In the early days of the World Wide Web, companies were forced to buy physical servers and build their own data centers, spending on more computing power than they needed or failing to respond to demand due to lack of available resources. Today, the public cloud market has grown to $206.2 billion and businesses have fundamentally changed the way they think about assets and resource allocation, scaling their usage up or down depending on their shifting needs.
Amazon Web Services revolutionized the way we think about digital space, enabling the birth of countless enterprise software companies in the process. That revolution lowered the barriers to entry for would-be entrepreneurs, enabling them to start businesses with much less capital and experience than the previous generation. More importantly, cloud computing gradually became the preferred solution for large organizations with complex technical, privacy, security and performance needs, such as Dow Jones, Kellogg’s, Netflix, Expedia, and even the CIA.
Now, the dynamics that reshaped the way companies access digital space are making their way to the physical world. Companies are growing and contracting faster than ever before. Software-as-a-Service is able to move at the same pace, but physical space is a constant bottleneck, limiting growth when times are good, increasing costs when changes are needed, and impacting overall productivity.
From Assets to Liabilities
The commercial real estate industry has been relatively slow to adopt new business models, preferring the stability of multi-year leases to the kind of innovation we’ve seen in other sectors. Tenants used to prefer this kind of stability as well, but in our “fail fast” startup climate, most new business owners have no idea what their staffing and space needs will be that far in advance. Meanwhile, large enterprises are constantly moving and reshuffling their spaces to accommodate new business units or in search of fresh talent, as exemplified by recent announcements from Amazon, Apple , and Google. Thanks to the rise of artificial intelligence and automation, for the first time in history, business growth might actually mean having fewer employees. These shifts mean larger companies also have significantly less insight into their future space needs than they once did.
Long-term leases have become even more of a liability in 2019 now that IFRS 16, a new global accounting standard, has gone into effect for public companies. In 2020, we’ll see that standard apply to private companies as well. IFRS 16 requires businesses to list any leases with a term of more than 12 months on their balance sheets unless the asset is valued at less than $5,000. Many companies currently use off-balance sheet leases as a way to bundle space costs under operating expenses, downplaying the size of these commitments. The new accounting standard makes that impossible, impacting the way these companies are taxed, how they are valued, and their ability to borrow.
At the same time, established norms around work are evolving. The best-paid humans are those whose jobs cannot be automated or replaced by machines. These employees value flexibility, and while they are at the office, they need access to a variety of spaces to fit a variety of tasks: focused work, brainstorming sessions, client presentations, or working on the road. As Leesman’s recent workplace experience survey of over 400,000 individuals in 3,000 workplaces around the world points out, employees should be empowered to “do both their individual and collaborative work in spaces that they decide suit them best at that point in their working day.”
In a world where people have grown accustomed to getting just about anything (a ride, a massage, a dress, a gourmet meal) on-demand with just a few taps, employees increasingly expect the same level of flexibility in the workplace. Accommodating this preference helps companies attract great people, and allows them to produce their best work.
The combination of these economic forces is giving rise to a new kind of SaaS or, perhaps, SPaaS: Space-as-a-Service. Less than a decade ago, co-working took the real estate world by storm by catering to freelancers and entrepreneurs. Today, interest from larger enterprises is driving the industry away from the original shared spaces and is fueling the growth of new companies and business models. Convene is catering to corporate tenants in large office buildings, The Office Group converts whole buildings into private and shared suites, and Breather (which I advise) lets anyone rent private workspaces for hours, days, months or years.
Customers (formerly known as “tenants”) are not simply changing their taste in workspace. Instead, they are choosing dynamic solutions that provide access to the spaces their teams need, on demand, anywhere — in the same way that enterprises use Uber for their mobility needs instead of operating a fleet of company cars. Advancements in Internet of Things (IoT) technology will soon add another layer to this experience, allowing employees to walk into workplaces that remember their preferences and adjust to their needs.
Real estate giants are waking up to this opportunity, with large players experimenting with new concepts and designs. They’re just in time. PWC predicts that at least 30 percent of all urban office space will be delivered as a service within 5-10 years, offering tenants access to furnished, customer-friendly space with maintenance and other services built-in. Right now, only about two percent of space in New York City is delivered this way, which means we’re on the cusp of a massive transformation in a multi-trillion dollar market.
We’re still in the early innings of this shift, but the real estate game is in for a shakeup once companies of all sizes realize they can pay for space only when and where they need it. If the humble beginnings of AWS are any indication, Space-as-a-Service has the potential to mature into one of the most consequential markets we’ve seen. Are you ready?