Despite a phenomenal amount of press scrutiny and all the associated buzz around the concept of ‘co-working’, there are still misconceptions in the broader real estate market as to what it exactly entails. A paucity of meaningful data about co-working has not helped correct these market views. But what is also at play is a radical shift in mindset from a landlord/investor focused market to one that gives greater credence to the “client” that occupies the space and the impact of brand on the sector. Using market data from the US market, we look at what co-working really means for commercial real estate.
1. The evolution of the flex market – co-working does NOT just mean co-working
The press still tends to view co-working in terms of the tight, membership model of workers from different companies occupying a desk next to each other and doing so in a collaborative way. But this is erroneous.
The market for co-working has evolved over time to encapsulate a number of different services – this now includes serviced offices / executive suites and hybrid spaces (incorporating both private office space and co-working) all coming under the broader umbrella of flex space. Co-working has been growing relatively fast across the US at 10%+ each year but is in fact hybrid space that has been expanding more quickly at 20%+. The vast majority of WeWork’s space, for example, is made up of hybrid space NOT co-working which makes up single digit % of total desk space in most of the flex space giant’s centers. It is the same for many other providers of flex space.
The main driver behind the increased popularity of the hybrid office is the agility it offers – choose a private office for a confidential meeting, co-working to collaborate, break-out space to chew the fat, but do so on your terms. But one thing that hybrid space certainly isn’t is pure “co-working” space which is a totally different model altogether. Too often the media reports on the trend for co-working but really it is referring to the growth in supply and increased demand for flex space.
2. The market is diversifying NOT consolidating
Committed independent operators make up a vast proportion of the market – 93% of operators of flex space in the US are “indies”, and this number has still increased in the past 12 months, albeit only by 1%. In reading the mainstream press you would think that only WeWork and Regus were out there but this is a massively diverse marketplace.
A definitive element of this nascent sector is that more than half of all centers in the US are run by independent operators – this differs greatly compared to the other more mature flex space markets of the UK, France and Germany that tend to be dominated by the larger operators like Regus, Servcorp and WeWork.
Indie operators drove more than 30% of new supply to the sector in the more established markets of New York City, Los Angeles and San Francisco. The new entrants also seem to be driving the trend of ‘niche-ification’, providing spaces that cater to specific audiences and interest. Because they are small and nimble they can really customise their spaces to provide services to very specific markets – hence the rise of female-only co-working spaces, tech specialists and micro-hubs, to name a few.
3. The geographic spread of flex space is ready to change
NYC, San Francisco and LA have been the bulwarks of the flex space market since the inception of the industry but we are now seeing the market really starting to grow right across the US.
While the flex market has been expanding, the majority (51%) of the total number of centers are
located in just five US states. The top seven city markets still retain a third of flex space / co-working centers, and the top 20 contain more than 50% of the total market share. There is much more expansion to come across the US particularly in those cities outside the more established markets of NYC, LA and San Francisco.
We strongly anticipate flex space growing proportionately as part of the CRE mix across the country,
In fact, our view is that the markets in the second cities and across “Middle America” are going to provide real growth in the coming years. With desk rates in the likes of Indianapolis almost three times cheaper than the equivalent space in the Bay Area. The market supply in cities across the US has ramped up but demand for space in the markets has increased too, as clients turn to different way to occupy workspace and start to move away from the prohibitively high living costs associated with the US’ largest cities.
4. Square footage vs profitability is a real challenge
The old-style formulas that have traditionally been used to calculate the costs of space per person are not suited to requirements of the co-working / flex model. The reality is that operators are having to push the boundaries in this area – partly to maximize profitability but also to account for the way they are blending space in new and innovative ways.
As competition amongst operators grows, the market comes under the pressure of increased costs and sq. ft allocation is pushed to ensure margins are retained. However, it might be argued that increased adoption of workplace technology and enhanced design is also offsetting much of this reduction in space.
More amenity space and shared collaboration spaces supersedes the need for desk space while the close nature of co-working workspaces promotes a greater networking environment. However, there will come a crunch point as more corporates take flex space as a solution to staff overflow and the need for more private, quiet spaces increases. For many corporates this is a real sticking point already in some city central flex space environments.
5. Corporate requirements are changing the demand profile
The last five years has seen terrific growth and a new dynamic for the flexible workspace market as the wider real estate sector wakes up to the possibilities that a more agile approach represents. As a result, we are seeing more landlord interest, higher client demand, the adoption of flex space by corporate occupiers and growth in supply catering to larger companies.
In the US and the UK, clients are not only asking for bigger requirements of flex space – with 20+ desk requirements increasing by more than 35% last year alone – but they are also taking the space for longer. Nearly 50% of all flex space deals in the US are for 18 months or more now and this has jumped up in the last year. Flex space is a viable option for corporates in the medium term not just a short-term fix.
Interest in the flex market model shows that the conventional market is finally responding to occupier demand that has been growing significantly year on year. In every other sector where market disruption has taken place – retail, travel, media etc. – this initial acknowledgement of changing end-user behavior has ultimately led to significant changes to the status quo.
The property market will need to adapt and evolve to this challenge of meeting consumer demands in a way it has never had to do so before. The flexible workspace market provides space to its clients on their terms – flexible pricing, length of stay, choice of location, buying online and, yes, even free beer! Space blends with service and is then packaged up as a single product. This is the fast-moving end of the property market where the customer (not the tenant) is right, and the end-product has been created for a specific user-base.
The flex market itself will rise to the challenge as dominated as it is by small operators, it is by its nature a nimble and agile sector that moves quickly to recognize client demand and change. Can the rest of real estate keep up?