flexible space revolution.

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1 Bracing flexible for the space revolution.

2 Flexible space Flexible Space United States 2017 < 2 > An introduction to: JLL forecasts a dramatic shift in the office market, as tenant demand for more flexible space options forces building owners to adapt to occupier needs. Although flexible space currently accounts for less than 5 percent of current office inventory, JLL projects this figure could rise to 30 percent by 2030 due to insatiable levels of tenant demand for flexible-term spaces. As tenants across industries grapple with managing an increasingly fluid workforce consisting of telecommuters, freelancers and contract employees accommodating digital talent is taking on heightened importance. Companies both large and small have begun to realize the potential of leveraging flexible space arrangements to better manage their liquid workforce. The flexible space sector is experiencing explosive growth, expanding nearly three-fold as a share of U.S. office leasing activity in YTD 2017 (3.1%) relative to its share from two years prior (1.3%). WeWork has emerged as the industry s fastest-growing operator, accounting for 76 percent of flexible space leasing activity in the U.S. since 2016 (among transactions > 20,000 s.f.). Although IWG, plc. (which includes Regus, Spaces and four other subsidiaries), WeWork and Servcorp control 42 percent of the global flexible space market, there are an estimated 7,600 flexible space operators worldwide, which highlights the fragmented nature of the industry. JLL forecasts a flexible space revolution: Past Present Future <5%* Flexible 30% Flexible 80% occupancy 85% occupancy 90% occupancy 20% vacant 15% vacant 10% vacant 40% Utilization 300+ s.f. per person 50% Utilization 200+ s.f. per person 80% Utilization <150 s.f. per person *Approximately 2 percent of current U.S. office inventory is controlled by independent, third-party flexible office providers (spanning all operator types, from traditional executive office suites to flexible space to incubators). Given industry shifts, flexible workspace and shared amenity spaces are projected to encompass up to 30 percent of the future office market.

3 Flexible Space United States 2017 < 3 > London is by far the largest global location for flexible space options, followed by New York City. While concentrated in gateway cities, urban cores, and knowledge centers around the world, the flexible space sector s geographic footprint is beginning to extend to more suburban locations; 17 percent of U.S. flexible space leasing activity since 2016 has occurred in the suburbs. Corporate accounts (medium and large companies) have grown to represent a reported 30 percent of WeWork s revenue, relative to less than 1 percent of revenue two years ago. Large companies have committed to 40+ full floors in WeWork locations as of midyear 2017, including a 70,000-s.f. commitment by IBM in Manhattan. The challenge will be for customers to capture and measure the benefits of flexible strategies while mitigating risks and integrating the various components of the portfolio of the future. Despite decades of struggling with the sublease model of typical coworking providers, institutional investors are increasingly exploring vertical integration and partnership opportunities within this sector. Brookfield has invested in Convene, a full-service platform that integrates meeting and event spaces along with flexible workspace, dining and hospitality functions. Blackstone recently acquired London-based The Office Group and The Carlyle Group invested 150 million investment into the launch of its Uncommon flexible space brand. Expect continued exploration and investment from investors including models that more closely resemble retail leases with revenue sharing or hotel management agreements. JLL s extensive research and analysis of the details of demand, supply, and pricing in the flexible space market will be presented in additional upcoming research. While startups and individuals in coworking spaces created the initial hype in this wave, the reality is that there are structural changes and complexity to the landscape with an increasing variety of demand drivers, user profiles and flexible space channels. Flexible space is broadly defined as all third-party flexible office operators, including traditional serviced office suites, coworking and related meeting and amenity providers, and innovation focused incubators/ accelerators. Business is a flexible thing. Space is fixed. Adam Neumann, co-founder of WeWork

Flexible Space United States 2017 < 4 > Demand Occupier needs sparking this phenomenon How quickly can I open a new or expanded office?

What can I do to attract and retain talent and drive innovation?

Do I need to adjust my portfolio given changing accounting rules? How can I plan for an uncertain future?

4 Flexible Space United States 2017 < 4 > Demand Occupier needs sparking this phenomenon How quickly can I open a new or expanded office? How can I limit initial out-ofpocket expenses? How can I improve efficiency? Where can I find a temporary space option (i.e. swing space)? What can I do to attract and retain talent and drive innovation? Reasons for adopting a flexible workspace model: How can I enable more collaboration among my employees? Do I need to adjust my portfolio given changing accounting rules? How can I plan for an uncertain future? Businesses wanting to reduce occupancy costs Workers demanding to work closer to home Businesses wanting to be more agile as they seek to grow Businesses wanting to avoid fixed leases Businesses wanting to scale staffing more flexibly Businesses wanting protection from market volatility Businesses hoping to improve staff retention Businesses hoping to attract talent Businesses expanding abroad 25% 23% 19% 38% 37% 35% 35% 43% 51% Source: MindMetre survey

initial capital expenditures and average utilization rates ranging from just 50-60% for most tenants.

5 Flexible Space United States 2017 < 5 > Why are corporate users leveraging the flexible space model? Swing space Culture Innovation Satellite offices Serving mobile workforce Serving contract workforce Business development Underlying drivers of flexible space demand Cost reduction Challenge: High initial capital expenditures and average utilization rates ranging from just 50-60% for most tenants. Opportunity: Adoption of flexible space solutions can reduce initial outof-pocket costs, enable greater efficiency and potentially drive down total occupancy costs. Flexibility Challenge: Most organizations only have 24 months of revenue projections and 36 months of strategic planning. Opportunity: Flexible space options can help organizations buy time as they launch new initiatives, establish growth projections and develop longer-term space strategies. Collaboration/innovation Challenge: In today s day of digital nomads, companies are seeking ways to drive innovation and collaboration. Opportunity: Flexible space arrangements may foster innovation through increased employee interaction, exposure to new business concepts and cross-pollination of ideas. Buildings are evolving to better meet consumer demand and improve the employee experience: Shared conferencing Hospitality style lobbies Communal gathering spaces Flexible-term space and hot desks Curated events Health and wellness programs Talent management Challenge: Employers are finding it increasingly challenging to properly accommodate and manage their flexible, digital-enabled workforce. Only 40% of employees feel fully engaged in their current workplace format. Opportunity: Leveraging a flexible space platform can help companies better align their real estate strategies with the needs of their workforce, improving the employee experience, enabling more collaboration and potentially reducing commute times.

Flexible Space United States 2017 < 6 > Supply Defining flexible space models Coworking and serviced offices Meeting, conferencing and training ¹ Flexible-term workspace ² Tenant demand is

6 Flexible Space United States 2017 < 6 > Supply Defining flexible space models Coworking and serviced offices Meeting, conferencing and training ¹ Flexible-term workspace ² Tenant demand is increasingly shifting here ¹ Meeting, conferencing and training includes: Office meeting venues (e.g. Convene) Business clubs (e.g. Yale Club) Hotels Event spaces (e.g. museums, galleries) Internal conference rooms ² Flexible-term workspace includes: Modular spec suites Subleases Month-to-month leases Expansion/termination options

Flexible Space United States 2017 < 7 > Understanding the current supply landscape 19% average year-over-year

50 average price per month for a dedicated desk across the 10 largest U.S. cities. 17% of U.S. flexible space leasing >20,000 s.

Largest markets Largest providers Market # of centers YoY growth London 1,136 16% New York 330 24% Los Angeles

27% Singapore 167 22% Provider Source: JLL Research, Instant Group # of locations Regus (IWG, plc) 2,926

U.S. flexible office leases > 20,000 s.f. since Q1 2016 have been signed by the industry s fastestgrowing operator, WeWork.

7 Flexible Space United States 2017 < 7 > Understanding the current supply landscape 19% average year-over-year growth rate of the industry among the top 10 global cities. $ average price per month for a dedicated desk across the 10 largest U.S. cities. 17% of U.S. flexible space leasing >20,000 s.f. since 2016 has occurred in suburban locations. Largest markets Largest providers Market # of centers YoY growth London 1,136 16% New York % Los Angeles % Tokyo % Hong Kong % Shanghai % San Francisco % Sydney % Melbourne % Singapore % Provider Source: JLL Research, Instant Group # of locations Regus (IWG, plc) 2,926 WeWork 159 Servcorp % of U.S. flexible office leases > 20,000 s.f. since Q have been signed by the industry s fastestgrowing operator, WeWork. Supply could grow quickly given alternative space options: Ace Hotel (New York) Verizon data center (Washington, DC) Hotels Coffee shops and restaurants Conventional retailers Underutilized corporate space Libraries and public spaces Staples (Boston) Workflow (Washington, DC)

Flexible Space United States 2017 < 8 > Risks and considerations Understanding the value proposition Although flexible space is often the most simple and affordable space option for individuals and

The economic appeal of flexible space is situational and variable, so a full cost-benefit analysis should be performed to determine the best course of action based on a particular user s specific

8 Flexible Space United States 2017 < 8 > Risks and considerations Understanding the value proposition Although flexible space is often the most simple and affordable space option for individuals and small groups, as users achieve scale and accrue more time at a single location, the per-square-foot occupancy costs of flexible space arrangements may exceed traditional lease models. The economic appeal of flexible space is situational and variable, so a full cost-benefit analysis should be performed to determine the best course of action based on a particular user s specific circumstances. Protection of intellectual capital In addition to cyber-security risks, the open design of most flexible space locations could inhibit the safeguard of intellectual property. Even office-intensive build-outs typically involve a substantial amount of glass and density, which could limit visual and auditory privacy, respectively. Employee productivity In recent years, a variety of companies have changed their policies regarding remote work. Although a group of employees working together within a flexible space environment could stimulate collaboration and the structure could enable enhanced supervision over a mobile workforce, some companies are finding it beneficial to instead shift more functions back to headquarters locations. Retention is appreciably higher among employees with access to flexible workspace options, but employers adopting flexible space new strategies might require changes to their performance and productivity management protocols. Cultural and strategic fit Flexible space has become fashionable. Large companies are increasingly testing the concept, assessing whether it is accretive to their culture and compatible with their strategies. Whether the structure works for certain individuals, small business units, large company divisions or as a substantial part of an organization s overall portfolio will depend on the unique user and its cultural vision and strategic plan. At the very least, corporate occupiers should consider flexible space as an option, and a potential tool at their disposal to add flexibility to their portfolio.

Flexible Space United States 2017 < 9 > Implications for the future of work The workplace overall is becoming more liquid to match the needs of a modern business and employee.

9 Flexible Space United States 2017 < 9 > Implications for the future of work The workplace overall is becoming more liquid to match the needs of a modern business and employee. The range of options for a user of real estate is broader than ever, and evolving every day along with the digital workforce. Flexible work options need to be considered within a framework for the future fo work, and an understanding of what the portfolio of the future will look like. We look at the future of work in five critical dimensions: Operational excellence, Financial performance, Human Experience, Digital Drive, and Continuous Innovation. More communal spaces and programming With only 40 percent of the global workforce feeling engaged, office space needs to become more inviting, comfortable and fun. Communal spaces that facilitate social interaction e.g. lounges, coffee bars, rooftops and structured programming that assists in professional development and networking will be critical to building workplace satisfaction. Building design that emphasizes shared amenities and dedicated flexible space spaces will help enable this component of the future of work. Technology enabled spaces Technology has the potential to streamline day-to-day operations and make workplaces more efficient. From monitoring occupancy to booking conference rooms, resolving facilities issues, arranging catering services etc., technology will play a vital role in adding convenience and efficiency to portfolios and improving the employee experience. More flexible leasing models The traditional 10-year leasing model is too rigid given today s dynamic economy and fluid, digital-enabled workforce. Flexible space demand is being driven in part by this lack of flexibility. Instead of viewing real estate purely as a financial instrument, owners will increasingly view their buildings as a consumer product and build an ecosystem that better meets the needs of occupiers. Decoding the five dimensions Human experience Enhance user experience through engagement, empowerment and fulfillment. Digital drive Harness digitization and rich data to enhance people and enterprise performance. Continuous innovation Combine new thinking, solutions and processes to drive value creation and accelerate transformation. Financial performance Manage spending to enable growth and enhance return on investment (ROI). Operational excellence Optimize enterprise resources and service delivery to increase productivity, mitigate risks and ensure high performance.

10 Flexible Space United States 2017 < 10 > you What should do now? 1. Define your objectives After establishing your organization s goals and identifying your pain-points, look for ways in which flexible space can serve as a potential solution. This might include achieving greater flexibility, reducing initial out-of-pocket expenses, promoting innovation, attracting and retaining talent or other objectives. 2. Find for a proper fit Flexible space locations have spread to every corner of the globe and operators number in the thousands. Which location and service provider is right for you? Approach site-selection for a flexible space location as you would a traditional lease tour the market and find the proper fit for your organization. 3. Run a cost-benefit analysis Based on your initial assessment, run the numbers. Is flexible space the most economical option for achieving your goals? If not, is it worth paying a premium for the speed, convenience and flexibility that flexible space options may provide? 4. Understand your risks Protection of intellectual capital is generally simpler within a closed system, so examine the potential risks of shifting your operations to a more public setting. What security protocols and operating procedures should be adopted within a more open environment? 5. Test your model If you determine that flexible space is right for you, consider introducing the concept gradually. This will help ensure a smooth rollout and enable greater control over any unanticipated challenges that may arise.

Flexible Space United States 2017 < 11 > Forecast What s on the horizon for flexible space? Corporate demand Large-block corporate leasing will become more prevalent.

11 Flexible Space United States 2017 < 11 > Forecast What s on the horizon for flexible space? Corporate demand Large-block corporate leasing will become more prevalent. Freelancer demand Continued growth will supplement the rising share of enterprise users. Geographic reach Operators are expanding to the suburbs and covering more international markets. M&A within industry Acquisitions are helping to add scale and enhance operators global reach. Operator failures Future market volatility will test commodity players, with only the strong surviving. Industry profitability Margins are compressing given rising costs and increased competition.

12 About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit ir.jll.com. About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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