Co-working is changing how space is let and managed in offices, retail and industrial with flexible offerings, service provision and a huge difference made by technology. The rise of the co-working, flexible workspace phenomenon in recent years is remarkable. In 2018, We Work arguably became the biggest single private occupier of office space in London and Manhattan. Hot on its heels is the emerging complementary ‘co-living’ trend. In this second article in the series we look at the structural changes taking place in office space provision, although other sectors see similar changes albeit at a smaller scale.
Think and View Space Differently
The flexible workspace providers – or should we call them operators – think and view space differently. The focus is on workspace as an ‘eco-system’, not simply square footage. It re-defines the traditional landlord-tenant relationships. It re-brands office use, which changes from a place of work to a place of life.
How work is done and how it is seen is being reshaped. The tenant is a ‘member’, other occupiers become ‘your community’, the physical space delivers ‘an experience’ and the corporate or individual business growth is a ‘journey’. It feels like a place you want to be at and be connected to. The operators and other members have values and an ethos like yours.
The concept of flexible workspace is not fundamentally new. In a sense, serviced-office companies like IWG/Regus have operated for close to 3 decades. The solutions have been ‘re-packaged’ but still deal with the following:
- ‘Wholesale’ to ‘Retail’: instead of the traditional tenant having to bulk-buy space (i.e. a fixed amount of space with a fixed floor layout, at a fixed rent for x number of years in a fixed location), they now buy ‘retail’. They buy a flexible product as and when and where to suit their needs.
- ‘Direct’ to ‘Indirect’: instead of the owner-landlord having a multitude of direct tenant relationships, something they hate as it’s time-consuming, they have a single relationship with one tenant. This gives indirect exposure to the underlying tenant base which changes over times, and reflects a mix of new and established businesses.
- ‘Passive’ to ‘Active’: tenant-occupier management becomes more dynamic, pro-active or at least responsive, demand-driven and fluid. Very different from the traditional passive asset manager.
- Structural Changes: global cities are urbanising and growing. This is underpinning long-term structural growth in office-based employment and thus office space demand. This is coupled with the changing nature of working patterns and the enterprise economy. To an extent it counteracts the trend towards less office space per employee. The most technically footloose companies have the interesting paradox they demand prime, centrally located office space: face-to-face meetings are invaluable. Companies like Google and Amazon like the dynamic atmosphere of co-working-type spaces and their staff like to work in physical teams and enjoy a pleasant office atmosphere.
Eco-System
The co-working business model is seen and wants to be seen as operating differently. They consider themselves a facilitator, connecting human workers with their physical environment.
The ‘space’ they sell is not just square footage. They provide a community and collaboration, amenities, workspace and shared space, networking, wellbeing, innovation (labs, think tanks, idea generators), support and operational services, hybrid formats (start-ups, next stage growth, small, medium & large businesses), multi-locations choices for drop-ins and on the road working, flexible/shorter commitments, express timeline to sign-up/move-in and can be very cost efficient.
To rent space on a proper long-term contract is complex, fraught with difficulties and time-consuming. Occupiers are tied down, and in the UK, they will be responsible for dilapidations, cannot sublet easily, et cetera. Co-working and flexible space mean the traditional barriers to entry (having to use a letting agent, do a property search, negotiate leases, design space and infrastructure set up, commission this, and more) are made user-friendly.
The Property Investor
Real estate landlords are impacted by the changes in tenant demand and non-traditional space operators offering flexible working space. Landlords can react in various ways: they might ignore the trend and carry on as usual, they might let space to the flexible-office space operators, they more-and-more try to set up their own flexi-space ventures in direct competition, or they partner up with co-working operators in various ways.
Our final article will look at the turf war between traditional landlords and the co-working operators. Turbulence and disruption are felt on either side as operators and investors come to terms with the continuous change in the market place.
The New Frontier is not fixed in place: its borders keep changing.
The author, Kaushik Shah, is a senior real estate practitioner teaching the course Deeper Understanding of Real Estate Cash Flows running on 21st March in Central London, UK