020 p. 36).
We can argue that someone’s flexibility is someone else’s inflexibility in the context of occupying
space. However, the performance of the market participants on managing the inflexibility is not
identical. Thus, a specialized operator or a landlord can manage the tenure’s inflexibility more
effectively compared to the end-user. Thus, the efficient management of inflexibility is valuable as
then flexibility can be offered to the end-users.
The more flexible the terms are, the more expensive the occupancy is. After all, an investor seeks to
receive the best possible return according to the risk level managed. Changes in tenancy usually result
in costs. As shorter occupancies are viewed as more uncertain in comparison to longer occupancies,
an investor demands compensation for the increase in risk.
It can be argued that flexible office space operators are not commercial office space providers but
rather hospitality providers. The nature of the space providing significantly differ between traditional
leasing and flexible space, as flexible space operators usually provide other services in addition to
desks, e.g., food services and connections, which altogether condense into a more refined user
experience (Baum et al. 2020 p. 74, Clayton et al. 2019 p. 19). An increasing number of hotel
operators are already mixing flexible space such as private offices and coworking within their
premises (Poleg 2020 p. 81), which practically prove the hospitality providing aspect of the business.
In the legal framework, flexible office space is usually not leasing. As stated, flexible office space
operating is considered a part of the entity of real estate, thus being leasing in this study. However,
in the legal framework, agreement on usage of flexible space such as a coworking subscription is not
a lease agreement, rather a user agreement. In Finland, the leasing of commercial premises is subject
to Act on Commercial Leasing (1995/482) (Act on Commercial Leasing (1995/482)). Due to freedom

8
of contract and not having a specific law designated to flexible spaces, the user agreements on flexible
spaces are flexible in terms of terms.
Flexible space user agreements are usually offered to businesses as well as directly to consumers. It
should be noted that consumer contracts are subject to various consumer protection rules. In general,
the agreements between entities carrying a trade are subject to industry-specific contractual practices,
rather than specific legislation of the specific activity (Hemmo & Hoppu 2020).
Concluding, Yu et al (2019 p. 452, 454) present that a flexible workspace model can offer companies
cost savings, promote collaboration and innovations, and boost employee satisfaction in addition to
reducing pollution and traffic. An investor can receive financial benefit if it can provide efficient
space solutions to tenants and have a positive image by executing models that are considered
sustainable by the audience.

2.2.1 Outlook for flexible office space

The nature of office property ownership is changing as the office assets are becoming more
operationally intensive as flexible space operators are packing up more and more services and tenants
into an office space (Clayton et al. 2019 p. 19). The future of office investments seems quite different
compared to traditional leasing, as more components are introduced on asset level, e.g., services and
a larger number of heterogenous tenants. The lease terms are presented to be shorter in the future due
to the general movement towards space-as-a-service models in the field of office leasing (Clayton et
al. 2019). Clayton et al. (2019) also present that due to the reasoning in this paragraph, office
properties may become more like hotels in the future.
Newsec (2020 p. 28), Colliers (2020 p. 7), and KTI (2020b p. 15) present that companies are
increasingly interested in acquiring satellite offices in addition to the central office. This way of
development in customs requires more flexibility from agreement standpoint, which means that it
would strengthen the demand for space-as-a-service concepts (Newsec 2020 p. 28).
Demand for flexible office spaces is increasing. JLL (2020 p. 8) presents that even in the medium-
term the demand for flexible space will increase as occupiers adopt flexible office space models more
widely. In a survey conducted by Colliers in 2020, over 50% of surveyed 4 000 occupiers considered
flexible workspace solutions (Colliers 2020). Colliers (2020) predicts that the outsourcing of real
estate by acquiring flexible workspace solutions will increase by large due to the current market
conditions.
The attitude towards coworking seems to continue getting more receptive within the population. A
practical note of this is the fact that the only work environment many of the millennials have ever
experienced is some form of coworking (Levinson 2019). Corporations are starting to realize that by
offering the best, creative spaces they can attract and keep the best workers (Levinson 2019).
The amount of coworking spaces is increasing. Global Coworking Growth Study 2020 presents that
in comparison to 2020, the number of coworking spaces doubles by 2024. In addition, the number of
people using coworking spaces is predicted to be over 2,5 times larger between the above-mentioned
time points. (Coworker & CoworkingResources 2020 p. 3)
The pace of the movement towards more flexible occupancy within the industry is predicted to be
fast. JLL predicted in 2019 that 30% of office space is occupied through a space-as-a-service type
model in 2030, while in 2020, the percentage of space-as-a-service space is around 5% (Baum et al.
2020 p. 75).
The wider adoption of flexible space concepts changes the office field also in other ways. Baum et
al. (2020) present that if the usage of flexible space-as-a-service models drastically increases,
9
customer satisfaction ratings will be used to compare different spaces in the future. The change will
encourage concept operators to think like hospitality operators. In addition, actively collected data
from space utilization will offer opportunities to price the occupancy more efficiently. Baum et al.
(2020) also present that the valuation of buildings will shift away from analyzing features of the leases
and tenants to rather be valuated through EBITDA. (Baum et al. 2020 p. 75)
CBRE presented in 2020 that the industry of flexible office space was then at the “end of the
beginning.” The challenges the flexible office space faced during 2020 had made way for
opportunities in 2021. (CBRE 2020 p. 48)
In conclusion, KTI (2020b p. 14) presents that the need for office spaces is not vanishing, rather
changing quantitatively and qualitatively. This chapter show that many sources present that the
relevancy of flexible office space is increasing drastically in the following years.

2.2.2 Sources of flexible office space demand

As presented in the previous chapter, the demand for flexible office space has increased during the
last years and will increase even more in the future. In this chapter, we review the sources of the
demand. Since an investor must form the strategy based on the characteristics of the demand, we
review information about the end-user groups, their sizes, and their relevancy.
Traditional coworking concepts mainly target smaller occupiers. The majority of the coworking
concepts focus on targeting their services on individual consumers and companies under ten
employees (Deskmag 2020 p. 128). The coworking concepts usually try to create a collaborative
atmosphere within the spaces (Sankari 2019 p. 76).
The increasing demand for flexible office space is as well coming from larger, enterprise office
tenants. CBRE (2020 p. 10) presents that traditional corporate office users are strongly present on
future leasing activity of flexible office space in addition to smaller occupiers such as startup
companies and entrepreneurs.
Flexible office space offers a viable option in solving space needs during the recovery from the
pandemic. CBRE (2020 p. 13) presents that as the tenant demand returns after the pandemic, the
flexible office spaces will offer a viable space acquiring method, which was not available the same
way during the recovery from Global Financial Crisis. Likewise, JLL (2020 p. 8) presents that as
flexible space is easy and fast to acquire, it is reasonable to foresee that companies turn into flexible
space solutions during this time of uncertainty.
Flexible office space is essentially used as a complement to traditional leasing in the future. CBRE
(2020 p. 48) presents that the occupiers will look for flexibility around their longer-term commitments
in the post-pandemic world. This strengthening trend will include mixed-use of traditional leasing
and flexible space within the same building. In addition, flexible space is expected to offer a way to
bring employees back to the office while avoiding large commitments. (CBRE 2020 p. 48)
Flagship headquarters are still desirable. Many companies tend to have large, underutilized
headquarters locating in secondary locations. A variable allocation could be a smaller, well-utilized
headquarters in a better location and a space-as-a-service utilization that together fulfill the
company’s premise needs (Puheenaihe 2020, Colliers 2020 p. 7). This occupying strategy makes it
possible to maintain a central flagship headquarters while even reducing the occupying costs in total
(Colliers 2020 p. 7).
Colliers (2020 p. 4) presents several key drivers for companies to outsource occupying needs to
flexible workspace. In addition to the flexible space being agile as headcount changes can be
uncertain, the existing spaces can be occupied urgently. A decrease in the number of long-term
10
commitments can offer more efficiency to the use of capital. Flexible spaces can offer operational
savings and a single supplier can manage the office more efficiently compared to self-delivery by the
tenant. In addition to operational efficiency, some amenities can be even impossible to self-deliver.
(Colliers 2020 p. 4)
Since a relevant share of potential demand in the future is formed by large enterprise tenants, the
marginal benefit of entering the flexible office space market is becoming more attractive to investors.
The issues reviewed in this chapter show that the demand for flexible office space is not only formed
by small companies and single entrepreneurs. Moreover, investors are not specialized in managing
smaller contracts with single end-users as the model of tenant-managed coworking concept has
established its position. As there shortly will be larger companies to sign agreements with, the offering
of flexible office space might be more desirable for the investors.

2.2.3 Knowledge spillover in Coworking

Encounters happening in workplaces produce economic benefits. The exchange of ideas between
individuals is called knowledge spillover (Carlino 2001 p. 1). Encounters provide added value
through social interactions (Jakonen et al. 2017 p. 8). Encounters among people in the workplace
offer possibilities for knowledge spillovers.
Jakonen et al. (2017 p. 8) present that professional and academic literature idealize that different
encounters have become a central feature of coworking. Orel & Kubátová (2019) present that human
capital bearers tend to work on independent jobs online, thus working in coworking concepts as it is
suitable for such a job in comparison to more traditional jobs. The coworking space can generate a
community-like environment for these workers resulting in collaborations for better economic and
social results (Orel & Kubátová 2019). Jakonen et al. (2017 p. 8) state that serendipitous encounters
within coworking do not necessarily occur. Even though the coworking operators expect this type of
encounters, some workers anticipate them while some avoid them as principally the primary interest
is working (Jakonen et al. 2017 p. 7).
Coworking has changed during the last two decades. Waters-Lynch and Duff (2021 p. 133) argue that
for the first wave of coworkers the coworking’s social and communal features were the primary
source for value. As the coworking industry expanded and entered the second wave, the interactions
among coworkers diminished. However, some scholars present that a third wave of coworkers might
revive the features of the first wave in the future. (Waters-Lynch & Duff 2021 p. 133)
As coworking has changed during the decades, it certainly suffers from prejudices. Currently, the
concept of coworking primarily offers a flexible space for working rather than buzzing encounters
within the spaces (Puheenaihe 2020). A prospective user should not deem the idea of coworking
based on the value-adding component of encounters, as mostly the users of the spaces utilize
coworking as more ordinary working places rather than for encounters and buzzing. A prejudicial,
unrealistic image of coworking might harm the investor’s position if services offered by the investor
itself or its tenant are considered undesirable.
Even though the knowledge spillover might benefit space users and companies, the investor does not
receive compensation, thus unlikely benefitting directly. However, if knowledge spillover creates
value for end-users and companies, the investor might capitalize on it by offering spaces favorable
for the knowledge spillovers.

2.2.4 Operating flexible office space

In this chapter, the operation of flexible space is considered. Like any commercial business, the
flexible office space concept is after profit. Flexible office spaces can be operated by an external
11
operator or the landlord itself. If the landlord operates the flexible spaces, the rent level of the space
must only be considered in the form of opportunity cost. However, the issues regarding the valuation
of the building containing flexible spaces regardless of who the actual operator is are invariably
relevant for the landlord.
The operator must be able to generate such revenue that exceeds the rent and other costs it is paying
by executing its business to reach profit. The costs of operating a coworking unit are mainly fixed,
e.g., furniture, internet, and printing (Wheaton & Krasikov 2019 p. 3). As the business revolves
around short-term leasing, the revenue of coworking is observed to be volatile (Wheaton & Krasikov
2019 p. 7). Coworking Survey Europe presents that in 2019 only 44% of the surveyed coworking
spaces reported being profitable (Deskmag 2020 p. 127). This result regarding profitability
pragmatically manifests the fact that many consider that no clear proof-of-concept of coworking
exists.
There are dissenting standpoints regarding whether coworking operators are considered as risky
tenants. Wheaton & Krasikov (2019 p. 10–11) present that investors seem to be skeptical of the ability
of coworking tenants to provide as reliable cash flow as traditional tenants. According to a
quantitative study with a dataset of six major cities of the United States conducted by Chegut &
Langen (2019 p. 22), the market dynamics regarding coworking operator as a tenant remain unclear.
The study suggests that the coworking operators have longer leases, more rent-free periods, and more
tenant improvements than other tenants (Chegut & Langen 2019 p. 22). However, based on the
interaction between landlord and coworking operator, categorization whether coworking operators
are substitute, anchor or risky tenants cannot be done (Chegut & Langen 2019 p. 21). On the other
hand, a quantitative study conducted by Wheaton & Krasikov (2019 p. 10–11) suggests that as the
coworking tenancy share in a building increases, the capitalization rate of the asset increases, possibly
denoting the increase in the risk of having a coworking business as a tenant. A small amount of
coworking tenancy within a building had little difference in the asset price compared to buildings
with no coworking tenants (Wheaton & Krasikov 2019 p. 10–11).
There is justification for the concern that a flexible office space operator as a tenant might have to
pay above-market level rent for its premises. Wheaton & Krasikov (2019 p. 3) present that if landlords
consider coworking a riskier business, they could ask higher than market rents for coworking operator
tenants, which in turn require more revenue to keep up with in comparison to a situation where lower
rent level is acquired. Coworking concepts tend to require an exceptionally high amount of tenant
improvements, resulting in higher rent level (Wheaton & Krasikov 2019 p. 7).
External flexible space operator faces other challenges as well. Poleg (2020 p. 101) presents that the
flexible space concept accrues big proportion of the value it creates to the landlord by being the tenant.
As a tenant the operator must rely on more expensive financing than landlords as they have no real
property as collateral. (Poleg 2020 p. 101)
It seems that landlords nor flexible space operators can solve office occupiers’ needs thoroughly by
themselves. Traditional landlords struggle to offer flexibility and serve smaller tenants, while external
flexible space operators combat to appeal to larger tenants and secure longer-term occupiers (Poleg
2020 p. 100). Could an alliance between landlords and space operators overcome the challenges of
each party?
In the future, flexible office space operation is expected to not be based on tenancy on the same
magnitude as currently. CBRE (2020 p. 17) presents that landlords and flexible space providers move
away from traditional leases towards partnership agreements in which profits and losses are shared.
In practice, such agreements range from revenue sharing models to a simple management fee the
landlord pays for the operator (CBRE 2020 p. 17). Likewise, JLL (2020 p. 8) presents that in the
12
future flexible space models are instead managed by landlords or under management agreements with
the space operators. Colliers (2020 p. 9) presents that even though a management agreement model
offers low surety of income for the landlord, it offers the highest possible returns. Concluding,
landlords are increasing their importance as market participants within the field of flexible office
space.

2.2.5 Lease arbitrage of flexible space concepts

The flexible space concept carries the risk of the possible mismatch between the size of their longer
tenure and the number of shorter occupancies where it receives its income from. This chapter
considers the challenge regarding the lease arbitrage.
Poleg (2020 p. 100) states that the flexible space operation is based on a lease arbitrage. The flexible
space concepts have long-term obligations towards landlords and short-term obligations from the
customers. Rental payments are required to be made for even tens of years while the income is derived
from occupiers that commit to substantially shorter periods. (Poleg 2020 p. 100)
Flexibility is one of the key features for a consumer or a company that chooses to solve the need of
premises with a flexible space concept. Compared to traditional leasing or property freehold, tenure
provided by a flexible office space operator is tiny in length, as some of the contracts can be
terminated within as little as a month, while some meeting room occupancies can last for only an
hour.
Challenges regarding the equilibrium between the amount of space and the number of active user
agreements can emerge relatively quickly. Baum et al. (2020 p. 76) present that all space-as-a-service
providers face a major risk of managing their revenue on an economic downturn (Baum et al. 2020).
The long-term leases offer protection to landlords, while short-term flexibility is in demand among
tenants (Baum et al. 2020 p. 76). The qualities of the physical space of flexible office spaces are
usually momentous for the users, so acquiring new space or downsizing the already acquired space
can be very sluggish. Adaptation to short-term fluctuation might be something that a flexible space
operator does not desire nor aim for.
The pandemic realized the risks regarding the function of turning inflexible tenure into a flexible
space concept. In turn, the flexibility of the model really benefitted the end-users during the pandemic.
According to Coworking Survey Europe 2020, the average number of contracted memberships fell
by around 25% from January 2020 and November 2020 (Deskmag 2020 p. 16). Moreover, the present
members per working day suffered around a decrease of 50% on the same time frame (Deskmag 2020
p. 16).
The pandemic made some tenants realize how inflexible the rents are. Coworking operators are not
safe from the effects, as coworking concepts in Europe reported having decreases of tens of percent
during the pandemic on their contract amounts (Deskmag 2020 p. 16). Around 70% of the surveyed
coworking concepts reported that loss of revenue happened between January 2020 and November
2020 while the average loss of revenue between the time points was around 30% (Deskmag 2020 p.
79). Almost 40% of the surveyed coworking spaces reported that their remaining lease term was more
than three years (Deskmag 2020 p. 126). 52% of surveyed Coworking concepts have leased spaces
and only 28% own their premises (Deskmag 2020 p. 124).
If the landlord manages the flexible space concept, the burden of maturity transformation of the tenure
should be viewed in the form of opportunity cost. The longer leases protect the landlord from
recession, and optionally space could be leased in a traditional manner instead of a flexible space
concept.

13
Effective management of inflexibility creates value for the space operator. By offering valuable
solutions to occupiers, the space operator can receive excess revenue as the services can be higher in
price.
Poleg (2020 p. 100) emphasizes that the premium paid for the flexible spaces is not only formed by
the risks regarding lease arbitrage. Customers of the flexible space concepts pay for design,
community, and services as well. (Poleg 2020 p. 100)

2.2.6 The location of flexible office spaces

The flexible office spaces are scattered around the conurbation in Finland, some being in secondary
locations while others are close to or in prime locations. It is presented based on studies by the major
commercial real estate service companies that 80% of coworking is concentrated in urban cores in
the United States while most of the office space within the nation being in the suburban areas
(Levinson 2019). It can be argued that logically the growth of coworking spaces would expand to
suburbia, which some evidence already does support (Levinson 2019).
The flexible office units can be operated with lesser occupancy costs in the secondary locations as
the location is one of the primary fundamentals that define the value of a property and a lease. As
with ordinary goods, the supply-side costs tend to capitalize on the price of the good. As flexible
space operating is expected not to differ in this context, the end price of flexible space occupancy
should be lower in cheaper locations in the longer run.
According to Coworking Survey Europe, the share of profitable coworking spaces is larger in areas
with a larger population (Deskmag 2020 p. 127). This pragmatically suggests that coworking business
is favorable in more central locations.
Alternative locations for coworking have also been considered within the academic community.
Wright (2018 p. 59) presents that Philadelphia neighborhoods could benefit from coworking located
in historic sacred places.
2.3 Platform-model
Different platform-based solutions have conquered several newborn or radically changed industries.
For instance, Uber dominates the market for private transportation intermediaries in many regions the
same way Airbnb does for intermediary for short-term accommodation. During the late 2010s,
platforms for food-delivery became thriving in Finland and the market ended up having few large
companies capturing most of the market. These platforms have in common that they offer easy-to-
use solutions for market participants on commodity markets that benefit from having a large network
of users and suppliers available on the same digital place.
Without an intermediary, some markets with a lot of small suppliers and consumers, such as short-
term accommodation, would result in challenges in the process of encountering the parties. The
market for an intermediary is economically well justified for many goods, as the model can result in
encounters between market participants, thus benefitting all the parties.
One of the main sources of platform value creation is the network effect, which can be interpreted as
a type of demand-sided economy of scale. In economics, the economies of scale are often divided
into demand-side and supply-side economies of scale. In this context, the supply-sided economy of
scale denotes that the production cost per product lowers if the total production is scaled upwards. In
turn, the demand-sided economy of scale denotes that the more users present on the platform, the
more valuable it becomes, which is in the context of the platform denoted as the network effect. The

14
network effect is often considered the main characteristic defining the success of the platform. (Han
et al. p. 10–11)
A simple example of the network effect manifests from a telephony system. The more telephones
there are, the more people there are to call with one’s telephone. If the telephone example is
interpreted as a platform, there is only one user type within the platform. The effect creating utility,
in this case, is denoted as the direct network effect. The direct network effect means that the number
of users within the platform positively correlates with the value of the platform. (Han et al. p. 10)
A platform can have more than one type of users, and in fact, many of them do. For example, in
AliExpress, an online marketplace, the users are divided into buyers and sellers. When there is more
than one group of platform users, indirect network effects manifest, which denote value creation
between more than one group (Han et al. p. 10, Danivska & Junnila 2019 p. 3–4).
The indirect network effect in the context of an online marketplace mainly occurs when the buyer
group benefits from large seller group as there is more competition and variety while the seller group
benefits from large buyer group as there are more customers to serve (Han et al. p. 10). The network
effect is the main dynamic that can create value for platform users, thus creating value for the platform
itself.
However, the network effect can be negative as well, and it manifests if the complementary sides of
the platform misalign (Han et al. p. 10–11). In the AliExpress context, this could, for example,
manifest if within a product the variety and competition are too intense, which results in puzzlement
among buyers as there is too much to choose from.
As a successful platform becomes more valuable the more users it has, a natural monopoly is certainly
possible in markets where platform model is favorable. In addition to the scale benefits a powerful
platform can deliver in the demand-side, the basic scale benefits of supply-side manifest on platform
industry. In the previous example of AliExpress, the supply-sided scale benefits could lead, for
example, to having relatively low cost on digital infrastructure management as the managed entity is
massive in size. The management unit cost is lower when there are a million cases to be done instead
of one hundred if supply-sided scale benefits manifest.
2.4 Flexible office space platform
A platform combines broader selection of spaces into a multilocational office network in the flexible
office space platform model. The most important characteristic of the platform model, the network
effect, is present in the flexible office space platform model.
The efficiency of encountering between space owners and potential occupiers is often considered a
challenge in commercial real estate, which the flexible office space platform model targets to ease. It
could be asked that if short-term accommodation benefits from platform-based solutions, why would
not short-term office occupying benefit from it as well, assuming demand for flexible spaces does
exist.
The flexible office space platform model leans strongly towards the idea that scale benefits do exist
on the good. Combining a larger number of spaces into a larger network of spaces results in more
utility per space than a network with lower number of spaces available, resembling the demand-sided
economy of scale. The platform’s management is hypothetically subject to supply-sided economy of
scale as the management costs per unit lower as the amount of managed space increases. By offering
more utility per space unit, the boundary of the profit per space unit can increase. Even though the
platform and space operator or landlord could together capture more surplus from the consumer side
in the model, the surplus division between market participants results from a complex entirety of
15
market dynamics. Thus, the revenue division between the platform and space operator or landlord
might not be sufficient for the space operator or landlord to desire participation in the platform model.
The flexible office spaces benefit from a large end-user base by the positive network effect while the
large end-user base benefits from a large variety of different spaces. In the framework of the platform
model reviewed above, a platform creates value by positive network effect (Han et al. p. 10–11). The
flexible space platform can be interpreted as being a matchmaker between space users and spaces.
There are several arrangements on how a flexible office space platform is formed. The legislation,
customs, and markets of different areas differ. In this study, we try to understand and evaluate the
flexible office space platforms especially through the market situation of Finland.
It should be noted that, e.g., a flexible space concept with more than one available location can be
interpreted as a platform-based flexible space network. Even a single location space of coworking
can be viewed as an intermediary, thus being a platform in a way. However, in this study, the flexible
office space platform term is used to describe the product with considerable number of available
locations available under one specific platform, thus making it favorable to have many parties on the
supply side instead of only one.
Currently Spacent offers the largest flexible office space platform across independent flexible spaces
in Finland. Scandic Hotels operate its coworking and flexible space model in the Nordics within their
hotels, which also participates in Spacent’s platform. There is a wide variety of concepts in the world,
and as the trend goes on, different concepts are prone to emerge.
The next few chapters review few specific real-world concepts of flexible office space platforms to
understand what possibilities are available for an investor.

2.4.1 Platform-based office space network of WeWork

Being founded in 2010, WeWork is starting to have an established concept of space-as-service
business. At the time being, WeWork offers over 800 locations worldwide, key locations being in
North America, South America, Middle-Europe, Oceania, Middle East, and Eastern Asia. In addition
to hot desk memberships, also private desks and private offices are available. (WeWork 2021)
The pricing and the contents of the subscriptions differ, e.g., a hot desk subscription to a certain
building in Berlin costs around EUR 250 monthly. In contrast, a similar subscription to New York
City prime locations can exceed USD 500. Even though amenities are dependent on the location,
certain amenities recur in the repertoire of WeWork, e.g., additional mail handling service, day-
passes, conference rooms, wellness rooms, and event spaces. (WeWork 2021)
WeWork mainly signs direct leases with commercial property owners and developers, in their own
words, “eliminating the hassle of managing flexible and short-term leases.” WeWork presents that
the presence of the concept increases financial activity within the neighborhood and “builds regional
energy.” WeWork claims that selected buildings experienced increased rent levels of tens of percent
and a 50% to 120% percent increase in sale prices after WeWork started operating their business
within the building. (WeWork 2021)
WeWork has also evolved into a landlord. As WeWork believes that the presence of their model in
the premises affects the value of the asset positively, owning assets themselves seems reasonable
(Baum et al. 2020 p. 75). Owning buildings offers a way for WeWork to capture even more of the
value that they create for the building.
The expansion of WeWork has been so quick that many agents within real estate remain prepared for
financial challenges for WeWork and its landlords. It is presented that a quick expansion of short-
16
term lease provider is subject to financial challenges that can be hard to manage. The immersive
problematics of the expansion of WeWork are compared to Regus, which filed for bankruptcy as
early as 2003 essentially due to financial challenges its flexible space providing concept had brought.
The main source of the challenges is presented to be the mismatch between the long-term leases on
the supply side and the short-term subleases on the demand side. (Kirk 2019)
Some investors have given WeWork substantial amounts of rent-free months and tenant
improvements. Kirk (2019) claims that some of the leases signed by the subsidiaries of WeWork are
structured efficiently so that the holding company does not guarantee them. If a tenant has financial
challenges, insufficient securities can lead to substantial financial harm for the landlord due to unpaid
rents in the situation of bankruptcy of a limited liability company. There is evidence that due to the
uncertainty of WeWork, some REITs refuse to lease their premises to WeWork. (Kirk 2019)
In 2020 WeWork accounted for 31% of flexible office space in North America (CBRE 2020 p. 18).
The figure presented reveals the magnitude of the business of WeWork.
In the context of this study, WeWork is considered a flexible space operator, which forms its platform.
The platform of WeWork only has one supplier, WeWork.

2.4.2 Scandic Hotels, platform-based office space network in the Nordics

Scandic Hotels started offering flexible office space services during the pandemic outbreak in fall
2020. In addition to 24/7 open shared workspaces, hotel rooms as an office and other private spaces
are available. Coworking costs EUR 19 for a day and EUR 199 for 30 days, both including VAT.
Typical coworking amenities such as coffee, water, and printing services are available in addition to
hourly-priced meeting rooms. The coworking subscription gives access to all coworking spaces in
270 locations, mainly within the Nordics. (Scandic Hotels 2021)
Coworking and other flexible space operating can be interpreted as hospitality providing rather than
real estate. It can be argued that the coronavirus outbreak harmed the hotel industry especially hard,
thus harming hotel property landlords.
The fact that a large hotel operator participates in the business of flexible office space manifests well
the emerging hospitality component of flexible office space in practice. Considering the number of
locations, Scandic Hotels is surprisingly the largest flexible space operator in Finland.

2.4.3 Flexible office space platform of Spacent

Spacent offers a flexible office space platform in Finland. At the time being, Spacent membership
combines around 30 locations into a hot desk network usable through a single coworking subscription.
The standard membership for a team of one to ten persons costs monthly EUR 195 + VAT per
subscription with 30 days of termination period. In addition, pay-per-use services for meeting and
project spaces are available through the dedicated mobile application. (Spacent 2021)
Many of the spaces participating in the Spacent hot desk network are standalone coworking spaces.
The concept is young, initiated in fall 2020, and the concept is not yet that established.
In addition to the hot desk membership, Spacent offers pay-per-use and other short-term premises.
Landlords or companies may list their spaces to the network and define their prices. Usually, Spacent
receives a percentage of the sales realized under the platform. The user agreements and invoicing are
managed by Spacent.
Even though the product offered to the end-user is like WeWork’s product, the model of Spacent
differs as Spacent is not a tenant nor a flexible space operator. Instead, Spacent manages the platform
by signing agreements with operators of the spaces and offers them to end-users by user agreements.
17
Fundamentally, Spacent offers two essential elements: the platform with its application and the
management of user agreements with the space users. Moreover, Spacent’s model manages some of
the components that are not necessarily strengths of a property investor nor something that the
investor seeks to manage.

2.4.4 Flexible office space platform of LiquidSpace

LiquidSpace (2021) presents that LiquidSpace is “built to simplify the discovery and transactions of
office space.” Like Spacent, LiquidSpace offers a platform solution for flexible occupancy by
combining spaces from different landlords or operators. In addition to landlords and operators,
companies can list their excess space in the platform (LiquidSpace 2021).
LiquidSpace claims to be the largest real-time network for office space by having over 18 000
available spaces. Several occupancy models are offered, such as hot desks and private offices on
hourly or monthly plans. In addition, meeting rooms and office suites are offered. (LiquidSpace 2021)
For example, LiquidSpace has around 20 flexible office locations listed in the Helsinki Metropolitan
Area at the time being operated by Regus. (LiquidSpace 2021)
It should be noted that even though the platform manages the user agreements towards space users,
the user agreement is formed between the space operator and the end-user (LiquidSpace 2021).

2.4.5 Typology of flexible office space platform operation models

As introduced in the above concrete cases, the flexible office space platform models differ just as
single location operating models do. However, a typology can be made based on the differences of
responsibilities. Broadly, the flexible office space platform models can be divided to two extremes
based on whether the platform is the space operator of the spaces or not. In this chapter, we present a
typology of flexible office space platforms.
Platform-as-a-space operator
In the platform-as-a-space operator model, the platform operates the spaces, an example being
WeWork. This means that the platform carries the responsibilities of the tenure and movable
infrastructure within the physical space. Tenure of the platform is typically based on a lease, but
freehold of the spaces does also occur among platforms.
The tenure of the platform can be based on other institutions than tenancy or freehold. An operator
can operate a flexible workspace for the landlord under a management agreement (Colliers 2020 p.
9). Management agreements place flexible space operators and landlords to the same side of the table,
enabling a wider range of solutions to offer for occupiers (Colliers 2020 p. 17). Management
agreement forms a partnership between a flexible space operator and a landlord rather than a tenancy.
Match-maker platform
In the second extreme, the match-maker platform model, the platform brings the different locations
into one platform by agreements with landlords or managers of different spaces, such as in the models
of Spacent and LiquidSpace. Compared to the previous model, the latter model has one more party
in the structuration, as in this model space operating and platform operating are divided.
Even though the products provided to the end-user could be interpreted the same from the user’s
perspective as in the platform-as-a-space operator model, the underlying responsibilities differ. The
responsibility of operating the flexible space is carried by the space provider, not the platform. The
match-maker platform only manages the platform while in the platform-as-a-space operator model
the platform manages the spaces and the platform. In the match-maker platform model, the user
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agreement can either be signed between the end-user and the platform as in Spacent’s model or
between the end-user and the host as in LiquidSpace’s model.

Picture 2. Match-maker platform.

The typologized match-maker platform is modeled in Picture 2. The available listed spaces are
provided by hosts which can be, e.g., investors, flexible space operators, and companies that list their
excessive space. The platform typically receives a fee from the revenue when the occupier uses a
space. Occupiers can range from single consumers to large corporations. As the match-maker
platform manages invoicing and user agreements, the space provider does not have to manage the
agreements with the occupiers. This type of match-maker platform is evaluated in the case study.
Conclusion
In the context of platform value-creation theory introduced above, the platform-as-a-space operator
model has only one party on the supplier side, the platform. The platform itself supplies the spaces
within the platform. The match-maker platform model has many suppliers instead, as the platform is
formed from spaces across different space managers such as landlords, flexible space operator
tenants, and companies with excessive office space. In the combiner model, the supply and demand
are both formed by multiple participants.
The two typologized models are extremes, and nothing prevents them from being mixed. The
characteristic on which the typology is based is whether the platform is the space operator or not.

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2.4.6 Flexible office space in the microeconomic framework
This chapter broadly introduces few microeconomic concepts related to flexible office space
platforms that are relevant for the investor.
Specialization
In economics, it is often presented that benefits exist on specialization and an agent should focus on
the activity where it has its comparative advantage. Specialization is required to efficient execution
of many certain tasks. (Pohjola 2015 p. 22–26) As typologized above, the models of platform-based
flexible space providing can be divided based on whether the platform is the space operator or not.
In the platform-as-a-space operator model, the platform must manage the spaces in addition to the
platform. Some synergy benefits might exist if the same party manages the platform and the spaces.
The match-maker platform model is simpler, as the platform only manages the platform as the space
listers manage the spaces. The focus is more limited in comparison to the other model, so there may
be specialization benefits.
The match-maker platform can combine all kinds of spaces with different management models, as
the space lister can be a tenant or the landlord itself. In the specialization framework, one could ask
that is a real estate investor capable of competing as a flexible space operator, as it requires
specialization to execute it efficiently.
The end-user can be indifferent or even unaware of the business model of the supply-side regarding
the platform of flexible office space. Even though the supply-side of the flexible office space platform
could differ by a lot, the demand-side can be somewhat homogenous among the products. Just as in
many other markets, the flexible office space market is complex, leaving space for various production
models to exist simultaneously.
Agency dilemma
The agreement between a space operator and a platform and the agreement between a space operator
and a landlord contain agency dilemma. The agent optimizes their own interest rather than the interest
of the principal. The agent’s incentive to perform well on what is agreed upon can fail from the
principal’s perspective.
Agency dilemma is generally acknowledged in the negotiation of the agreements and the structuration
of the agreements often aims to align the parties’ incentives. A well-structured contract incentivizes
the agent to act in the desired way, e.g., to manage the investor’s premises well.
The management agreement model can help to solve some issues regarding the agency dilemma.
Instead of tenancy, an operator can operate a flexible workspace for the landlord under a management
agreement (Colliers 2020 p. 9). Management agreements place flexible space operators and landlords
on the same side of the table (Colliers 2020 p. 17). If revenue and costs are shared, the interests of
the parties are aligned.
Recurring payments and unlimited plans
Hot desk memberships are usually recurring. E.g., The Spacent coworking membership subscription
is monthly recurring with 30-day termination period (Spacent 2021). Recurring payment as a pricing
model has unique characteristics.
Recurring payment models are argued to be effective for goods that have immediate costs but delayed
benefits (DellaVigna & Malmendier 2006). DellaVigna & Malmendier (2006) found that people tend

20
to pay considerably more by having a monthly unlimited plan to the gym in comparison to pay-per-
visit prices.
Recurring payment model seems to be effective on coworking memberships. Even though DellaVigna
& Malmendier (2006) studied the mechanics of recurring payments in the context of health clubs, a
coworking space is a one kind of a good that similarly have immediate cost and delayed benefits.
Consumers usually postpone the cancellation of recurring memberships. Even if a monthly recurring
plan would be economically most effective choice for the consumer at the beginning of the
subscription, the cancellation of underutilized subscription tends to be delayed. DellaVigna &
Malmendier (2006 p. 716) present that less active monthly subscribers that pay a high price per visit
have a longer gap between the last use and the contract termination. Consumers’ overestimation of
efficiency or self-control is suggested as an explanation (DellaVigna & Malmendier 2006 p. 716).
The dynamics of recurring payments and unlimited plans are relevant in the flexible office space
context. Many of the coworking spaces participating the Spacent network offer pay-per-use day
passes for average price of around EUR 20, which can be a suitable price model for less active users.
It should also be noted that the in the usage of unlimited coworking membership the end-user accepts
to carry the risk that the spaces might be full and unusable on certain moments. An investor should
note that the performance of coworking membership model is partly based on these microeconomic
mechanics reviewed in this chapter.
We argue that the dynamics of recurring payments and unlimited plans partly reason the decreases
on the number of active contracts and users between the time points of January 2020 and November
2020. While the average daily user count on coworking concepts fell around 50%, the number of
contracts fell by 25% between the time points (Deskmag 2020 p. 16). During that time frame some
users undoubtedly paid excessive amount compared to their usage even though the subscriptions are
usually very flexible.

2.5 Real property as an investment

Property as an investment is often described as tangible, indivisible, and immobile. A piece of land
is concrete and cannot be moved, ever. The unit size of real property investment is huge compared to
a typical share of a company, a share of a fund, or a piece of gold, which decreases the number of
potential buyers. Property is unique and complex in terms of the features that remark the yield
providing capabilities. The information among market participants is incomplete and asymmetrically
distributed. These features together make property valuation necessary. (Breuer & Nadler 2012 p.
10–11)
In real estate, there are three traditional valuation methods: sales-comparison method, income
method, and cost method. Even though in practice valuation methods are used as toolkits, the methods
rest on underlying economic theory (Mooya 2016 p. 43). The valuation assumes that market value is
a determinate magnitude independent from everything that constitutes the market (Mooya 2016 p.
62).

2.5.1 Income method

The income method is based on the principle that value can be derived from income-producing
capabilities and the required rate of return. The simplest approach to the income method is direct
capitalization, in which the net income of the property is divided by the required rate of return.
However, direct capitalization assumes that the cash flow from the property remains the same forever,
which is hardly ever the case. (Mooya 2016 p. 49–50)

21
Discounted cash flow (DCF) approach expands the principle of direct capitalization to a series of cash
flows, thus adding approximations of future cash flows into the income-producing component of the
function. It should be noted that both components, the income, and the required rate of return, are
completely market-related as the income of the space is a result of supply and demand. The required
rate of return is a result of complex capital market dynamics. (Mooya 2016 p. 49–50)
Skepticism of the income approach usually regards the fact that it is based mainly on assumptions,
not actual evidence. In many cases, it is troublesome or even impossible to predict parameters, e.g.,
rent or expenses of the next decade, thus resulting in using unreliable values. However, as the income
method is kind of an industry standard, buyers and sellers alike tend to rely on it, resulting in a
somewhat reliable illustration of the market value. The universality in the use of the income method
itself does enhance its credibility. (Mooya 2016 p. 49–50)
In this study, the scenarios of the case study are valuated through the income method.

2.5.2 Characteristics of real property investment

As with any investment, to gain a return the investor must burden some risk. Risk as a term can be
defined in numerous ways, but we think of it as the difference between expectations and realizations
in this study.
There is a bundle of risks that relate to real estate as a business. The general economic fluctuation
parameters affect the real estate market in numerous ways, the parameters being, e.g., employment,
population, price of capital, space demand, and price of operating. The effect of certain parameters
can be reduced by diversifying, but not completely removed. It should be noted that the fluctuation
of the general economic conditions may benefit and interfere with position of an investor. (Goddard
& Marcum 2012 p. 118)
Specifically, some of the above-mentioned, general economy-related parameters are usually
considered separately, them being inflation and interest rate. The risk of inflation realizes if the real
value of income underperforms in comparison to the overall price level or the operational expenses
(Goddard & Marcum 2012 p. 123).
In addition to inflation, interest rates affect almost every investment class. Inflation expectations are
present while the interest rate on the loan is defined. Traditionally real estate is a highly leveraged
asset class, which leaves thought on it being affected even more by the interest rate fluctuations. The
interest rate level directly affects the incentive to borrow money for property investments. Properties
are usually financed with variable interest rates or fixed interest rates. As loan periods can be long, a
loan with variable interest rate can differ in cost a lot within the period. The borrower carries the
upside interest rate risk if a variable interest rate loan is considered. If desired, the borrower’s upside
risk can be eliminated by having a fixed interest rate loan. However, if interest rates decrease, the
fixed-rate loan becomes more expensive compared to what is available in the market. The interest
rate risk itself is present regardless of what interest rate is considered. In addition, the amount of
leverage independently affects the risk and return even if changes to the interest rate level are
disregarded. (Goddard & Marcum 2012 p. 124–126, 130)
One difference real estate has as an asset class compared to, e.g., stocks and bonds is the management
requirement (Goddard & Marcum 2012 p. 121). Investment properties require active management for
them to reach potential cash flow. In addition to the upkeep of the physical building, the management
components are, e.g., leasing, marketing, and financial administration. The manager of the investment
properties is usually paid with a plan that is meant to incentivize the manager to maximize the
property’s income (Goddard & Marcum 2012 p. 121). Poor management of the property can lead to
reduced income or even cost a fortune to the owner.
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As considered above, commercial real estate tends to have massive unit sizes. Investment property
purchase can easily take half a year between the beginning of the search and acquiring the asset
(Goddard & Marcum 2012 p. 122). Real estate is considered more illiquid than other forms of
investments (Goddard & Marcum 2012 p. 122). As the unit size increases, the liquidity does not
ceteris paribus increase. However, the markets tend to price this resulting in an illiquidity premium
over other assets in comparison, meaning that tolerating illiquidity can offer opportunities as well.
Real properties are multidimensional in terms of characteristics. As properties are immovable, they
are quite easy to regulate. As customs and technologies advance, regulations tend to change with
them, though with lag. Changes in the environment of regulations can affect the investment
characteristics of real property in numerous ways by, e.g., changes in taxation, management
requirements, zoning, and financing regulations (Goddard & Marcum 2012 p. 122–123). These
regulatory changes can affect the income of the investment property by a lot.
Another risk related to immovability is the risk regarding the environment. Operating a real property
affects, e.g., air, water, sewage, land, and aesthetics (Goddard & Marcum 2012 p. 128). The investor
should consider the risk of contamination as the legal consequences can end up being massive
(Goddard & Marcum 2012 p. 128). In addition to the possibility of real property investment affecting
the environment, the environment can affect the real property investment. Weather conditions,
animals, plants, or earthquakes can harm the investment’s ability to produce income.
Real estate as an asset class has characteristics that result in the need for property valuation. In
addition to property valuation, the process of purchasing an investment property is subject to high
transaction costs, partly due to the risks introduced in this chapter. Justified risk analysis prior to
purchase should reduce the possibility of objectionable surprises (Goddard & Marcum 2012 p. 136).
Due to the asset’s multidimensionality, the buyer’s diligence should be taken seriously, even though
it results in costs. Some instruments to manage the risks of real property investments are, e.g., limited
partnerships and insurances (Goddard & Marcum 2012 p. 136).
This study views the operation of flexible office space as real estate. If flexible office space is operated
in the premises of a property, an additional risk and uncertainty is added on top of the underlying
risks and uncertainties reviewed in this chapter.

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3 Investor’s perspective on flexible office space platforms
In this section, we comprehend the results of the literature review into a qualitative understanding of
flexible office space platforms from investor’s perspective.
The platform model must result in an allocation where every party is better off by participating in the
model rather than sticking to other models in the longer run. If any of the parties find the model
unprofitable, the usage of the model is not justified, thus resulting unused.
The issues of the investor’s perspective can be considered especially relevant in the flexible office
space platform models, as real estate investors are often considered exceptionally conservative.
Investor’s goal is to maximize profit on a certain risk level, thus willingness to adopt a new concept
may be low, especially if its profitability cannot be estimated certainly enough.
Investor is after profit and will require a compensation for additional costs, risks, and inflexibility.
The investor has a lot more to lose compared to end-users in the flexible office space platform model.
The implementation usually requires the investor to modify a physical space and form processes
regarding management to participate in the platform. In turn, the users can have flexible occupancy
with little commitment. The flexible occupancy can be terminated even in a little time as a month,
while pay-per-use services can be terminated immediately.
Many costs of managing property investments derive from tenant changes. Tenant changes result in
vacancies, searching costs, negotiation costs, and tenant incentives such as rent-free periods and
tenant improvements (Puheenaihe 2020). The movement towards flexible office space platforms can
lower this cost bundle, even though the spaces itself tend to require a lot of fitment improvements.
Lowering the costs of leasing is independently something a real estate investor is interested in.
As the solution provided by the platform is valuable for the lister of the space, the platform requires
a compensation. Flexible office space platform models differ, but, e.g., Spacent seems to offer a
relatively easy way to get started with listing a space. Many processes such as invoicing is provided
by Spacent, resulting in an easy-to-adopt solution for the lister of the space (Spacent 2021). Fixed
costs regarding the offering of the space are mostly covered by Spacent, resulting in lower
management effort for the lister of the space.
Flexible office space platform participation may refine the public image of the participants. Building
and construction as a sector account for a massive carbon dioxide emission amount (Spacent 2021).
Flexible office space is considered a more environmentally sustainable choice in comparison to
traditional leasing, as spaces and equipment are shared to some extent. Thus, offering flexible office
space solutions might offer a positive publicity component which relevancy can increase even more
in the future.

3.1.1 Disruptive innovation

There is justification for the concern that the incumbent property investors respond late to the
emerging trend of flexible office space platforms. The ownership of investment properties is
accumulated, partly because of their large unit size and the scale benefits in the compulsory
management of the investments. Real estate investors are considered exceptionally conservative. In
this chapter, flexible office space platforms are viewed in the context of disruptive innovation.
Disruptive innovations result in new business models providing new value propositions by not
attempting to improve the existing products. The products resulted from disruptive innovation are
usually not initially targeted to mainstream customers. By evaluating through prevailing industry
standards, the products of disruptive innovation tend to be worse than the ones utilized by the
24
mainstream customers. However, the products that resulted from disruptive innovation have new and
different features that initially only receive interest from a small customer group. Incumbent
businesses tend to respond late to disruptive innovations. (Poleg 2020 p. 74–75, 77)
Different definitions present that disruptive innovation provides radically new functionality, changes
the performance metrics and consumer expectations, creates new demands and competitors, and
replaces archaic ways of doing business. If successful, a disruptive innovation moves aggressively up
the market and displaces the existing competition. (Si & Chen 2020 p. 3).
We interpret that flexible office space platforms, specifically the typologized match-maker platform,
have the primary characteristics of disruptive innovation. The flexible space platform models started
by not targeting the mainstream space users. The flexibility the platform model can offer can be a
radically new functionality for office space occupiers. If the model succeeds, it will change the
performance metrics and consumer expectations within the field of office occupying. For example,
the proposed shift toward more flexible occupying, EBITDA-based valuation approaches, and
customer satisfaction ratings are features that are new in the office sector of commercial real estate.

3.2 Risks and returns of platform-asset

In this chapter, we consider the risks the flexible office space platform model possesses for the
investor. Some risks reviewed in chapter 2.5.2 are tied to the asset class of real estate, meaning that
the risks do not necessarily change even if the utilization of the physical space changes. Thus, some
risks of real estate investments are always present. The term platform-asset refers to an asset which
has some of its premises listed on a flexible office space platform.
A flexible office space concept transforms the maturity of the tenure in between the space user and
the landlord. As investors prefer predictability, shorter leases are more expensive than longer leases.
However, if an investor decides to operate the platform-asset on its own, the investor does not have
to think about how inflexible leases are, as the tenure is not based on a lease.
The flexible office space changes the competition within the field. The competition among flexible
office space, and office leasing in general, keeps getting harder as flexible space concepts pack more
services together, making the industry of office leasing more operationally intense (Clayton et al.
2019 p. 19). Although location is considered one of the main characteristics that define a property
and its intended usage, the flexible office space concepts have many more fields to compete as well,
such as services and fitments. The physical spaces must be high quality and personal, which lead to
considerable amount of planning and fit-out costs. This applies to the platform-asset as well as to
flexible office space concept in general.
A large platform might have leverage which harm the position of the investor in the negotiations. The
value creation ability of the platform derives mostly from the manifestation of scale benefits, which
can result in success and massive growth of the platform. If the contractual parties differ in size, the
larger may have a lot more leverage in dictating the conditions of the agreement (Hemmo & Hoppu
2020). Investors may face problems while negotiating the possibility of entering the platform with a
space. If the platform reaches oligopolistic or even monopolistic market share with its product, the
leverage on the negotiations gets even more effective. However, the ownership of real estate is
somewhat accumulated, meaning that many investors are large enough to stand a chance in the
negotiations against a large platform. Like many challenges regarding flexible office space from the
investor’s perspective, the uncertainty reviewed in this paragraph seems to ease over time as customs
among the platforms, users, and investors settle further.
The relation between the landlord and space operator contains agency dilemma. By participating in
the platform, an investor should note that the platform is no different in comparison to any entity
25
which optimizes its own interest. Thus, participating in an external platform contains agency dilemma
as well.
Even though industry of flexible office space has existed for decades, it is still considerably more
novel as an industry compared to most of the institutions in the field of commercial real estate. The
fact that the working customs and the ways to offer flexible space are still finding their balance in the
world of pandemic increases the risks the investor must face to improve and practice sustainable
business in the field of flexible office space. The addition of the platform introduces a new level of
uncertainty and novelty on top of already existing uncertainties of the unmature field of flexible space.
Overall, if platform participation requires an investor to manage additional risk, the investor will
demand higher revenue to compensate the risk.

3.3 Valuation of platform-asset

Within the field of real estate, income method is considered suitable for commercial property
valuation (Mooya 2016 p. 49). However, as the flexible space concepts usually receive their effective
rent from subscriptions and other payments for shorter-term tenancies, the prediction of the cash flows
is not as simple as in traditional leasing.
Valuation of flexible office space is considered challenging in the property field. As the flexible office
space changes the nature of the office asset, property field specialists are already wrangling about
what coworking does to the value of the building (Clayton et al. 2019 p. 19). Newsec (2020 p. 5)
states that crises in general do increase the spread between different valuation views. Thus, the
pandemic makes the valuation of flexible space even more challenging.
A flexible workspace can be managed under a management agreement by the operator rather than a
lease. Colliers (2020) presents that the main issue regarding valuation of spaces operated under
management agreement is the lack of market evidence. The management agreement assets are valued
for debt purposes, but the valuations are not considered to reflect the true value of the space. Even
though quantification of the income and its certainty is challenging, the space operated under a
management agreement must be more valuable than similar, vacant premise, as the income-producing
performance of the management model may be high. Even though a management agreement model
offers low surety of income for the landlord, it offers highest potential returns. (Colliers 2020 p. 9)
The increase in the amount of flexible space concepts will change the valuation of real estate in the
longer run. Baum et al. (2020 p. 75) present that as the share of space-as-a-service models increase
on the markets, the valuation in general will shift more into analyzing EBITDA instead of traditional
analysis on the features of tenants and leases. Currently, the terms of the lease and tenants’ covenants
universally form the basis for office property valuation (Baum et al. 2020 p. 75). The increase in the
number of tenants and the decrease in occupancy lengths require different valuation approach to
measure the worthiness of the cash flow.
The valuation of the platform-asset mainly faces the same challenges as the valuation of flexible
office space in general. The nature of the cash flow of flexible space concept is more uncertain and
fluctuating in comparison to a lengthy lease. As the commitments of the space users are far less
substantial in comparison to traditional leases, the analysis of the financial reputation of the space
users is substantially less relevant in valuation of flexible space. In the context of valuation, we
present that the platform is only an operational model on how to execute flexible office space.

3.4 How could investor utilize a flexible office space platform?

In this chapter, investor’s utilization of flexible office space platform is considered in more practical
manner.
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Typologized match-maker platforms offer the digital facilities, invoicing, and some customer base in
exchange for the platform fee. The flexible office space platforms offer a low threshold way to
participate in flexible office space markets. The possible improvement work may be started as soon
as vacancy occurs, as traditional tenant search is not required.
Initially, an investor should decide whether to concentrate on developing an independent flexible
space concept of their own or to rely more on the platform. Currently many independent standalone
flexible office space concepts exist and are operated by subsidiaries of investors in the Helsinki
Metropolitan Area. Majority of these concepts are also accessible through membership offered by
Spacent. Several components of operation certainly overlap if spaces can be accessed through the
platform and through the independent concept as well. The current situation might be explainable
through investors and independent operators being careful on evaluating the opportunities within
flexible office spaces and flexible office space platforms in general. However, relying on the platform
may result in changes in the balance of negotiation. The more dependent the flexible space asset is
on the platform, the harder time the investor is having on the negotiations. This way the independency
of flexible space concept might be profound even though it results in costs. However, it is reasonable
to presume that currently the sizes of the platforms are not large enough to dominate in the
negotiations against landlords.
One utilization model of the flexible office space platform for the investor is to modify a part of an
asset’s premises into a flexible space and list it through a platform. The asset as a whole might benefit
from the flexible spaces, as some tenants might find required amount of flexibility from the flexible
premises offered on the same building. As presented by CBRE (2020 p. 48), in the post-pandemic
world the occupiers will look for flexibility around their longer-term commitments, including mixed
use of traditional leasing and flexible space within the same building.
Flexible office space platform might be suitable for higher vacancy properties. Maninka (2020)
presents that properties located in higher vacancy areas could utilize coworking model (Maninka
2020). Instead of searching for tenants, a landlord could utilize a vacant premise by setting up a
flexible office space. It could be possible that differing views of valuation of higher vacancy rate
spaces increase the incentive to participate in the platform with such spaces. If this strategy is suitable
in general, it should capitalize on the value of the property in advance. However, as the required
fitment improvements are a large commitment for the investor, the investor might be unwilling to
invest to such higher vacancy premises. It is very uncertain that the large fitment investments and the
implementation of the platform-model make a low occupancy property perform well enough for it to
be financially desirable.
The platform might also be attractive to other riskier properties as well. As uncertainty is considered
bad, the current differences in valuation views derived from the pandemic might increase the
incentive for the implementation of the platform regarding risky properties. The decrease in the value
of the riskier asset might make room for platform trials.

3.4.1 Participation in hot desk platform membership

Spacent also provides a combined access to independent coworking spaces for a monthly price of
EUR 195 + VAT (Spacent 2021). The pricing seems competitive, as the memberships for some of
the independent coworking spaces that participate in the Spacent membership can well exceed the
price of the Spacent membership.

27
Table 1. Monthly cost for hot desk, single user. List prices as of 27.1.2021. (UMA Workspace 2021,
MOW 2021, Epicenter 2021, Myyr York 2021, Spacent 2021)
Membership Monthly list price, one user,
from EUR. VAT exclusive.
UMA Teurastamo, Vilhonvuori, Helsinki 285
MOW Mothership, Helsinki center 250
Epicenter, Helsinki center 260
Myyr York, Myyrmäki, Vantaa 90
Spacent 195
Spacent seems to offer the hot desk access less costly to many of the independent coworking spaces
than the spaces themselves. It should be noted that the presented figures are list prices and may not
reflect the actual contracts signed by users at all. In addition, it is unclear whether the Spacent
membership contains the same exact services that the independent memberships do.
As the membership model reviewed in this chapter contains unattainable information such as what
the platform has agreed on with the space hosts of the participating spaces, the fixed subscription
model reviewed in this chapter is not examined further in this study.

3.4.2 Flexible office space occupied solely through the platform

The models of the platforms differ as well as the concepts of the spaces do. Platforms such as Spacent
and LiquidSpace offer all kinds of flexible office spaces on monthly and pay-per-use basis. The length
of the occupancies can vary by a lot.
Instead of leasing the space to an operator, an investor could list a space to the platform. This way
users reach and occupy the spaces through the platform solely. By this strategy, an investor could
utilize an empty space in a relatively quick time span and with little effort, as the platform manages
the invoicing and agreements towards end-users. In addition, the management of the technical side
such as the reservation system and the application offered to the end-users is carried out by the
platform.
In exchange for platform’s commission percentage, an investor can reach the end-users in need of
flexible spaces by the platform. The platform can offer efficient solutions due to supply-sided scale
benefits, meaning that the product offered can be high quality. The management of e.g., invoicing,
user agreements and the digital infrastructure such as the application can become more efficient the
more there is to manage. Due to these facts the platform can offer value for money for the space
listers.
Many costs regarding real estate investments derive from changes in tenancy. Changes in tenancy
result in e.g., vacancies, searching costs, rent-free months, and tenant improvements. This capitalizes
on the asset’s value: the more certain the cash flow is, the worthier the asset is. Because of this fact,
the weighted average lease expiry effects essentially to the value of the asset.
As introduced above, CBRE (2020 p. 48) presents that occupiers are expectedly going to acquire
flexible spaces around their long-term commitments, even possibly on the same building. The
platform utilization model reviewed in this chapter offers a practical way to offer such solution to
occupiers.

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Qualitatively examined, it can be argued that by offering flexible office premises alongside a lease
within the same building, it is possible to increase the weighted average lease term of the premises.
Tenants could upscale their office premise needs to some extent by utilizing the flexible spaces
offered by the landlord, meaning that staying is more desirable. As flexible spaces are offered within
the building, some prospective tenants could view signing traditional leases more appealing as well.
Based on these arguments, the effects of utilizing a small part of the building in the form of flexible
spaces accessible through the platform could be substantial. Flexibility does not solely mean that
leaving is easy, as easy leaving lowers the barriers to enter as well. In this model, the flexibility
scatters on top of the inflexible, traditional leasing tenants as well. Sometimes even a little flexibility
can be sufficient for the occupiers. By offering enough flexibility and sufficient premises for the
tenants’ needs, the premises could attract new tenants more easily.
Some multitenant office buildings offer reception services of some sort. The management of flexible
spaces in the premises might be subject to synergy benefits if a reception and receptionist already
exist in the premises. By some changes, the receptionist might be able to manage the on-site flexible
spaces, meaning that only a limited amount of excess human capital may be needed. If desired, the
landlord can limit the access to the flexible spaces to certain groups e.g., the tenants of the building.

3.4.3 Theoretical framework

Literature review suggests that the nature of office leasing is changing. Office occupiers demand more
flexibility from their premises (Baum et al. 2020 p. 74). The pandemic has accelerated the multi-
locality of work (Newsec 2020 p. 7) and strengthened the assurance that remote working is suitable
for a large part of knowledge workers (PwC 2021). The pandemic made some occupiers realize how
inflexible the traditional rents are. The demand for flexible office space is increasing. In addition to
single consumers and small companies, also larger enterprise tenants are interested in acquiring
flexible office spaces (CBRE 2020 p. 10). Based on the arguments reviewed in this paragraph, it is
reasonable to suppose that the average lease term of office leases is going to shorten during the next
years.
The typologized match-maker platform offers the management of invoicing, user agreements, and
digital infrastructure in exchange for the platform fee. Thus, a match-maker platform is specialized
in managing several tasks of flexible office space operation that are challenging for real estate
investors to self-deliver. The platform fee is usually a percentage of the revenue created by the space.
Percentage fee as a pricing model offers predictability, which is desired by the investors. The match-
maker platform also creates value by network effect, which offers opportunities for the investor to
reach more potential occupiers through the platform.
Tenants are looking for flexible occupancy solutions as a complement to traditionally leased spaces.
Occupiers expectedly seek flexible office spaces around their longer-term commitments, even
possibly from the same building. (CBRE 2020 p. 48)
In the case study, we examine an imagined asset which premises are partly utilized through a flexible
office space concept. The flexible office space concept is solely accessible through the match-maker
platform. The rest of the asset’s premises are traditionally leased. The primary idea of the flexible
office concept within the premises is to offer flexibility for the traditional tenants of the same building.
The case study models the economic boundaries under which a flexible office space is profitable to
offer through a match-maker platform.

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4 Case study
In this section, the investor’s perspective on flexible office space platforms is reviewed through a
case study in more quantitative manner.

4.1 About the case study

In this section, the investor’s perspective of flexible office space platform is reviewed though
simulated calculations exercised with different leasing scenarios, primary scenarios containing
flexible office space platform utilization. The platform model utilized is the typologized match-maker
platform. The other leasing model is traditional leasing. Traditional leasing denotes the model in
which the tenant utilizes the space under an ordinary lease agreement signed with the landlord with
no other contractual parties present.
In succession to the presentation of the results, the results are reviewed in qualitative manner based
on the findings of the literature review.
A model in which a space is occupied solely through the platform offers a relatively easy way for a
landlord to engage in the flexible office space market. It also reduces the parameters to estimate in a
such case study we are conducting in this section, making it suitable to base the case concept on. In
addition to the platform, there is no other external operator present in the case study. The occupancy
for the flexible space concept space is fulfilled though the user agreements managed by the platform.

Picture 3. Parties of the flexible space concept of the Case stylized.

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The fluctuating revenue stream of flexible office space usually comprises of flexible desk
memberships, fixed desk memberships, private offices, and renting other spaces for, e.g., meetings
and events.
For simplicity, the case shall contain three end-products, which are hot desk day pass, private office
per month, and meeting room per hour. Even though lengths of the occupancies and sizes of the rooms
differ in the real-world, the case shall be simplified.
It is supposed that the case concept does not have market power, meaning that the increase in total
flexible space available in the market initiated by the case concept does not affect the equilibrium of
supply and demand of flexible space. The declaration of the above-mentioned is essential, as the
aggregate demand for flexible spaces might be limited with the current number of spaces and their
prices.

4.2 Valuation method

As we model the flexible office space model through a case with supposed cash flow parameters,
income-based valuation model is chosen. The valuation method used in this case study is direct
capitalization. In direct capitalization, the net operating income of the asset is divided by the
capitalization rate. Instead of using more complex discounted cash flow models, direct capitalization
offers broader yet simpler way to compare valuations.
As the studied case at minimum contains considerable number of suppositions, the usage of more
complex income valuation model is not justified. Moreover, in terms of comparison, a simple
calculation model is suitable.

4.3 Parameters
In this chapter, the parameters used in the Case modelling are presented. Data is collected from
various sources. However, as this is a case study and the data availability is limited, considerable
number of suppositions are required. The suppositions on each parameter are reasoned. If specific,
the sources are presented.
Rent level, occupancy rate, and capitalization rate are fetched from Datscha.
The prices are VAT exclusive.
Further, the parameters are concluded and presented in more exemplified tables.

4.3.1 Benchmark
First, the benchmark, which is to be compared with the Case, is considered.
Location
The Case is imagined in the sub-market of Vallila in Helsinki, Finland.
Vallila is chosen as it is a clear specific sub-market within Helsinki with sub-prime rent level.
Gross leasable area
The chosen gross leasable area for the Case is 5 000m2.
Rent
The gross rent level of the benchmark is chosen to be EUR 19,5/m 2.

31
Newsec reported that the median rent level of modern office buildings in Vallila is EUR 17,0. A
modern office building denotes office premises built during 1990 and after. The respective value
reported by CBRE is EUR 22,0. The chosen parameter for the rent level is the average of these two
reported values.
Occupancy
The occupancy of the benchmark is 93%.
Newsec and CBRE both reported that the median occupancy of modern office buildings in Vallila is
93%.
Operational costs
The average monthly operational cost of office space of the Case is EUR 5,32/m2.
KTI (2020) reported that 4,70/m2 was the average monthly operational cost for office space in Finland
in 2019.
A cost of EUR 0,62/m2 is added as a cost of reception within the building. The value is calculated by
dividing EUR 3 100 monthly cost with the leasable area.
The cost of EUR 3 100 comprises a gross salary of EUR 2 250, employing fees of EUR 450 and EUR
250 of other costs. The price of employment reflects the cost of the service to some extent, meaning
that the value is suitable enough in this context even though it would be outsourced by the Case.
This operational cost related to the building is constant across the compared items. Changes in it does
not change the absolute value differences. Thus, more in-depth estimation is not necessary.
Fit-out costs
The rent and operational costs contain a basic level of tenant fit-outs. For simplicity reasons, the fit-
out costs are constant.
Capitalization rate
The capitalization rate of the benchmark is 6,40%.
Newsec reported that the median capitalization rate in modern office buildings in Vallila is 6,80%.
The respective value reported by CBRE is 6,00%. The chosen parameter for the capitalization rate is
the average of these two reported values.
Table 2. Numerical parameters for the benchmark.
Gross monthly Monthly
GLA Occupancy Capitalization rate
rent operational cost
5 000m2 EUR 19,5/m2 93% EUR 5,32/m2 6,40%

4.3.2 The Case parameters

To acquire information on occupancy and pricing, the case costs are defined, and different simplified
scenarios are reviewed. The two scenarios shall be a concept with only hot desks and a concept with
only private offices. The scenarios give idea of the occupancy level and price level to break-even in
comparison to leasing the space traditionally.

32
The acreage of the case space shall be 900m 2. The case space is around few hundred square meters
larger than the average coworking concept found on the world.
Benchmark space
Based on the benchmark parameters, the 900m2 space would have a monthly net operating income of
EUR 11 534.
Table 3. Net operating income of the space if leased traditionally. Monthly NOI is rounded to zero
decimals.
Name of Gross monthly Monthly operational
GLA Occupancy Monthly NOI
the value rent cost
Value 900m2 EUR 19,5/m2 EUR 5,32/m2 93% EUR 11 534
Formula A Rb Cb Ob Nb = ARbOb - ACb

Case space costs

The case concept space shall have four types of costs: operational costs, case specific operational
costs, fit-out costs, and the platform fee. The operational costs are the same as in the benchmark,
defined at EUR 5,32/m2.
The next costs are operational costs that are specific to the case.
Printing
The cost of all-inclusive printing contract is estimated at EUR 800 monthly. The cost should cover
around 15 000 printed pages. For the headcount of 50, an allocation of 300 pages printed per head
per month is acquired.
Internet
The cost if internet is estimated at EUR 300 monthly. Currently, in Finland, 1 000mbps connections
are offered to consumers for under EUR 100 monthly. A safe estimate of EUR 300 monthly is
reasonable for professional use internet.
Electricity
The usage of electricity is estimated at monthly 40kWh per user. The headcount average presumed is
50. The estimated price for yearly 24 000kWh starts from around EUR 1 100 in electricity price
comparison services.
Electricity transfer price is estimated at EUR 0,08/kWh in the area.
Rounding to hundreds, the cost for electricity and electricity transfer is EUR 3000 yearly, which
corresponds EUR 250 monthly.
Cleaning
The costs of cleaning are estimated at 80 hours of EUR 30/h cleaning per month, resulting in monthly
cost of EUR 2 400.

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Coffee, tea, and water
All-inclusive contract for two beverage machines for a headcount of 50 is estimated at monthly EUR
800. Typical rents for coffee machines range from weekly EUR 10 to EUR 100.
Table 4. Case specific operational costs.
Cost Monthly
Printing EUR 800
Internet EUR 300
Electricity EUR 250
Cleaning EUR 2 400
Coffee, tea, and water EUR 800
Total, Co EUR 4 550

These case specific monthly operational costs are further denoted by Co.
Fit-out costs
The fit-out costs introduced to the Case are additional fit out costs on top of the constant fit-outs
appearing on the benchmark space.
100% private offices
The fit-out improvements for the private office space are valued at EUR 170 000. The fit-outs are
paid monthly during 8 years with interest of 1% per annum.
With the above parameters, the constant payment loan monthly installment is EUR 2 763. The sum
is rounded to zero decimals. This monthly cost for fit-outs is further denoted by Cf.
The average tenant improvements for coworking concepts reported around the world are around USD
100 000 to USD 130 000. The case space is hundreds of square meters larger than the average
coworking space found on the market while in Finland the construction costs are high. Thus, a safe
estimate of EUR 170 000 is reasonable.
100% hot desks
The fit-out costs for more open hot desk space are estimated at half of the private office costs, as
considerably less structures are installed to the open space. Thus, the constant payment loan monthly
installment is EUR 1 381. The sum is rounded up to zero decimals. This monthly cost for hot desk
fit-outs is further denoted by Cf/2.
Platform fee
The platform fee shall be fixed 12%. The fee is reduced from the revenue created by the Case.
A typical fixed fee of such platforms on the market is 10 to 15 percent. The models for fees can be
more complex in the real-world. For simplicity, a fixed fee for the Case is chosen.

34
Pure hot desk scenario
Coworking Study 2020 presents that average space capacity of a coworking spaces is 83 people, while
the average space size is around 680m2 (Coworker & CoworkingResources 2020). By dividing the
average space size by average capacity, around 8,2m2 per user is acquired.
The case shall have a lounge and corridor allocation of 150m 2.
By dividing the average space with 8,2m2, A capacity of around 110 is received. However, the average
capacity calculation comprises the lounge and corridor area. If the 150m 2 lounge and corridor area is
valued out, the average space per hot desk which yields the capacity of 110 is 6,8m2 on the remaining
750m2.
To be safe, we allocate 7m2 per hot desk on the 750m2 remaining space, resulting in capacity of 107.
The number for capacity is rounded to zero decimals.
As the occupancy of hot desks is based on day passes, the occupancy percentage excludes weekends.
The absolute daily occupancy including weekends is the reported occupancy multiplied by 5/7. The
occupancy percentages are rounded to two decimals.
The platform fee of 12% is accounted in the calculations.
Day pass prices average to around EUR 20 (VAT 0%) in the Helsinki Metropolitan Area.
Table 5. Break-even point for the pure hot desk scenario with defined cost level. The total costs are
rounded to zero decimals.
Name of the value Value Formula
Monthly NOI if leased traditionally EUR 11 534 Nb
100% hot desk case costs excluding platform fee EUR 10 719 Ch = ACb+Co+Cf/2
Break-even point revenue EUR 22 253 Nb+Ch
Break-even point revenue per m2 incl. costs excl. platform fee EUR 24,73 (Nb+Ch)/A
Break-even point revenue per m2 incl. costs incl. platform fee EUR 28,10 ((Nb+Ch)/A)/(1-0,12)

The break-even revenue is the sum of the NOI of the benchmark and the case concepts costs which
exclude the platform fee. To reach EUR 24,73 revenue per m 2 after the platform fee, the total
underlying revenue paid by the users must be around EUR 28,10 per m2.
Table 6. Combinations to break-even with defined cost level by only hot desks. Occupancy is rounded
to two decimals. Absolute occupancy is rounded to zero decimals.
Day pass price, EUR 15 16 17 18 19 20 21 22 23
Occupancy excl.
73,43 68,84 64,79 61,19 57,97 55,07 52,45 50,06 47,89
weekends, %
Occupancy out of
107 desks on office 79 74 69 65 62 59 56 54 51
hours

35
 Combinations to break-even, 100% hot desks
80%
Occupancy excl. weekends, %

75%
70%
65%
60%
55%
50%
45%
40%
15 16 17 18 19 20 21 22 23
Day pass price, EUR

Picture 3. Combinations to break-even with defined cost level by only hot desks.
In the break-even calculations, the NOI of the Benchmark space equals the NOI of the concept spaces.
The equilibrium is found by changing the occupancy of the concept space. E.g., to reach break-even
revenue of EUR 22 253 after the platform fee with a day pass price of EUR 19, around 57,97% of the
hot desk capacity must be sold on weekdays.
Pure private office scenario
The only type of private office is defined to be 12,5m 2. The space can fit 1 to 3 persons.
The case shall have a lounge and corridor allocation of 150m 2.
The 750m2 space fits 60 private offices. The offices are priced on monthly basis, thus there is no need
to exclude weekends from the occupancy.
The platform fee of 12% is accounted in the calculations.
Table 7. Break-even point for the pure private office scenario with defined cost level. The total costs
are rounded to zero decimals.
Name of the value Value Formula
Monthly NOI if leased traditionally EUR 11 534 Nb
100% private office case costs excluding platform fee EUR 12 101 Cp = ACb+Co+Cf
Break-even point revenue EUR 23 634 Nb+Cp
Break-even point revenue per m2 incl. costs excl. platform fee EUR 26,26 (Nb+Cp)/A
Break-even point revenue per m2 incl. costs incl. platform fee EUR 29,84 ((Nb+Cp)/A)/(1-0,12)

Table 8. Combinations to break-even with defined cost level by only private offices. Occupancy is
rounded to two decimals. Absolute occupancy is rounded to zero decimals.
Monthly private
600 650 700 750 800 850 900 950 1 000
office price, EUR
Occupancy, % 74,60 68,87 63,95 59,68 55,95 52,66 49,74 47,12 44,76
Occupancy out of
45 41 38 36 34 32 30 28 27
60 private offices

36
 Combinations to break-even, 100% private offices
100%

90%
Occupancy, %

80%

70%

60%

50%

40%
600 650 700 750 800 850 900 950 1000
Price per month, EUR

Picture 4. Combinations to break-even with defined cost level by only private offices.
In the break-even calculations, the NOI of the Benchmark space equals the NOI of the concept spaces.
The equilibrium is found by changing the occupancy of the concept space. E.g., by pricing the private
offices at EUR 900 monthly, occupancy of around 49,74% is required to reach the break-even revenue
of EUR 23 634.

4.4 The final Case space

Now that we have an idea of the combinations of the occupancy levels and price levels to break-even
with, we can form the final Case. First, we conduct sensitivity analysis on changes around the base
prices and base occupancies. At last, we conduct valuation and showcase the possible value changes
on the asset level.

4.4.1 Parameters
Space allocation
Based on the combination calculations conducted above, the occupancy required for hot desks to
produce positive net operating income seem high. Thus, the final Case shall have smaller amount of
hot desk space. 200m2 of hot desk area is formed with a capacity of around 29 hot desks.
Private offices form most of the final Case. 500m 2 of private offices is allocated, resulting in 40
private offices with acreage of 12,5m2.
In the final Case, the meeting room allocation is derived from the average headcount present on the
case during office hours. If there traditionally is one meeting room for every 10 to 25 employees, 4
meeting rooms should cover the meeting room demand in the final Case. The meeting rooms shall be
12,5m2 and fit from 2 to 8 persons.
The rest of the space is lounge and corridor.

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Table 9. Space allocation for the final Case.
Space Acreage
Lounge and corridors 150m2
Hot desks 200m2
Private offices 500m2
Meeting rooms 50m2
Total 900m2

Costs
The costs for the final Case are the same as in the 100% private office space scenario. Even though
the hot desk area requires less fitments, the meeting rooms require premium components and
materials. Thus, EUR 170 000 of fit out costs are reasonable for the final Case.
The total monthly costs for the final Case are EUR 12 101. This total monthly cost for the final Case
is denoted by Cp. The monthly total cost of the final Case is around EUR 13,45/m2.
The platform fee of 12% is accounted in the revenue calculation.
Base pricing
The average hot desk day pass price is around EUR 20 in Helsinki metropolitan area, while the lowest
prices are around EUR 15 while the highest are over EUR 30. A safe EUR 18 to fit in the lower end
is chosen for the case.
The data for private office prices is very limited, and they mostly seem to be negotiated separately
for each occupier. The case style private office prices start from EUR 700 in Helsinki. However, the
pricing range is broad, and EUR 700 can be considered very low. The chosen base price for private
office month is EUR 750 for the Final case, which is certainly still low for a workspace that can fit
even three people.
Case style, medium sized meeting rooms appear on the market from EUR 20 to EUR 40. The
minimum is chosen for the case base price for the meeting room hour.
Table 10. Base pricing for the final Case.
Product Price
Hot desk day pass EUR 18
Private office month EUR 750
Meeting room hour EUR 20

Base occupancy
The break-even occupancy for the hot desks would be around 60% with the price of EUR 18 on the
pure scenario reviewed above. If weekends are included, the occupancy percentage is around 39%.
The market reports present variable numbers on the occupancy of hot desk spaces. We present that
60% office hours occupancy is high for a hot desk space. A lower estimate of 55% occupancy
excluding weekends is chosen for the base occupancy.

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Successful private office concepts have reported occupancy percentages of well over 70%. However,
the data is critical thus often undisclosed and unavailable. Base occupancy for the private offices is
chosen to be 60% to be on the lower side.
The estimation of meeting room occupancy is very demanding. A safe 2 hours per day corresponding
2,8 hours per day excluding weekends is chosen.
Table 11. Base occupancy for the final Case
Space Occupancy
Hot desks 55% excl. weekends/39,29% incl. weekends
Private offices 60%
2,8 hours daily excl. weekends/
Meeting room hour
2 hours daily incl. weekends

Parameters exemplified
Table 12. Variables of the final Case space. The occupancy and capacity of hot desks are rounded to
two decimals.
Product Hot desk day pass Private office month Meeting room hour
Price Ph = EUR 18 Pp = EUR 750 Pm = EUR 20
Base occupancy, incl. Oh = 39,29% Op = 60% Om = 2
weekends
Available units Uh = 28,57 Up = 40 Um = 4

4.4.2 Results
The traditionally leased benchmark is the same as in pure scenarios, resulting in monthly net operating
income of EUR 11 534. All the net operating income numbers are rounded to zero decimals in the
tables.

39
Table 13. Monthly net operating income of the final Case space and calculation formulae.
Monthly revenue, the Case concept Formula
Hot desks 6 061 € Rh = 30PhOhUh
Private offices 18 000 € Rp = PpOpUp
Meeting rooms 4 800 € Rm = 30PmOmUm
Total case revenue incl. platform fee 25 398 € Rtotal = (Rh+Rp+Rm)*(1-0,12)
Monthly costs, the Case concept
Operational costs 4 788 € ACb
Case specific operational costs 4 550 € Co
Fit-out costs 2 763 € Cf
Case total costs 12 101 € Cp = ACb+Co+Cf
Monthly NOI
Monthly NOI, case space 13 297 € Ncs = Rtotal-Cp
Monthly NOI, benchmark space 11 534 € Nb

E.g., the monthly revenue of the meeting rooms is calculated by multiplying the price, base
occupancy, available units, and 30. The sum of the revenue is multiplied by (1-0,12) to account the
12% platform fee.

4.4.3 Sensitivity analysis

Table 14. Monthly NOI comparison of the final Case to traditionally leased identical space. NB.
Changes are in percent, not percentage points.

In the sensitivity analysis, the net operating income of the final Case is compared to traditionally
leased space of the same acreage. In the comparison, the NOI of the benchmark is subtracted from
the NOI of the Case space. The NOI for the Case space after, e.g., 10% change in occupancy and 5%
decrease in price is calculated as Ncs = (1,1 * 0,95) * Rtotal - Cp.
Small percentage changes in prices and occupancies of the spaces influence the net operating income
greatly.

40
4.5 Valuation of the final Case
This chapter showcases the asset level value changes if the final Case is implemented on the premises
of the asset. While the previous section covered only the 900m 2 space dedicated for the case, this
chapter reviews the whole asset.

4.5.1 Valuation
First, we valuate the Benchmark asset and the final Case asset.
Table 15. Valuation of the benchmark asset, 100% traditional leasing.
Valuation, the Benchmark asset Formula
NOI 768 900 € Nba = (5000 * (RbOb - Cb)) * 12
Capitalization rate 6,40 % 6,40%
Value 12 014 063 € Nba / 6,40%

Table 16. Valuation of the final Case asset.

Valuation, the final Case asset Formula
NOI 790 061 € Nca = ((5 000 - 900) * (RbOb - Cb) + Ncs) * 12
Capitalization rate 6,40 % 6,40%
Value 12 344 699 € Nca / 6,40%

4.5.2 Sensitivity analysis of the final Case asset

Table 17. Sensitivity analysis on changes in costs and occupancy of the final Case asset.

In Table 17, the value of the final Case asset is compared to the benchmark asset with different case
performances. The value of the Benchmark asset is subtracted from the value of the final Case asset.
The changes alter the Ncs component, which is the net operating income of the final Case space.
E.g., a -5% change in revenue and a 5% change in costs is calculated as
Ncs = 0,95 * Rtotal - 1,05 * (Co+Cf) - ACb. Co denotes case specific operational costs and Cf denotes
the fit-outs costs. The operational costs of the building (ACb) remain unchanged.

41
Table 18. Sensitivity analysis on changes in occupancy and capitalization rate of the final Case asset.

In Table 18, the value of the final Case asset is compared to the benchmark asset. The value of the
Benchmark asset is subtracted from the value of the final Case asset. The change in occupancy alter
the Ncs component, which is the net operating income of the final Case space. The changes in
capitalization rate only affect the final Case asset.
E.g., a 15% change in revenue changes the NOI of the Case space to Ncs = 1,15 * Rtotal – Cp. If then
the capitalization rate changes to, e.g., 6,30%, the final Case asset is valuated with the capitalization
rate of 6,30% in the table. The capitalization rate of the benchmark asset remains at 6,40%.
Lower occupancy comparison
Next, a comparison between lower occupancy benchmark and the final Case is conducted. Instead of
93%, the occupancy of the traditionally leased spaces on the benchmark and the final Case is 88%.
The lower occupancy is reasonable to consider, as an investor might not want to implement a flexible
office space concept to a high occupancy property. The final Case asset’s traditionally leased part
also has the lower occupancy of 88%.
Table 19. Valuation of lower occupancy Benchmark asset, 100% traditional leasing.
Valuation, lower occupancy Benchmark asset Formula
NOI 710 400 € Nlba = 5000 * (Rb*0,88 - Cb) * 12
Capitalization rate 6,40 % 6,40%
Value 11 100 000 € Nlba / 6,40%

Table 20. Lower occupancy on traditionally leased spaces of the final Case asset.
Valuation, the final Case asset, lower occu- Formula
pancy on traditionally leased spaces
NOI 742 091 € Nlca = ((5 000 - 900) * (Rb*0,88 - Cb) + Ncs) * 12
Capitalization rate 6,40 % 6,40%
Value 11 595 168 € Nlca / 6,40%

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Table 21. Sensitivity analysis on changes in occupancy and capitalization rate, lower occupancy on
traditionally leased spaces.

Table 22. Sensitivity analysis on changes in occupancy and capitalization rate, lower occupancy on
traditionally leased spaces.

The logic of calculation remains the same as in Tables 17 and 18. The only difference is that the
traditionally leased spaces only reach 88% occupancy on the Benchmark asset and on the final Case
asset. The lower occupancy makes the case perform relatively better.

4.5.3 Capitalization rate and break-even revenue of the final Case

Table 23. Sensitivity analysis on how a change in capitalization rate effects the required performance
of the final Case space. The value and NOI values are rounded to zero decimals. The rent/m 2 values
are rounded to two decimals.

Table 23 showcases the required performance of the final Case space to break-even if the
capitalization rate of the asset changes. As the implementation of the final Case space is defined to

43
account for the change in the asset’s capitalization rate, the change in value must be compensated by
the cash flow produced by the final Case space.
To receive the break-even value for the final Case space, the value of the traditionally leased 4 100m2
is subtracted from the benchmark’s value of EUR 12 014 063. The value is then multiplied by the
altered capitalization rate and divided by 12 to receive the monthly NOI requirement for the final
Case space.
To receive the required rent level per m2 incl. the platform fee, the monthly specific costs of the final
Case space is added on top of the NOI requirement for the case and then the value is divided by 900
after which the value is divided by (1-0,12). The final Case space monthly cost is EUR 12 101.
The last row displays the difference of the required rent/m2 and the traditional rent of EUR 19,50/m2.
If the overall capitalization rate of the asset rises to, e.g., 6,60% from 6,40%, the final Case space
must produce around EUR 2002 more monthly NOI to compensate the decrease in the value of the
traditionally leased spaces. If the platform fee is accounted, the EUR 2002 rise in NOI results in the
requirement of EUR 32,37/m2 in rent. Thus, the premium over the traditional rent of EUR 19,50/m 2
is EUR 12,87/m2.

4.6 Review of the results

In this chapter, we review the results of the case study in more qualitative manner.
The limited availability of market data of flexible office spaces made the case study approach
demanding. In the future, as the flexible office space and its platforms mature and more time data is
collected and becoming available, studies can be more profound with less suppositions required to be
made.
The case study reduces the flexible office space concept into three end products. In the real-world,
the flexible office space concepts can have all kinds of different spaces with different pricing models
in addition to variety of additional services available. The spaces usually aim to have an own brand
and a personal design. The platform fee models can be more complicated. The case study showcases
the most fundamental economic boundaries of a flexible office space accessible through the platform.

4.6.1 The final Case space

The results of the case study suggests that the Case with moderate occupancy on the concept spaces
increases the net operating income of the asset. Within the final Case, the occupancy and prices were
estimated on the lower end while the fit-out cost was estimated on the higher end. Even though the
safe estimates, the case study suggest that such allocation and concept could success.
The sustainability of the cashflow differ between the benchmark and the Case space. Colliers (2020
p. 9) present that management agreements offer least secure cashflow for the landlord. The utilization
of the platform in such way presented in the case study can be interpreted as such management
agreement, as the spaces are utilized under flexible user agreements. The management agreements
can offer the highest returns (Colliers 2020 p. 9). The results of the case study support this claim, as
higher occupancy in the flexible concept space create considerable amount of excessive cash flow in
comparison to the benchmark. This undoubtedly requires the investor to carry additional risk.
Hot desk coworking remain low in profit if examined independently and when compared to other
components of the revenue of the final Case. However, the space allocated to coworking is more
open, thus less fit-out costs are allocated towards such spaces in comparison to private offices or
meeting rooms. The hot desk space can be seen more as an additional component complementing
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tenancy within the building and the private offices of the case. The presented dynamics of recurring
payments and unlimited plans are unutilized by only offering day passes.

4.6.2 The final Case asset valuation

The case study showcases the highest potential returns of the flexible office spaces. For example, a
10% increase in the final Case space occupancy increases the asset’s value by almost EUR 500 000.
In practice, if occupancy among all case components increases by 10%, the absolute increase would
be around 1,57 more hot desk users per day, 2,4 more private office users per month, and 0,8 hours
more meeting room usage per day.
Upon comparison to lower occupancy benchmark, the final Case asset surpasses the traditionally
leased space with considerably lower occupancy of the final Case space. Comparison to lower
occupancy benchmark might be more suitable, as investor may not want to implement the flexible
space solutions to high occupancy buildings.
Even small changes in the capitalization rate of the asset influence the value of the asset abundantly.
Qualitatively examined the presence of the flexible office space concept within the building should
affect lease maturity within the premises, thus effecting the capitalization rate as well. The case study
does not measure this, yet it showcases the effects to some extent. If the effect is positive, it requires
even less occupancy and revenue to be generated by the flexible space concept for it to be desirable
to implement in the premises of the asset.
The effect of the flexible space implementation on the average lease maturity can as well be negative.
The flexible space itself has relatively low maturity in comparison to leases, as the point of the flexible
office space concept is to offer flexibility. Thus, as the flexible space concept space has low maturity,
the overall maturity of the asset might decrease and possibly affect the capitalization rate negatively.
It is not clear which effect dominates on the overall maturity. The lower the occupancy on
traditionally leased spaces, the higher the positive effect of the flexible office space have on the
maturity.
Table 23 showcasing the break-even revenue for the final Case space under changing capitalization
rates can be interpreted as a model which attempts to price the flexibility premium on top of the
additional costs derived from the operation of the final Case concept space. If the capitalization rate
of the asset increases due to the uncertainty generated by the final Case concept to, e.g., 6,60%, the
break-even revenue requirement rises by over EUR 2,5/m2. This rise of EUR 2,5/m2 can be interpreted
as the broad amount of the flexibility premium if in valuation the capitalization rate of the asset is
resolved to be 6,60%. However, the case study does not measure the flexibility premium, rather
showcases the possible results under certain circumstances.
This study is based on the supposition that the average lease maturity is going to shorten during the
next five years, which in the context of the final Case means that the capitalization rate rises. Based
on this supposition, the presence of the final Case space can possibly lower or reduce the rise of the
capitalization rate if the concept incentivizes the traditional tenants to commit to longer leases.

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5 Discussion and conclusions
In this chapter, we discuss the study and present conclusions.
The literature review suggests that the demand for flexible office space increases. Unlike in the past,
larger office occupiers are also interested in flexible office space services. The office investment
market is changing as space operators are introducing more services to office spaces, making office
assets more operationally intensive in general. As the cash flow produced by a flexible office space
concept is uncertain, the valuation of such spaces is considered a challenge within commercial real
estate. Flexible office spaces are also presumably used as a complement to traditional leases.
An investor should add a part of an asset to a flexible office space platform if the investor is certain
enough that the flexible office space reaches relatively high occupancy. However, as the underlying
product is a flexible office space concept, the investor cannot be very certain of the occupancy of the
spaces in the longer run.
The typologized match-maker platform offers a relatively low threshold way to participate in the
flexible office space markets as invoicing, user agreement management, and digital infrastructure is
carried out by the platform. A flexible office space offered through the platform may be desirable to
implement to premises of which tenants are interested in utilizing flexible office space as a
complementary service on top of their tenancy. By offering flexibility through a flexible office space
concept, some prospective or current tenants might be willing to commit to longer term tenancies
within the premises.
The case study suggests that the operation of flexible office space introduces a substantial amount of
additional costs to the asset. Poleg (2020 p. 100) presents, that in addition to the lease arbitrage
premium, the flexible space users pay for other elements of the space such as design and services.
The final Case space must achieve over EUR 10/m 2 higher rent to break-even with traditionally leased
space due to the higher total costs. However, the required rent to compensate the increase in risk on
top of the additional costs of the flexible office space increases the price even more.
The case study results suggest that relatively high occupancy is required for a flexible space concept
to become a profitable business. The higher the prices, the lower the required occupancy to break-
even is. However, the price competition among flexible office space concepts seems harsh, suggesting
that a competitive price is necessary. The flexible office space concepts are unlikely to thrive if the
occupancy is random, meaning that active users and demand is required for the concepts to exist.
The results of the study were expected.

5.1 The price of flexibility

Can landlords and space operators offer sufficient level of flexibility for the price that occupiers are
willing to pay? The high demand for flexibility is not enough for flexible concepts to exist if no one
is willing to supply the product with certain price level. Investor’s goal is to maximize its profit on
certain risk level, meaning that the supply side of the flexible office space demands sufficient
compensation.
Do the flexible space concepts offer the right type of flexibility for the price? Even though the pricing
models among flexible office space concepts differ, the landlord must fundamentally receive
considerable premium in rent if flexible office space is offered. The potential flexible office space
occupiers should and will consider the opportunity cost of the occupancy. The occupier might be
better off by initially acquiring more traditionally leased space in comparison to utilization of flexible
office space, as the utilization of flexible office space for the specific needs might be too costly.
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The observed pricing in the flexible office space market within Helsinki Metropolitan Area seems
immature. The hot desk membership of Spacent is priced below several individual hot desk
subscriptions of the spaces that participate in the Spacent membership. Currently, for Scandic Hotels,
the flexible office space is probably at least partly a substitute for hotel business due to the pandemic.
Thus, Scandic Hotels may be able to price their flexible space services aggressively for the time being.
As the fixed costs for operating a hotel continue to be sunken, the overall business including the
flexible space can remain unprofitable for the time being. Moreover, flexible office space market
seems competitive. After all, Coworking Survey Europe presents that in 2019 only 44% of the
surveyed coworking spaces reported being profitable (Deskmag 2020 p. 127).

5.2 The future of flexible office space

The multidimensionality of a property leads to the need of valuation. The addition of the flexible
office space business and its platform increases the complexity of the asset valuation even further.
This study considered flexible office space as a part of real estate and in the case study the flexible
office space concept is valued as a part of the property. The case study showcases some of the
problematics regarding the valuation. If the flexible office space is increasing at the pace reviewed in
the literature review, the tools to valuate such spaces should develop drastically during the next years.
It seems possible that the shift towards EBITDA style valuation is starting slowly during this decade.
The development of the valuation methodology of flexible office spaces should benefit all the parties
within commercial real estate.
It remains unclear what occupiers precisely mean by claiming that they demand flexible office space.
The trend seems clear as many of the largest commercial real estate consultants emphasize the
increasing demand for flexible office space. However, do occupiers and real estate professionals mean
the same thing by the term flexibility? It is reasonable to consider whether the occupiers understand
the true price of flexibility.
By moving from a traditional office to a flexible office space, the occupier must give up on some
features of the traditional office. Flexibility is not offered for free, and the flexible office spaces do
not have all the positive features of the traditionally leased offices. The masses of knowledge workers
have not yet entered and experienced the flexible office spaces, meaning that the suitability of the
spaces for the large masses remains unknown. As the true utility of flexible office space remains
unknown, so does its commercial suitability.

5.3 Conclusions
This study examined flexible office space platforms from investor’s perspective through a literature
review and a case study. The case study modeled the requirements under which offering flexible
office space is profitable through a platform.
We present that the occupiers seeking flexible occupancy must be willing to pay a considerable
premium for the flexible occupancy. The flexible office space concept offered through a platform
results in significant costs through additional operational costs, fit-out costs, and the platform fee. In
addition to the costs, an investor must consider the change in the predictability of the cash flow
produced by the flexible space concept compared to traditional leasing. The landlords are not going
to offer flexible occupancy services more widely if occupiers struggle to pay the correct price for the
whole service.

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