Seismic shifts in customer demand have caused radical re-thinking across numerous industries over the past two decades.
By overlaying proprietary data on the growth of the flexible workspace market with sources from Credence Research, Foundersresearch.com and The Presido Group, at Instant Offices, the world’s largest office booking service, we investigated what the commercial real estate industry can learn from these other sectors.
The importance for a business to react rapidly to change is increasing as fluctuating demand, financial market instability and radical changes in technology are all impacting business planning. Plans are now typically set out for five years at most, and this timeframe is set to continue to shrink. The CEO survey by PWC highlighted that not only do 51% of CEOs expect to enter a new alliance in the next 12 months, but 63% are currently planning for no more than three years ahead.
We have seen an overriding trend has been the shift towards service-based models, in many cases enabled by digital innovation, and the inevitable repercussions in terms of cost models and business structures. Many industries are now unrecognizable from their previous iterations only a decade ago.
Commercial real estate is undergoing an evolution of its own as increased demand for flex space and innovation around the office models for procurement and operation are leading to profound change; with much of this centered around the provision of workspace as a service.
This growth in more flexible working, enabled by technology and the changing attitudes of business, has seen how organizations find and occupy offices radically evolve. “Co-working” is a phenomenon that has shaken up commercial real estate and led to the development of one of the biggest “unicorns” – the multi-billion dollar WeWork.
There are countless telling examples of similar “innovate or die” stories across the technology sector. Cloud-based services have grown over the last decade, spawning global tech giants such as Salesforce, Oracle and SAP in a relatively compressed timeframe.
This new service-based model has been both a cause and effect of other changes that are profoundly impacting business models across multiple sectors.
The availability of transparent pricing and the competition this encourages is enabling companies to become more agile and to focus on their core business functions – for example, services such as IT can now be operated by a third party or stored off-site via the cloud. In a short amount of time, the concept of the server cupboard or a large in-house IT team has become a throwback to the early days of technology.
B2B firms are mimicking the evolution of the B2C marketplace as customers place more value on the immediacy of delivery and easy to digest service, rather than a bespoke end product.
In the entertainment industry, subscription services allow an individual to have far greater flexibility and variety in what they consume, and they are willing to pay a premium for this service. The success of this model now also sees the companies providing the digital streaming services becoming the content providers too, with both Netflix and Amazon Prime’s programming budget now dwarfing those of long-established film studios and TV channels. They have innovated far beyond their initial iteration to become both content enabler and provider, in both cases fueled by limitless ambition and an agile approach to their business model.
The automotive industry is undergoing similar change, with the global car rental market expected to double in value between 2015 and 2022 as consumers change their outlook on owning a vehicle. The requirement to “own” a physical asset is now viewed as an inefficient use of capital, particularly with limited resale value and inherent risk attached to the ownership and liability for repairs. As well as the dynamic growth in the car leasing market, car sharing platforms are also among the fastest growing tech start-ups in the world. On-demand access to vehicles is increasingly viewed as a service, and the potential of driverless technology may render the physical possession of cars totally redundant.
The dynamics that are driving demand for flexible office space are very similar to those we have seen create change in so many other industries. The need to minimize CAPEX, promote growth and maintain an agile approach to business are objectives that flex space helps companies achieve while retaining focus on core business functions.
Industries with historic value chains that have only recently seen disruptors start to impact long-established business structures. In fashion, we have seen the likes of Zara and H&M change the way they operate within a traditional industry and introduce supply chains that can react to changing consumer demand. This means that while they may not charge any more for their products than their competitors, they are able to reduce wastage and oversupply, and maximize profits, thereby allowing them to outperform challenging market conditions.
The commercial real estate industry is seeing similar disruptors emerge in a sector where the value chain has altered very little for 100 years or more. However, now the market is moving faster with flexible workspace operators that are focused intently on customer demand. Their model is reliant upon creating a service that reacts rapidly to client requirements, providing a mix of amenity space and workspace that can be tailored to very specific client needs.
The expansion we are seeing at present from the leading operators in the flex market matches the activity seen in other industries during the early stages of business evolution. Not only are some of the leading providers continuing to increase their rate of growth, but are forecasting even stronger activity looking ahead.
If we look at our industry from the perspective of atypical business growth models, we would propose that, despite companies such as Regus operating for over 25 years, we are only really in the “Early Adopters” stage of evolution. To be more precise, we expect that we are in the top 3rd of this stage of sector maturation. Looking at the adoption curve below, we can see that this stage is characterized by high growth in the early stages of change, and we can expect a dip in positivity before true majority adoption occurs.
Our research shows that today’s industry in 2018 has a little over 32,000 centers globally. Conservative CAGR estimates of 15% year on year at a global level up until 2028 would likely see the growth of 140,000 new spaces. We are currently starting to see a steadier rate of growth in the UK and the US, the most mature country markets, as we start to see the first signs of sector realignment.
These markets can be expected to see renewed growth, potentially as early as 2022, as early adopters from the corporate sector move into the industry. In Asia, growth figures remain high as we continue to see increased interest from the first adopters across the region.
Make no mistake, these are exciting times, and all our data would suggest that we can anticipate 15 years of dynamic market expansion, right across the global flex market.
What we will see is the proliferation of choice, of client demand forcing operators and landlords to aggressively evolve their models; to differentiate and specialize. Now that commercial real estate has started to wake up to the needs of the end user, the sector will have to become smarter at finding and using big sets of data to assess, in detail, where this demand is coming from and how it is going to change over time.