As flexible workspaces emerge as a major force in commercial real estate, Elad Hod, Real Estate Director of Mindspace shares four trends that will drive growth over the coming years.
The first coworking space was a modest affair. Opened in 2005, the San Francisco Coworking Space was situated inside a feminist collective in a converted Victorian style house. Surrounded by bohemian decor, freelancers worked there twice weekly and had access to internet, a kitchen, and a healing center.
The rest is history. Coworking caught on like wildfire: the number of coworking spaces worldwide surged from 14 in 2007 to more than 14,000 a decade later. Freelancers and startups looking to move out of the home and garage jumped on the opportunity to cluster together in shared, flexible work spaces.
Coworking space operators upgraded the level of services and community activities like receptionists for visitors, access to conference rooms, and networking events. Along the way, coworking has changed the work culture by letting members network in new ways, rent the space flexibly and thereby work the hours they choose, and share resources. It also raised employee expectations. Those in traditional offices began to crave the inspiring office design, communal spaces, extra-curricular lectures that are coworking staples. Today, millions of people around the world take advantage of workspaces that are more vibrant and compelling than the grey corporate offices of the past.
Coworking has evolved well beyond its grassroots origins. It’s come into the mainstream as a formidable business phenomenon.
What’s more, large incumbent office space managers like IWG have (belatedly) realized that coworking newcomers have surpassed them in meeting expectations of millennial and techie employees who have high expectations for office look and feel, and — most importantly — services. Welcome to the new era of coworking, or “flexible” serviced workspaces.
A New Phase of Working
As flexible workspaces emerge as a major force in commercial real estate, we see four trends that will drive growth over the coming years:
Demand for high quality flexible workspaces from multinational companies;
Expansion of flex space services throughout a wider range of office buildings; and,
Profit-sharing ventures between flex space operators and landlords.
Even though coworking is rapidly growing and disrupting the commercial real estate market, the sector is still in its infancy: In 2018, flexible workspaces accounted for only 1.6 percent of the office space inventory in U.S. metropolitan markets. Looking forward, the number of coworking users is projected to grow at an annual pace of 15 percent over the next three years.
1. Economies of Scale Drive Consolidation
With about 20,000 flexible workspaces worldwide, the market is ripe for consolidation. Economies of scale will drive the emergence of a few dominant players in the next few years.
Consolidation is already under way. In recent years, IWG, the owner of Regus, acquired two coworking operators – Spaces and No. 18 – to quickly bring its design up to speed with flexible office providers like WeWork, and Industrious.
Last year, Mindspace acquired Klein Kantoor, a Dutch flexible office serviced offices operator with seven locations in Amsterdam and Utrecht. This year, Knotel, a leading coworking operator with dozens of locations across the U.S., acquired local flexible workspace operators in Berlin and in Paris in order to allow the company to quickly enter these two important European markets.
The business logic is straightforward: For international flexible workspace operators expanding to new markets, especially overseas, acquiring a local operator provides a faster path to expand in an unfamiliar market. At the same time, larger players offer local businesses expertise in operations and services. Local operators become more profitable while partnering with international players.
As the coworking field became increasingly crowded in recent years, profit margins started to shrink. One shouldn’t be surprised that this consolidation will affect the entire office market by prompting landlords to take leading coworking providers more seriously.
2. Multinational Users
The original coworking spaces catered to freelance techies and writers, tapping an under-served workforce of freelancers and start-up ventures. Now the mix of community, hospitality-level services and inspiring work spaces is spurring demand among multinationals, which need spaces to accommodate hundreds of employees. The list includes blue chips like Microsoft, IBM, HSBC, Samsung and Barclays Bank.
Larger companies have realized that coworking spaces take away the headache of signing a lease, predicting occupancy needs and hosting staff in remote countries. They can get peace of mind by taking a space for one to two years, giving them freedom to grow and shrink as much as they want, and saving money too. It’s an opportunity to reap cost savings while outsourcing the job of running an office.
The presence of large enterprises alongside startups in coworking spaces also creates an interesting synergy. The staff of larger companies benefit from the proximity and exposure to the creativity of startup innovators. On the other hand, fledgling businesses can form useful connections and work relationships with larger neighbors.
3. Flex Space Services for All
Coworking has become so influential, it’s raising the bar for landlords. Tenants are increasingly demanding a high quality flex workspaces alongside the same level of hospitality services. The one problem is that landlords lack the know-how to handle these new demands. So what are they doing?
Many landlords, especially in top tier markets like London, New York, and Berlin have acknowledged this fact and are seeking out leading flex space providers to operate parts of their buildings. In addition to leasable areas in buildings, landlords are also seeking out operators to run communal areas such as the building lobby, roof terraces, and other spaces that serve all of the tenants.
4. A New Partnership with Landlords
Most leading coworking operators are generating higher net operating income per square foot than landlords — some even bring in two to three times as much. Landlords that want to join the earnings party have started to pay attention.
As a result, landlords have started to acquire and invest in coworking operators. But above all, landlords and leading flexible workspace operators (mainly those offering international expertise) are partnering through management agreements.
How do the management agreements work? Up until recently, flex workspaces operators needed to sign 10 to 15 year leases with landlords and heavily invest in building renovations . The capital intensity of such a structure created a significant financial burden for operators. But management agreements are overcoming this by allowing operators to undertake the same operational commitment and efforts as a traditional lease, though without having to commit to a fixed rent. Moreover, the fit-out works expenditure is borne by the landlord.
Landlords share the significantly higher revenues generated by the operators. Moreover, landlords get the peace of mind that their buildings offer the flexible workspace solutions that are a necessity these days. As mentioned above, some landlords also request that operators run communal areas that previously were not properly used. That way, flexible workspace operators enable landlords to upgrade their buildings.
The latest example for such a partnership occurred last June, when the Hines real estate empire teamed up with coworking operators Industrious and Convene to open various flex workspace at Hines locations in major U.S. cities.
A New Growth Engine
Coworking spaces have come a far way from their humble origins in a San Francisco coop. Along the way, they’ve helped change the culture of work, upgraded working environments, grabbed the attention of multinational enterprises, and disrupted the commercial real estate market.
Now the sector is entering a new chapter of growth through partnering with landlords rather than competing with them. This phase will be driven by investors, large enterprises and landlords — all spreading the flex workspace transformation to new locations around the globe. The world of work as we know it is on the verge of changing for good.