It’s a commonly held view that commercial real estate is perhaps the largest remaining asset class yet to be influenced by technology. Compared to the proliferation of computer-assisted “quant” trading for stocks and bonds or the race into the unknown world of blockchain by many FinTech pioneers, that might be true.
However, if one takes a closer look, the changes in the commercial real estate industry has been gradual but significant. Rather than software replacing the traditional roles of real estate professionals, the biggest technological change to the commercial real estate industry is the emergence of the co-working model.
It’s fascinating to trace back how co-working has changed the way that commercial real estate is organized and to extrapolate what is next for the industry.
While co-working models are transforming the entire commercial real estate ecosystem, its impact is felt most by multinational companies. Half a dozen global commercial real estate service providers currently dominate the industry by primarily providingservices related to transactions (brokerage), facilities management and project management (design and fit-outs).
A deeper analysis of their services and revenue models reveals gaps that are being smartly exploited (dare I say disrupted) by co-working.
The current brokerage agreement incentive structure rewards larger space transactions as compared to smaller ones – larger space translates to increased brokerage fees- and long-term leases rather than short ones. This is precisely why the organized international players focus on larger transactions while the small and medium size transactions market continues to be disorganized and fragmented, left to be serviced by a long tail of smaller firms. Some PropTech companies like Compass have been successful in providing alternate tech enabled services to such companies but for the most part, larger firms are not interested in smaller deals.
Co-working allows companies to have greater flexibility in their space acquisition strategies from an area and tenure perspective. Consequently, even if per seat costs are higher, the overall costs remain lower as space usage is flexible. Additionally, common areas are shared between companies and efficiently controlled using technology.
Companies are often advised outsource much of their facilities opperation to third party service providers. This eliminates the need for dedicated facilities staff but opens up those companies to pay for the markups that come at every link in the value chain. Any economies of scale are harvested by the service provider and tenants are often left at the mercy of the often non-competitive service market.
Co-working models provide facilities and services to multiple companies. This allows them to charge a lower cost per client and yet earn a healthy overall margin. Costs are lower as facilities like security, maintenance and provisions are shared, eliminating an additional ‘management fee.’
Companies generally focus on the selection of vendors and managing fit-out costs. Service providers have a fee model that is a percentage of overall costs and therefore the incentive is to increase these costs.
With co-working, companies can avoid massive capital outlays for leasehold improvements. The pre-furnished condition of the space also ensures that there are no hidden additional expenses for initial costs and built-out.
It’s not just the overall efficiency of the co-working model that’s contributing to its popularity. We’re in an era where technology is disrupting our way of doing business (perhaps our way of life too). Many organizations find it challenging to generate jobs, increase revenue and maintain profitability. Companies have realized that real estate is one of the top cost components in their balance sheet and if managed efficiently, can have a positive impact on their bottom line. In this context, co-working models fit in perfectly without significantly altering the operations of the company.
While it may have gone unnoticed, flexible models of working like telecommuting, teleworking and hot-desking have been a part of the modern companies playbook for a while. The rise of the gig economy was the real impetus for the popularity of co-working and it is only starting to get adopted by firms to help them best utilize their productive spaces. After all, real estate is meant to be occupied by people generating ideas and revenues and not just an empty cost center.
Interestingly, as per Wikipedia, Brad Neuberg invented the word ‘coworking’ (without a hyphen) and is credited with starting the coworking movement in San Francisco in 2005. The idea then was to combine the independence of freelancing with the structure and community of an office space.
Business centers (remember those?) addressed this need in a limited manner for few years. But with zero innovation in business models or tech interface, they literally hand-delivered a potentially thriving business to co-working models. Co-working models started making their mark around 2010 and have now become mainstream with the emergence of WeWork, Convene, Knotel, Liquidspace, etc. Various co-working models have since emerged and most of them appeal to specific client segments or requirements.
As is the case with most trailblazing ideas, the industry initially reacted with skepticism and largely dismissed its importance. After being in denial for few years, most of the participants have now adopted the concept in some way or another.
Corporations like IBM, HSBC, Amazon, Dell, etc. are partnering with co-working firms. Large investors like Blackstone, Brookfield, Ivanhoe Cambridge are investing in similar companies and ensuring that co-working space forms part of their overall service offering. Developers are partnering with co-working companies to offer customized spaces. In some cases, co-working firms have turned into quasi-developers and have become landlords themselves.
With long-term capital being invested in some of these co-working firms and companies embracing new models, there is little doubt that it’s here to stay. While one or few companies may go bust (and I hope that neutralizes the naysayers), the model changed the commercial real estate industry forever.
My prediction is that, in the medium term, co-working companies will start dealing directly with the clients and brokers will have a limited role to play. Increased flexibility in the terms and shorter leases will be key to empowering the end user and eliminating the need for a middleman. Companies will need to rely on brokers only for strategic advice once every few years.
In the long term, co-working companies will have the largest database in the commercial real estate industry. They’ll capture names of every person who walks into their space and will use technology to offer solutions directly to companies. Co-working companies will be the central repository of all company data in the long term and control a large part of the ecosystem. They’ll implement sophisticated data mining and data analysis techniques to offer customized solutions like Google, Facebook and Amazon do in search, social media and e-commerce respectively.
Similarly, property owners currently offer part of their space to co-working companies on a straight lease or profit sharing or as a customized solution. Co-working companies will eventually compete with developers by offering large format spaces with differentiated service offerings. If owners don’t respond quickly enough co-working companies will use tech, data and unique business models to threaten their existing business structure.
The talk of how commercial real estate hasn’t adopted technology is misguided. Those with that view have overlooked the fact that not all technology is mobile apps and machine learning. One of the biggest shifts happening in our world right now has to do with the innovative new use of space that has been brought about by the rapid popularity of co-working. Technology comes in all forms and sometimes it looks less like a motherboard or page of code and more like a lot of people sharing a cutting-edge office space.