flexible workspace in corporate real estate · 2019-09-23 · main conclusions are that real estate...
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School of Architecture, Urban Planning and Building Engineering and School of
Industrial Engineering and Information
Master of Science in Management of Built Environment
FLEXIBLE WORKSPACE IN CORPORATE REAL ESTATE
A SWOT ANALYSIS FOR INVESTMENT PROFESSIONALS
Master Thesis of Matheus Bismarck PENQUE
Matr. 896639
Accademic Year: 2018-2019
Supervisor: Prof. Liala Baiardi
2
INDEX
ABSTRACT ........................................................................................................................................... 6
INTRODUCTION ................................................................................................................................. 9
1. OVERVIEW OF FLEXIBLE WORKSPACE IN CORPORATE REAL ESTATE ............ 11
2. THE FLEXIBLE WORKSPACE MARKET ........................................................................... 15
2.1 OVERVIEW OF THE EUROPEAN MARKET ................................................................ 17
2.2 OVERVIEW ON THE UNITED STATES MARKET ...................................................... 24
2.3 FLEXIBLE WORKSPACE OPERATORS ........................................................................ 29
2.3.1 WEWORK ......................................................................................................... 29
2.3.2 INTERNATIONAL WORKPLACE GROUP ................................................... 35
2.4 FLEXIBLE WORKSPACE USERS ................................................................................... 40
3. FLEXIBLE WORKSPACE SWOT ANALYSIS ..................................................................... 45
3.1 SWOT ANALYSIS MOTIVATIONS ................................................................................ 45
3.2 OVERVIEW ON THE FLEXIBLE WORKSPACE SWOT ANALYSIS ......................... 47
4. FLEXIBLE WORKSPACE STRENGHTS .............................................................................. 48
4.1 DIFFERENTIAL OFFERING ............................................................................................ 48
4.1.1 BUSINESS FLEXIBILITY ................................................................................ 49
4.1.2 SERVICES AND AMENITIES ......................................................................... 50
4.1.3 UPFRONT COSTS REDUCTION .................................................................... 52
4.1.4 CREATIVE ENVIRONMENT .......................................................................... 55
4.1.5 COMMUNITY ATTRACTION ........................................................................ 56
4.2 FLEXIBLE SUPPLY CHAIN ............................................................................................ 58
4.2.1 SERVICED OFFICE .......................................................................................... 60
4.2.2 COWORKING ................................................................................................... 61
4.2.3 HYBRID AND ALTERNATIVE MODELS ..................................................... 62
5. FLEXIBLE WORKSPACE WEAKNESSES ........................................................................... 66
5.1 PRODUCT VULNERABILITIES ...................................................................................... 66
5.1.1 HIGH OCCUPANCY HARM EFFECTS .......................................................... 67
5.1.2 CONFIDENTIAL ENVIRONMENT AND SECURITY .................................. 70
5.1.3 COMPANY IMAGE IN OWN SPACE ............................................................. 71
5.2 OPERATOR FRAGILITIES .............................................................................................. 73
5.2.1 LOW CREDIT RATING ................................................................................... 73
5.2.2 PROFITABILITY ISSUES ................................................................................ 74
6. FLEXIBLE WORKSPACE OPPORTUNITIES ..................................................................... 80
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6.1 BUSINESS ENVIRONMENT ........................................................................................... 80
6.1.1 TRADITIONAL REAL ESTATE OFFERING ................................................. 80
6.1.2 DIGITAL INFRASTRUCTURE ....................................................................... 81
6.1.3 SHARING ECONOMY ..................................................................................... 82
6.2 CATALYST FACTORS ..................................................................................................... 83
6.2.1 GIG ECONOMY ................................................................................................ 83
6.2.2 STARTUPs AND SMEs BOOST ...................................................................... 84
6.2.3 INCREASE BIG COMPANIES’ ADOPTION .................................................. 85
6.2.4 NEW ACCOUNTING REGULATION ............................................................. 87
6.3 LANDLORDS ENTERING INTO THE MARKET .......................................................... 90
6.3.1 FLEXIBLE APPROACH STRATEGY ............................................................. 91
6.3.2 BUY STRATEGY .............................................................................................. 93
6.3.3 JOINT VENTURE STRATEGY ....................................................................... 93
6.3.4 BUILD STRATEGY .......................................................................................... 94
7. FLEXIBLE WORKSPACE THREATS ................................................................................... 96
7.1 ECONOMIC DOWNTURN ............................................................................................... 96
7.1.1 IMPACTS ON BUSINESS ................................................................................ 97
7.1.2 VACANCY RATE EFFECTS ........................................................................... 99
7.2 MARKET SATURATION ............................................................................................... 101
7.2.1 INCREASE IN COMPETITION ..................................................................... 101
7.2.2 SUPPLY SCARCITY ...................................................................................... 103
7.3 INVESTORS’ UNCERTAINTY ...................................................................................... 105
7.3.1 CAPITAL IMPLICATIONS ............................................................................ 106
7.3.2 CORPORATE REAL ESTATE CONTROL ................................................... 113
8. CONCLUSION ......................................................................................................................... 116
9. REFERENCES .......................................................................................................................... 122
4
FIGURES INDEX
Figure 1: Google searches for the term "coworking" (Source: Google Trends, Author) ...................... 12 Figure 2: Flexible Workspace in Corporate Real Estate Supply Chain (Source: Author) .................... 14 Figure 3: Global Share of Flexible Workplaces per number of centers (Source: Cushman & Wakefield, 2018) ................................................................................................................................... 15 Figure 4: Flexible workspace as % of take-up 2000 - 2018 in Europe (Source: PMA 2018, Author) . 17 Figure 5: Flexible Workspace numbers for markets in Europe (Source: Colliers International EMEA 2019, Author) ........................................................................................................................................ 18 Figure 6: Flexible workspace snapshot in Europe 2018 - Activity vs Size (Source: Colliers EU 2019, Author) .................................................................................................................................................. 19 Figure 7: European flexible workspace expansion 2001 - 2018 (Source: Colliers International EMEA 2019, Author) ........................................................................................................................................ 20 Figure 8: Flexible workspace operators in European cities by size of operated space - 2019 (Source: Colliers International EMEA 2019, Author) ......................................................................................... 23 Figure 9: US Flexible workspace - Share of total office inventory Vs Inventory (Source: Colliers International Survey 2019, Author) ...................................................................................................... 24 Figure 10: Number US Coworking Spaces and Members 2015 - 2022 (Source: Small Business Labs 2018, Author) ........................................................................................................................................ 26 Figure 11: U.S. Flexible workspace operators in 19 leading office markets (Source: Colliers US 2019, Author) .................................................................................................................................................. 27 Figure 12: U.S. Market share for flexible workspace operators in 19 leading office markets (Source: Colliers US 2019, Author) .................................................................................................................... 28 Figure 13: WeWork lettings as a proportion of total take up in Manhattan and London 2010 - 2017 (Source: Cushman & Wakefield Research 2018, Author) .................................................................... 30 Figure 14: WeWork membership alternatives (Source: Author & WeWork, 2019)............................. 33 Figure 15: IWG Performance Highlights 2016 - 2018 (Source: IWG Annual Report 2019, Author) .. 36 Figure 16: Flexible workspace solutions – Regus (Source: Regus, Author) ........................................ 38 Figure 17: US Flexible workspace share of total office inventory in 19 leading markets (Source: Colliers International Survey, 2019) ..................................................................................................... 40 Figure 18: ICT and Professional Services dominants on WeWork Membership by Industry - 2017 (Source: MSREI Strategy 2018) ........................................................................................................... 41 Figure 19: Smaller offices still dominate the flexible workspace sector (Source: Savills, 2018) ......... 42 Figure 20: Professional Status of Coworking Members (Source: Deskmag, 2017) ............................. 43 Figure 21: WeWork Membership by Professional Status (Source: CB Insights Research 2017, Author) .............................................................................................................................................................. 43 Figure 22: Flexible workspace SWOT analysis (Source: Author) ........................................................ 47 Figure 23: Reason for Using Flexible Workspace Survey (CBRE Research 2018, Author) ................ 49 Figure 24: Amenities & Services – WeWork (Source: WeWork, 2019) .............................................. 52 Figure 25: Case study: Traditional vs Serviced Office – Costs assumptions (Source: JLL Research 2017, Author) ........................................................................................................................................ 54 Figure 26: Case study: Traditional vs Serviced Office - Costs analysis (Source: JLL Research 2017, Author) .................................................................................................................................................. 55 Figure 27: Total Flexible Workspace Supply by Model - Top 20 European Flex Markets (Source: JLL Research, 2017)..................................................................................................................................... 58
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Figure 28: Wide range of flexible workspace means diversified income stream (Source: Deskmag 2018, Author) ........................................................................................................................................ 59 Figure 29: Flexible workspace main typologies (Source: JLL Research, Cushman & Wakefield Research, Author) ................................................................................................................................. 60 Figure 30: European average gross workspace per employee trend 1994 - 2018 (Source: PMA 2019, Author) .................................................................................................................................................. 67 Figure 31: Case Study: Traditional vs Serviced Office - Idealized curves for additional workspace (Source: JLL Research 2017, Author) .................................................................................................. 69 Figure 32: Profit tree of flexible workspace business model - in red the causes of profitability issues (Source: Author) ................................................................................................................................... 75 Figure 33: Revenue Stream Percentages of Flexible Workspaces - By age of center (Source: Deskmag 2018, Author) ........................................................................................................................................ 77 Figure 34: Share of Costs Types of Flexible Workspaces - by age of center (Source: Deskmag 2018, Author) .................................................................................................................................................. 78 Figure 35: Correlation between high rent and number of flexible workspaces (Source: Colliers International EMEA 2019, Author) ...................................................................................................... 81 Figure 36: Sectors driving demand for flexible workplaces (Source: Cushman & Wakefield Research - based on questionnaires) ....................................................................................................................... 83 Figure 37: Small Companies Create Office-Using Jobs in United States 2017 (Source: Bureau of Labor Statistics) .................................................................................................................................... 85 Figure 38: Consolidated occupiers' categories in flexible workspace (Source: JLL Research, 2017) .. 87 Figure 39: Identification of the lease agreement within the new IFRS 16 (Source: Cushman & Wakefield Research 2018, Author) ....................................................................................................... 88 Figure 40: European office vacancy including flexible workspace in 2018 (Source: Colliers International EMEA 2019, Author) .................................................................................................... 100 Figure 41: Proportion of Central London multi-let building let to flexible workspace operators - since 2012 (Source Cushman & Wakefield 2018, Author) .......................................................................... 105 Figure 42: Investors are cautious about high share of flexible workspace in their investments (Source: CBRE Research 2018) ........................................................................................................................ 106 Figure 43: Higher concentration of flexible workspace are correlated with higher cap rates (Source: CBRE Research 2019, Author) ........................................................................................................... 108 Figure 44: Most flex transaction outperformed or were on par with peers (Source: CBRE Research 2019, Author) ...................................................................................................................................... 110 Figure 45: Lower share of flexible workspace have minimal impact on building value (Source: CBRE Research 2019, Author) ...................................................................................................................... 111
6
ABSTRACT
The impressive technology development together with the last great financial crisis boosted the
demand of individuals and firms for flexibility, to better allocate their resources. Flexible
workspace is an alternative for them when leasing office. Unlikely the traditional model it
refers to office space that can be leased fast, with tailored solutions in terms of lease duration
and space layout, offering a diverse number of services and amenities, where people and
companies once sharing common spaces tends to interact and network in higher intensity. First,
looking at the market numbers, flexible workspace’s footprint is still small, but the growth rate
is extraordinary. It’s highly concentrated in leading markets, like London and New York, with
a huge number of small operators and two main ones: IWG and WeWork. Its typical users are
freelancers and startups and SMEs, mainly working in the ICT and professional services
industries, but big firms are increasingly using it. The meteoric growth of flexible workspace
has increased the attention of landlords and investors, for them is crucial to understand how it
can impact their portfolio performance, to better assess it, a SWOT analysis has been
developed. The internal factors revealed that the differential offering and the flexible supply
chain of flexible workspace make the sector competitive, while the product vulnerabilities and
operator fragilities are features still to be improved. Later, the external factors determined that
there are market conditions and trends jointly with the fact that more traditional landlords are
entering in the market can boost the sector consolidation. In the other hand, economic
downturn, market saturation and investors’ uncertainty keep blocking the sector’s growth. The
main conclusions are that real estate investment fundamentals – know the market and asset
very well – remain essential when evaluating the opportunity to adopt flexible workspace
within the portfolio, together with deep due diligence on the operator’s financial resilience and
profit-sharing lease agreement. Offering more flexibility through understand tenants needs or
partnering with operator might also be a good strategy to take a bigger step into the sector.
7
ITALIAN VERSION:
L'impressionante sviluppo tecnologico in associazione all'ultima grande crisi finanziaria ha
spinto la domanda di flessibilità da parte di singoli individui e aziende, con l'obiettivo di
allocare meglio le proprie risorse. Gli spazi di lavoro flessibili sono per loro un'alternativa
rispetto alle opportunità offerte dell'affitto di uffici. Infatti, diversamente dal modello
tradizionale, questi offrono spazi che possono essere affittati velocemente, con soluzioni su
misura in termini di durata della locazione e layout degli spazi, offrendo differenti servizi e
comfort, dove persone e aziende, che una volta condividendo spazi comuni, tendono a
interagire e a creare network di maggiore intensità. Prima di tutto, osservando i dati di mercato,
l'impatto degli spazi di lavoro flessibili è ancora piccolo, ma il tasso di crescita è straordinario.
Questo è altamente concentrato nei mercati primari, come Londra e New York, con un gran
numero di piccoli operatori e due altri principali: IWG e WeWork. Gli utilizzatori abituali di
questi spazi sono freelancers, startups e PMI, principalmente operanti nel settore dell'ICT e dei
servizi professionali. La rapidissima crescita degli spazi di lavoro flessibili ha catturato
l'attenzione dei proprietari e degli investitori, per i quali è cruciale comprendere come questo
fenomeno possa avere un impatto sulle performance del loro portfolio e per meglio valutarlo è
stata sviluppata una SWOT analysis. I fattori intrinseci hanno rivelato che l'offerta differenziale
di spazi flessibili, unita alla flexible supply chain, rende il settore competitivo, mentre i punti
deboli del prodotto e le fragilità degli operatori devono essere ancora sanati. In secondo luogo,
i fattori estrinseci hanno dimostrato che vi sono condizioni di mercato e trends in unione con il
fatto che i proprietari legati a prodotti più tradizionali stanno entrando nel mercato. Fenomeni,
questi, che potrebbero incoraggiare la consolidazione del settore. D'altro canto, la recessione
economica, la saturazione del mercato e l'incertezza degli investitori bloccano la crescita del
settore. Le conclusioni principali sono che i fondamentali degli investimenti nel real estate - la
conoscenza approfondita del mercato e dell'asset - rimangono essenziali nella valutazione di
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opportunità legate all'integrazione di spazi di lavoro flessibili all'interno del portfolio, in unione
ad un'approfondita analisi della solidità finanziaria dell'operatore e profit-sharing lease
agreement. Offrire più flessibilità attraverso la comprensione delle necessità dei conduttori o
creare partnership con gli operatori può anche essere una strategia per fare un gran passo avanti
nel settore.
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INTRODUCTION
The thesis tries to provide an overview of flexible workspace in corporate real estate for an
institutional asset allocator or for anyone with some minimum required knowledge that’s
interested in the understand more about the flexible workspace sector. The recent boom of the
sector has increased the interest of its players in the search for the right way to position
themselves in the market. The thesis has been designed to provide essential information about
the main features of the flexible workspace sector in the context of institutional investments.
As asset allocation decisions are the dominant determinant of long-term portfolio returns, the
thesis aims to work as an initial guideline for professional investors that are seeking to take a
bigger step the into the sector. To achieve the purpose and scope of the thesis, the following
disposition has been developed:
Chapter 1 – Overview of Flexible Workspace in Corporate Real Estate
As a motivation for the thesis, it starts with an introduction to the flexible workspace in
corporate real estate, a description of its growth story, an attempt in defining what’s flexible
workspace, an illustration of why traditional landlords and investor are curious about the sector.
Chapter 2 – The Flexible Workspace Market
The chapter starts giving a brief view of the flexible workspace sector across the world. Then,
it focusses on the two main markets for the sector: Europe and United States. After that, there’s
a deep description of the main flexible workspace operators in the market – IWG and WeWork,
and an overview about the typical users of this product.
Chapter 3 – The Flexible SWOT Analysis
The chapter is considered the “heart” of the thesis. It starts with a description of the motivations
for adopting the SWOT analysis, then it shows the SWOT developed.
10
Chapter 4 – The Flexible Workspace Strengths
The thesis explains in detail the strengths of the flexible workspace business model, divided
into “differential offering” and “wide range of income stream” which are considered the
internal features that keep the sector competitive.
Chapter 5 – The Flexible Workspace Weaknesses
The thesis explains in detail the weaknesses of the flexible workspace business model, divided
into “product vulnerabilities” and “operator fragilities” which are considered the internal
features that the sector needs to improve to become more competitive.
Chapter 6 – The Flexible Workspace Opportunities
The thesis explains in detail the opportunities for the flexible workspace business model,
divided into “business environment”, “catalyst factors” and “landlords entering into the
market” which are considered the external conditions and trends that can boost the sector
consolidation.
Chapter 7 – The Flexible Workspace Threats
The thesis explains in detail the threats for the flexible workspace business model, divided into
“economic downturn”, “market saturation” and “investors’ uncertainty” which are considered
the external conditions and trends that can disrupt the sector.
Chapter 8 – Conclusion
The very last section contains conclusions, answers to the thesis questions and limitations.
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1. OVERVIEW OF FLEXIBLE WORKSPACE IN CORPORATE REAL ESTATE
The process of technology development is changing the way people work, as consequence of
it many companies have been reviewing how their businesses are structured, stimulated for
many reasons that goes from the increase of employees’ productivity to the difficulty in
forecasting the right amount of space required to their headquarters. Moreover, after the big
crisis, the pursuit for mitigating risks due to the high uncertainty in all aspects, mainly through
reducing operational costs and focusing on the core business, gave rise to an increase demand
for generic flexibility (The Boston Consulting Group, 2006)1.
This scenario has important consequences in the real estate sector, once considered
uncomplicated and easy to do or understand, through the apocryphal “location, location,
location”, the sector has been forced to adapt and match their demand requirements, in this case
represented by companies searching for flexible workspace solutions, where lease agreements
can be procured quickly, with flexible terms and little to no capital improvement required
(CBRE Research, 2019)2. There’s no exhaustive definition for it, but “a membership-based
environment where the self-employed, or people with different employers, work in a casual,
community atmosphere” (HOK, 2016)3 illustrates in a simple way what it means.
The flexible workspace concept is not something new, even if the buzz is, it is rather a matter
of new terminology. In the 1960’s, new types of offices appeared in the United States (US) and
United Kingdom (UK), they were called serviced offices and included space rentable on-
demand with various different services, which shows that in the middle of last century some of
the first ideas on how to increase effectiveness use of office space and meet different demand
1 Opportunities for Action in Infrastructure and Real Estate - Building Flexibility into Corporate Real Estate. (2006). The Boston Consulting Group. 2 The Property Value Implications of Flexible Space U.S. (2019). CBRE Research. 3 Coworking: A Corporate Real Estate Perspective. (2016). HOK.
12
requirements (Erik Ellenfors & Hedvig Waller, 2018)4. Further on, Regus (now International
Workplace Group – IWG), the largest provider of flexible office space in terms of total square
meters, was founded in 1989 (Cushman & Wakefield Research, 2018)5.
One indicator to understand the trend popularity is to “google” the most used name to refer to
flexible workspace: “coworking” (JLL Research, 2017)6. The following graph demonstrates
the growing interest in the main markets for the sector – US and UK– and across the world. It
has been developed using the Google Trends data and taking the average percentage for each
six months. Further than comparing the regions, the chart shows the recent boom on the sector
after the Great Financial Crisis (GFC).
Figure 1: Google searches for the term "coworking" (Source: Google Trends, Author)
4 Increased profitability by offering more flexibility? Flexible workspace from the perspective of a commercial real estate owner. (2018). Erik Ellenfors & Hedvig Waller. 5 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research. 6 Coworking - Analysis of flexible workspace, for example in Hamburg. (2017). JLL Research.
0
20
40
60
80
100
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
%*
*Values are calculated on a scale of 0 to 100, where 100 is the most popular location asa fraction of the total searches in that location; 50 indicates a location that has half thepopularity; and 0 indicates a location where there was insufficient data
Google searches for the term "coworking"
World
United States
UnitedKingdom
13
The numbers speak for themselves, in 2019, according to Cushman & Wakefield Research7, it
has been tracked 11 million sqm of global flexible workspace. It represents only little over 1%
of global office inventory, anyhow it has piqued the real estate industry’s interest because of
its potential to grow and change how tenants rent space in the future. For example, when
looking to more mature markets as London, the impact has been significant, WeWork is now
the largest private office tenant and leasing activity by flexible workspace operators has ranged
from between 10-20% of quarterly take up for the last few years, which might be an indication
for what the other markets will experiment soon (Cushman & Wakefield, 2019).
For a sector that is becoming more and more professional, the upstream side of corporate real
estate supply chain, represented by the institutional landlords and investment managers, is
intrigued by the positive opportunities that this increase for flexibility demand can bring up.
Anyhow, their investment managers are still aware assessing the potential risks, given the
uncertainty about the future of this emerging niche sector, they want to understand the real total
value that flexibility can add to their real estate investments. That is, both in terms of security
income that can be produced along a holding period characterized by trends volatilities, and
capital growth at the disposition phase, when market perception can vaporize liquidity through
underestimating property market value. During a research conducted by CBRE on 20188, it has
been asked many investors and landlords to identify occupier trends exerting the greatest
impact on real estate value, and most respondents selected “flexible space”, or space that can
be procured quickly, with little capital investment and at very flexible terms (CBRE Research,
2018).
So, a dilemma arises: is this trend a risk or an opportunity? From one side, the non-adoption of
flexible spaces in their assets might mean obsolete portfolios represented by loss of competition
7 Coworking Hotspot Index. (2019). Cushman & Wakefield Research. 8 Building Value: Coworking and Property Valuation. (2018). CBRE Research - Valuation Series.
14
UPSTREAM: LANDLORD SIDE
and attractiveness in response to the changing tenant demands, or even the fact of non-
benefiting from the revenues that this product can generate in the long-run due to its typically
premium price used to cover the additional costs of marketing and managing multi-let buildings
on short let agreements. From the other side, “bet on” a high share of flexible tenants may
increase the risk because usually flexible terms lack the longer-term commitments and rigid
restrictions from their tenants that provide income security under traditional office leases,
hence there’s a high uncertainty of a flexibility performance through the cycle and how it would
react in poorer occupational market conditions.
At the end of the day, for investment professionals the question that might come up is “how to
deal with flexible workspace in the investment portfolio to improve the performance and
mitigate the potential risks?”. The aim of this study is to explore this question, through the
impact of flexible workspace in Real Estate investments from the upstream of the corporate
real estate supply chain point of view, i.e. analyze if the flexible workspace business has impact
on the landlord investment and which strategies to take a major step into this sector.
Figure 2: Flexible Workspace in Corporate Real Estate Supply Chain (Source: Author)
DOWNSTREAM: TENANT SIDE
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2. THE FLEXIBLE WORKSPACE MARKET
In the beginning of 2019, it has been tracked 11 million square meters of flexible workspace
across the world, representing little over 1% of global office inventory – around 919 million
sqm (Cushman & Wakefield Research, 2019)9. According to the research, the numbers
represent flexible workspace in its broad sense, including coworking, serviced offices and
hybrid models.
In terms of area, about 40% of all flexible workspace stock is concentrated in North America,
and the rest is split evenly between Europe and Asia-Pacific (APAC), and as it’s possible to
infer, the two main markets – United States (US) and United Kingdom (UK) – are respectively
underpinned by New York City and London, accounting circa 2 million square meters together,
these two cities alone represent approximately 20% of global flexible workspace stock
(Cushman & Wakefield Research, 2019).
Figure 3: Global Share of Flexible Workplaces per number of centers (Source: Cushman & Wakefield, 2018)
9 Coworking Hotspot Index. (2019). Cushman & Wakefield Research.
32%
27%
22%
15%
4%
Global Share of Flexible Workspaces
United Kingdom United States EMEA (ex UK) APAC Latin America
16
When comes up to number of flexible workspace locations (centers), at country level the United
Kingdom and United States are leaders, accounting for more than half of all centers across the
world.
This chapter focus on the central markets within the United States and Europe to understand
what’s the current situation of flexible workspace across the main central markets in terms of
relative stock and take-up and competitiveness among operators. Further the chapter shows the
main flexible workspace operators (WeWork and IWG) highlighting their main features.
Finally, the chapter reveals the main users of flexible workspace, in terms of sector and
professional status. This chapter has the goal of giving an overview of the sector within
corporate real estate, preparing also for better understand the next chapters.
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2.1. OVERVIEW OF THE EUROPEAN MARKET
In Europe, the sector has had it big jump in expansion between 2014 and 2018, the number of
flexible workspace locations increased by +205% (Colliers International EMEA, 2019)10
Analyzing the growth trend using % of office take-up as indicator, it’s possible to realize the
difference in maturity between the United Kingdom with respect to continental Europe.
Figure 4: Flexible workspace as % of take-up 2000 - 2018 in Europe (Source: PMA 2018, Author)
The information might be misleading, because once considering a huge number of countries
with market dynamic differences together the weighted average might go down since probably
in many of the continental European countries the flexible workspace is not that relevant.
Despite this, when the analysis goes into more detail, that is, looking at each city, the first chart
confirms itself.
The United Kingdom protagonist, London, is also the global reference in terms of number of
locations and flexible workspace take up share, exceeding, for example, New York Manhattan
10 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
0,00
2,00
4,00
6,00
8,00
10,00
12,00
14,00
16,00
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Take
-up
(%)
Flexible Workspace Growth Trend: % of Office Take-up
UK Rest of Europe
18
in terms of its scale (Cushman & Wakefield, Research, 2018)11. In the continental Europe, the
protagonist seems to be Amsterdam, with an significant flexible workspace share of the total
office stock, the Dutch capital has one of the highest proportions of independent workers in
Europe based in an entrepreneurial and innovative culture, actually a lot of flexible workspace
operators were born Dutch, such as Spaces before being purchased by IWG (Cushman &
Wakefield Research, 2018).
City
Number of flex
workspace centers
Number of flex
workspace operators
Space occupied by flex
workspace [2018, % of stock]
Space leased by flex
workspace operators
[2018, thsd., sqm]
Flex take-up [2018,
% of total]
London 1023 411 5,10% 169 14% Amsterdam 122 53 5,00% 24 9%
Warsaw 94 33 3,60% 107 12% Leeds 25 16 2,80% 5 8%
Manchester 16 10 2,80% 11 7% Birmingham 16 10 2,70% 11 16%
Budapest 50 31 2,60% 21 4% Bristol 16 16 2,30% 8 16%
Bucharest 27 17 1,70% 27 8% Copenhagen 66 31 1,60% 28 8%
Prague 41 14 1,20% 26 5% Paris 409 258 1,00% 108 10% Berlin 89 34 0,90% 69 9%
Frankfurt am Main 63 34 0,90% 54 9% Milan 68 17 0,80% 40 11%
Moscow 118 17 0,80% 50 3% Cologne 29 17 0,70% 26 9%
Düsseldorf 26 13 0,50% 18 5% Hamburg 70 40 0,50% 29 5% Munich 73 33 0,50% 60 6% Stuttgart 29 18 0,30% 4 2%
Rome 38 21 0,20% 10 6% Figure 5: Flexible Workspace numbers for markets in Europe (Source: Colliers International EMEA 2019, Author)
11 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
19
As it can be seen above, London and Amsterdam the space occupied by flex workspace and
the percentage of its take up, both in comparison to the total office stock, are respectively 5%
and around 10 to 15% at the end of 2018, cities like Stuttgart and Dusseldorf accounted for
only 1% in both measurements at the same period (Colliers International EMEA, 2019).
Figure 6: Flexible workspace snapshot in Europe 2018 - Activity vs Size (Source: Colliers EU 2019, Author)
The numbers talk for themselves, the cities performing in the United Kingdom (UK), like
London and Birmingham, are far much ahead of the major European cities. In the other hand,
within the UK, cities like Leeds and Manchester will probably see an increase in the take up
numbers, once their flexible workspace stock is ahead but the take-up numbers are lagged
behind European average.
London
Paris
Warsaw
Berlin
MunichFrankfurt am Main
Moscow
Milan
Hamburg
Copenhagen
Bucharest
Cologne
Prague
Amsterdam
Budapest
DüsseldorfManchester
Birmingham
Rome
Bristol
Leeds
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 1% 2% 3% 4% 5% 6%
Flex
take
-up
[201
8, %
of t
otal
]
Space occupied by flex workspace [2018, % of stock]
Flexible Workspace Snapshot in Europe 2018
Average Europe - Flex take-up
Average Europe - Space occupied by flex workspace
20
For the continental Europe there’s still high potential to growth in terms of both take-up and
total office stock both in terms of take-up and total office stock. There, it’s been tracked around
1,3 million square meters of flexible workspace and an average of just 1,0% of the total stock
in 2018 (Cushman & Wakefield Research, 2018). For example, centers like Milan, Paris,
Frankfurt, Cologne and Berlin might find their path through developing new stock of flexible
workspace, due to their gap in comparison to the European average. Greater opportunities
might see in cities below both European average measurements, such as Munich, Rome,
Moscow, Stuttgart, Prague and Dusseldorf.
In Europe’s leading markets, the distribution of operators – by number of locations – is given
by over than 75% from single location operators, in which there’s been a big jump in expansion
between 2014 and 2018, the number of new operators increased about +138% (Colliers
International EMEA, 2019)12.
Figure 7: European flexible workspace expansion 2001 - 2018 (Source: Colliers International EMEA 2019, Author)
Anyhow, as it can see below in the chart, IWG and WeWork are the absolute main operators
playing in the flexible workspace sector. The other top 6 operators are: (LEO) Executive
12 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
0
200
400
600
800
1.000
1.200
1.400
1.600
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Thou
sand
squa
re m
eter
s
Flexible Workspace Operators Expansion in Europe
Other Top 6 operators WeWork IWG (Regus & Spaces)
21
Offices Group, Landmark Space Limited, The Office Group, Design Offices, Mindspace and
WorkRepublic.
In the United Kingdom, the main operator is IWG – through Regus and Spaces – in terms of
flexible units, but its competitor WeWork is not that behind in terms of scale (Cushman &
Wakefield Research, 2018)13 According to Colliers, London and Paris – the most mature
markets – further than IWG and WeWork, host more established operators, moreover they are
“dominated” by a small number of local operators that represent over 60% of the sector’s
activity (Colliers International EMEA, 2019). IWG is the dominant player in Copenhagen,
Budapest and Frankfurt, accounting for between 25 to 35% for all those three cities, and in
Milan, there reaching over of 40% of space operated (Colliers International EMEA, 2019).
13 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
Regus16%
Klein Kantoor
7%
The office Operators
6%
Tribes5%
Unitz3%
Others -internat.
16%
Others -domestic
47%
Amsterdam
WeWork10%
Regus8%
WS Group5%
The Office Group
5%
(LEO) Executive
Offices Group
3%
Others -internat.
3%Others -domestic
66%
London
22
IWG (Regus & Spaces)
23%
WeWork20%
Morning Coworking
11%
Wojo (ex Nextdoor)
7%
Multiburo -Le Spot
5%
Wellio4% Others
30%
Paris
WeWork24%
Sirius Facilities
8%
Regus8%
Design Offices
8%
rent24 GmbH
4%
Others -internat.
4%Others -domestic
44%
Berlin
Regus29%
WeWork10%
Design Offices
9%
Agendis Business Centre
6%
Others -internat.
10%Others -domestic
36%
Frankfurt am Main
Design Offices
17%Regus13%
Friendsfactory AG
10%
Nutrion3%
WorkRepublic2%
Others -internat.
22%Others -domestic
33%
Munich
23
Figure 8: Flexible workspace operators in European cities by size of operated space - 2019 (Source: Colliers International
EMEA 2019, Author)
Regus38%Copernico
S.r.l26%
A & B Business Centre11%
Offisquare2%
Spaces (Regus)
2%Others -domestic
21%
Milan
WeWork21%
Regus12%
CiC7%
NewWork6%
Others -internat.
34%Others -domestic
20%
Warsaw
Regus27%
NewWork15%
DBH10%
L'Office3%
Others -internat.
2%
Others -domestic
43%
Budapest
Regus34%
Ordnung13%
Office Club (Denmark)
6%
WeOffices4%
Jeudan1%
Others -internat.
2% Others -domestic
40%
Copenhagen
24
2.2. OVERVIEW ON THE UNITED STATES MARKET
According to Cushman & Wakefield research, in the United States (US) the total stock was
circa 2,5 million square meters in 2017. The country has a relatively small proportion of
flexible workspace stock in comparison to the office one when compared to the United
Kingdom (UK) – around 2% across the main cities – anyhow the number of operators in the
US is much larger than in the UK (Cushman & Wakefield, 2018). According to the same
research, since 2012 flexible workspace leasing has represented an average of 2,9% in
Manhattan, compared to 10,6% in London.
Figure 9: US Flexible workspace - Share of total office inventory Vs Inventory (Source: Colliers International Survey 2019,
Author)
The number of flex locations in the US has rocket from less than 300 in 2010 to more than
4,000 at the end of 2017, for a compound annual growth rate of almost 50% (Colliers
1,40%
0,90%1,10% 1,10%
2,10%
1,40% 1,50%1,60%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
3.000.000
Flex
ible
Wor
kspa
ce In
vent
ory
(squ
are
met
ers)
US Flexible workspace 2016 - 2018
Flexible Workspace Inventory 2016Flexible Workspace Inventory Q2 2018Flexible Workspace Share of Total Office Inventory 2016Flexible Workspace Share of Total Office Inventory Q2 2018
25
International Survey, 2019)14. According to Colliers International Survey, in the core
submarkets of 19 major US markets, flexible workspace occupied over 2,5 million square
meters of office space as of mid-2018, which represents only 1.6% of its office stock.
Might look like surprisingly, the recent growth rates for both the largest and smaller markets
were virtually identical, i.e. the 19 major markets surveyed presented the inventory growth
between 2016 and mid-2018 of about 48%. Almost 40% of that space is in Manhattan alone,
accounting for circa 1 million square meters, representing the greatest amount of flexible
workspace with the highest share of office space (2,1%) in comparison to the other 10 top
markets (1,4%) (Colliers International Survey, 2019). Moreover, the data shows that while the
share of flexible workspace in office inventory has growth approximately 30% for the 19
markets surveyed in the period concerned, only in Manhattan the growth reached over 50%,
showing the dynamic capacity of the city in attracting this kind of product. Furthermore, in the
US the flexible workspace share of recent leasing has been far greater, equivalent to almost
one-third of the office inventory added between 2016 and 2018 (Colliers International Survey,
2019).
According to a research done by Small Business Labs, in the United States (US) the average
annual growth in the number of coworking spaces is forecasted to be 8% from 2019 to 2022,
at the same period, the number of coworking members is forecasted to growth about 14%
(Small Business Labs, 2018)15. While, looking globally, average annual growth in the number
of coworking spaces for the period concerned is forecasted at 15% and number of members is
14 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL. 15 Small Business Labs. (2018). U.S. Coworking Forecast: 2018 to 2022. [online]
26
expected to reach more than 5,1 million in 2022, with an annual growth of 22% (Small Business
Labs, 2017)16
Figure 10: Number US Coworking Spaces and Members 2015 - 2022 (Source: Small Business Labs 2018, Author)
In the United States, an independent guide for coworking space owners – Coworking Resources
– has listed the largest flexible workspace providers. As expected, the main ones are IWG
(mainly represented by Regus and Spaces) and WeWork. Moreover, there are two other
operators that have notable market share: Knotel, with over 230,000 square meters in over 120
locations; and Impact Hub, with 92 locations, with 16,000 members in 81 cities worldwide,
operating as franchise (Coworkingresources.org., 2019).17
A research conducted by Colliers in the United States (US) – 19 leading office markets – has
identified more than 140 different flexible workspace operators, accounting for more than 2,5
16 Small Business Labs. (2017). Global Coworking Forecast: 30,000 Spaces and 5.1 Million Members by 2022. [online] 17 Coworkingresources.org. (2019). The Largest Coworking Space Companies in 2019. [online]
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
2015 2016 2017 2018 2019 2020 2021 2022
Num
ber of Mem
bersNum
ber o
f Spa
ces
US Flexible Workspace Highlights
Number US Flexible Workspace Spaces Number of US Flexible Workspace Members
27
million square meters of stock and over 900 locations (Colliers International Survey, 2019)18.
Even if the quantity of operators is high, the market share is highly concentrated in the hands
of the leading players (Cushman & Wakefield Research, 2018).
Operator Total area leased
(sqm) Number of
Sites Average area per site
(sqm) WeWork 1.129.877 154 7.300
Regus 437.105 224 2.000 Knotel 232.256 120 1.900 Spaces 77.573 29 2.700
Convene 49.981 14 3.600 Industrious 48.774 22 2.200
Level Office 47.659 8 6.000 MakeOffices 39.762 12 3.300
Premier Business Centers 27.035 19 1.400 Jay Suites 24.155 8 3.000
Other Operators 483.370 301 1.600 Total 2.597.547 911 2.900
Figure 11: U.S. Flexible workspace operators in 19 leading office markets (Source: Colliers US 2019, Author)
In terms of total area of flexible workspace leased, the first two in the rank – WeWork and
Regus – together represent approximately 60%, and it’s interesting to note that WeWork alone
accounts for more than 43%, i.e. almost three times more square meters leased than the second
ranked Regus, in addition the third ranked one – Knotel – has a leased area that is half of Regus,
i.e. six times less in comparison to the leader WeWork. From the research it’s also possible to
observe that the bigger players tend to have larger facilities (Colliers International Survey,
2019): the weighted average space per each location for the top 10 operators (those included in
the table above) is approximately 3,500 sqm, while for the rest of the operators is a little bit
over than the half - circa 1,600 sqm.
18 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
28
Figure 12: U.S. Market share for flexible workspace operators in 19 leading office markets (Source: Colliers US 2019, Author)
Regarding the number of locations, the three flexible workspace operators best ranked – again
Regus, WeWork and Knotel – represent together circa 55% of the market share. The leader this
time is IWG – only considering Regus – with approximately 25% of market share – 28%
considering also Spaces. Anyhow, its space per location is much lower than WeWork –
respectively, 2,000 against 7,300 sqm – which reflects Regus tendency to have smaller average
size units (Colliers International Survey, 2019).
43%
17%
40%
Market share - leased area
WeWork Regus Other
17%
25%59%
Market share - n° location
WeWork Regus Other
29
2.3. FLEXIBLE WORKSPACE OPERATORS
The research of the main flexible workspace operators shows that there are a high number of
active players in the market. Anyhow, reviewing the bibliography and market researches it can
be realized that not all the operators are acting actively across boundaries, in fact many of them
serve local markets, sticking to a few big cities or national borders, outside of major global
economic centers. In the other hand, there are two major operators that dominate flexible
workspace activity around the most dynamic markets are WeWork and International
Workplace Group (IWG) – which includes both Regus and Spaces. The goal of this chapter is
to give a deep description of the main operators above mentioned in terms of funding history,
company numbers, its track records, business model and key features highlighting why they
are the current outstanding players.
2.3.1. WEWORK
WeWork was founded as a start-up in 2010 in New York City by Adam Neumann and Miguel
Mckelvey with the slogan: “Community is our catalyst” (WeWork, 2019)19. Even if relatively
new, the accelerated growth of flexible workspace across the world the past years has been
considered a consequence of WeWork emergence as a large-scale provider (Cushman &
Wakefield Research, 2018)20
Today, it is present in over 696 locations (open and coming soon), spread across 120 cities in
38 countries (WeWork, 2019). The company is the world’s seventh largest startup and currently
has a valuation larger than any office Real Estate Investment Trust (REIT) and a chained annual
growth rate of 90+% since its founding in 2010 (MSREI Strategy, 2018)21. It’s reported to be
19 WeWork. (2019). WeWork | Office Space and Workspace Solutions. [online] Available at: https://www.wework.com/. 20 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research. 21Coworking, Friend or Foe?. (2018). Morgan Stanley - Real Assets Research & Investing Team (MSREI Strategy).
30
valued as high as $40 billion – more than 10 times the current valuation of his competitor
Regus, $3,5 billion (The Wall Street Journal, 2018)22.
Now, it’s the largest single tenant in Manhattan, recently displacing J.P. Morgan, and the
largest private sector occupier in London with a total portfolio of over 270,000 sqm (Colliers
International Survey, 2019)23. Moreover, it has been the headline-leader in the European
market, since they have absorbed up to around 600,000 sqm of office space across the continent
in little over four years (Colliers International Survey, 2019)24.
Figure 13: WeWork lettings as a proportion of total take up in Manhattan and London 2010 - 2017 (Source: Cushman &
Wakefield Research 2018, Author)
These accelerated growth might be one of the reasons why flexible workspace increased a lot
across the world in the past years, as it can see below, In London, for example, since 2016
WeWork is the leading take up operator, while in Manhattan, in 2015 and 2016, the company
accounted for over 90% of space let to flexible workplace operators. Another outstanding fact
22 Brown, E. (2018). WeWork in Talks With SoftBank to Double Valuation to as Much as $40 Billion. [online] WSJ 23 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL. 24 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
30%22%
31% 30%
74%
91% 92%
49%
0% 0% 0% 0%9%
45%50%
59%
0%
25%
50%
75%
100%
2010 2011 2012 2013 2014 2015 2016 2017
Shar
e of
tota
l fle
xibl
e ta
keup
WeWork Takeup Share in Manhattan and London 2010 - 2017
Manhattan
London
31
is that in Central London, taking out WeWork “from the equation” of growth rate, the
percentage terms in 2007 – 2012 has been very similar to the one in 2012 - 2017 (Cushman &
Wakefield, 2018).25
It’s interesting to note that WeWork has been ranked as the second biggest corporate foreign
direct investor globally from September 2017 to 2018, knocking Amazon back into third place
(fDi Markets, 2018)26. According to data from greenfield investment monitor fDi Markets,
WeWork carried out 188 projects in the review period, impressive 420% more than the same
period in 2017, the biggest part of those projects (52%) took place in Asia-Pacific, followed
by western Europe (45 projects) and Latin America and the Caribbean (35) (fDi Markets,
2018). Through WeWork Labs (mentorship and programming branch of WeWork) they are
supporting a global network of startup ecosystems, playing host to 1,000 startups in 49 location
in 32 cities across 15 countries, in which “entrepreneurs have become small businesses, and
then big enterprises”, additionally 49% of enterprise WeWork members say that the company
helped them enter new markets (WeWork, 2019). The company started out taking 10 or 15-
year leases, redesigning the interiors, and renting individual desks or small offices to startups,
but in recent years, WeWork has expanded to much larger customers: more than 30 percent of
its members now work at companies with 1,000 or more employees (Bloomberg, 2018)27.
Some of them are companies like Microsoft, Facebook, BlackRock, Adidas, Citi and Salesforce
(WeWork, 2019), they represent around a quarter of WeWork’s revenue (The Economist,
2018)28.
The company promotes itself as coworking, but its business model can be considered as hybrid,
once they offer a wide range of real estate solutions to their clients. It has been extending their
25 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 26 Intelligence, f. (2018). fDi's Investors of the Year 2018: IWG takes Amazon's crown. [online] 27 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back - Bloomberg 28 The Economist. (2018). Big corporates’ quest to be hip is helping WeWork. [online]
32
brand, focusing on three business units: WeWork, the co-working unit; WeLive, its residential
arm; and WeGrow, which includes an elementary school and coding academy (CB Insights,
2019)29. According to their business model reported in their website, those solutions are based
on the following key characteristics: no upfront costs, i.e. the tenant has to invest zero capital
in office spaces that are tailored to their needs; greater flexibility, i.e. company can keep agile
as it grow with just a two-year minimum on member agreements, with possibility to expand
when business changes; global network, i.e. the agreement enables to leverage on WeWork
international business community for partnership opportunities; and one point of contact, the
member shall reduce operational “headaches” with consolidate support for amenities
(WeWork, 2019).
When comes up to the amenities and services provided by WeWork, the list reported on their
internet channel are categorized in four categories: space, services, perks and “above and
beyond”. The access to some specific amenities and services depends on the membership
agreement taken by the potential tenant, while others are always included independently from
it (WeWork, 2019). At WeWork’s spaces, in particular, the common areas’ leather sofas, coffee
and beer bars, neon slogans, and mix of entrepreneurial and innovative tenants all offer the
opportunity to mix and connect with a vibrant broader community in spaces architects have
designed to function as a “third place” between home and work (MSREI Strategy, 2018).
Regarding the membership options, a potential tenant can select among many options that go
from more standards ones like single desks and private office to more tailored alternatives such
as global access, custom-fit offices and whole headquarters (WeWork, 2019). The main
characteristics of each membership option are listed below, the table has been developed using
29 WeWork's $47 Billion Dream - The lavishly funded startup that could disrupt commercial real estate - 2019. (2019). CB Insights.
33
the information found in the operator’s website, specifying the central characteristics of each
one, going from the less tailored alternative to the most one.
Hot desk
Access to a guaranteed desk (not fixed) in the
common area, with 2 credits a month towards
booking conference rooms and option to add mail
& package handling.
Dedicated desk
Permanent desk at an invidual selected location,
included a chair, trash can and filing cabinet, with
5 credits a month towards booking conference
rooms and mail & package handling included.
Private Office Enclosed spaces for teams of 1 to 100 members,
with access to WeWork’s shared meeting rooms,
lounges, and amenities, like microbrewed coffee
and printing services.
Global access Decentralized office/desk with access to all
WeWork locations around the world under
instantly booking, amenities included under
customized agreement.
Office Suites Selection of an office layout for teams of 20 to 250
members, with possibility of customizing details,
including private reception, conference rooms,
executive offices, phone booths, and pantries, enjoy
exclusive access for a cohesive employee
experience.
Headquarters Set up of a custom buildout private location
exclusively branded and staffed by the tenant’s
company, from a full floor to an entire building,
WeWork handle everything from front-desk
service to fresh fruit water, utilities and security to
employee events. Figure 14: WeWork membership alternatives (Source: Author & WeWork, 2019)
+
TA
ILO
RED
-
34
The last consideration of WeWork that must be highlighted regards its portfolio impact. Its
large-scale amount of office around the world proves to be their biggest advantage over other
competitors looking to expand, once it gives them flexibility to accommodate a huge amount
and wide range of tenants within their portfolio, across and expanding geography (Cushman &
Wakefield Research, 2018).
In addition, the company, which acted as an operator who leases space or sometimes entire
buildings, have increasingly stepping on the turf of landlord and real estate brokers through
deals such as purchasing Manhattan’s Lord & Taylor building with private equity firm Rhone
Group, now some rumors in the market say that the company is raising a separate real estate
investment fund, called AKR, for properties acquisitions (Bloomberg, 2018). Those facts are
pushing back the industry, for example, it has been seen big real estate names like Blackstone
Group LP and Tishman Speyer venturing into flexible space offerings of their own
(Bloomberg, 2018), but this issue will have further details in this paper.
35
2.3.2. INTERNATIONAL WORKPLACE GROUP
Formerly named as Regus, the company has been founded in 1989 by Mark Dixon, an English
entrepreneur, in Brussels (IWG, 2019)30. Regus, now International Workplace Group (IWG),
is considered the oldest flexible space operating company and remains the largest providers of
flexible office space in terms of square meters (Cushman & Wakefield Research, 2018)31.
Regus, IWG main’s arm, has pursued a slightly differentiated space-as-a-service business
model ahead of its October 2000 IPO, offering corporate clients global flexibility and turnkey
office solutions (MSREI Strategy, 2018)32. It’s interesting because it has survived two
recessions, although a bankruptcy restructuring was required after the 2001 recession, when its
revenues dried up while rent payments were still due (Cushman & Wakefield Research, 2018).
It has showed the company’s maturity, differently from WeWork that still must pass through a
downturn to prove its capacity of being resilient (MSREI Strategy, 2018).
IWG was created in 2016 as the holding group for different flexible workspace companies –
Regus, Spaces, HQ, Signature and No18 – and is listed on the London Stock Exchange (IWG,
2019). As today, the company operates through almost 3,300 locations in over 1,000 towns and
cities across more than 110 countries (IWG, 2019). Today, IWG has a market capitalization of
$2.9 billion with almost 5 million square meters leased worldwide (MSREI Strategy, 2018).
As it’s a listed company (differently from WeWork) it has been possible to access its financial
performance, the revenue registered in 2018 has been of £2,535.4 million, an increase of 9,7%
with respect to 2017 (IWG Annual Report, 2019)33. It’s interesting to see that each location of
30] Iwgplc.com. (2019). What we do. [online] 31 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research. 32 Coworking, Friend or Foe?. (2018). Morgan Stanley - Real Assets Research & Investing Team (MSREI Strategy). 33 IWG - Annual report and accounts 2018. (2019). IWG.
36
Regus produces in average an annual revenue of circa £760,000, and it has been constant the
last three years, showing that revenue growth is mainly due opening new locations.
Figure 15: IWG Performance Highlights 2016 - 2018 (Source: IWG Annual Report 2019, Author)
In the last chapter, it has been said that WeWork was the second biggest corporate foreign
direct investors globally from September 2017 to 2018 (fDi Markets, 2018)34, the only
company that knocked down WeWork in this period was IWG. According to data from
greenfield investment monitor fDi Markets, IWG developed 221 projects in the reviewed
period, an increase of 200% on the previous 12-month period.
The market destination with highest investment has been Western Europe, a total of 92
investments. IWG has been the first investor also in emerging Europe and Africa, almost two-
thirds of these investments were made through the company’s subsidiary, Spaces - a high-end
co-working firm founded in Amsterdam that IWG acquired in 2015 (fDi Markets, 2018);
(Colliers EU, 2019)35.
34Intelligence, f. (2018). fDi's Investors of the Year 2018: IWG takes Amazon's crown. [online] 35 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
2700
2800
2900
3000
3100
3200
3300
3400
2016 2017 2018205021002150220022502300235024002450250025502600
Num
ebr o
f loc
atio
ns
Year
Rev
enue
(£m
)
IWG Performance Highlights 2016 - 2018
Number of locations Group revenue development (£m)
37
Regarding the company’s business model, it can be considered hybrid as WeWork, due to wide
range of flexible workspace solutions that IWG offers to its clients. Since there is a huge
number of brands, it has been decided to detail the products offered of only the main one:
Regus.
While for WeWork it has been developed a table considering the level of customization for the
solutions, for Regus it wasn’t so clear. Anyhow, a pattern that has been identified in their
products is the physical dependence, i.e. whilst some products offered by Regus foresee a fixed
and customized flexible workplace for their clients, like the office space, in the same time
there’re products like virtual offices that the user can establish a presence in any market with
the possibility to easy relocate the contract to any of Regus addresses at no additional cost
(Regus, 2019)36.
36 Regus.com. (2019). Regus US | Office Space, Meeting Rooms & Virtual Offices. [online]
38
Office space Customized and dedicated office workspace for
rent with possibility to set out increase-the-size
or temporary-office options.
Co-working Desk spot, both first served and dedicated basis,
with access to all Regus centers in a shared
environment.
Meeting room Professional space to meet presentations,
interviews, conferences and board meetings.
Workplace
recovery
Keeping business going in the face of disaster –
access to a private office, laptop and phone line
assures business continuity within 24 hours.
Business lounge Drop-in workspaces in key business locations –
city centers, airports, train stations, service
stations and business parks.
Membership All-inclusive pricing model for business
lounge, co-working space or office, included
access to all the benefits of a business center.
Virtual office Includes call answering and mail handling with
a professional business address. Figure 16: Flexible workspace solutions – Regus (Source: Regus, Author)
Even though the wide range of solutions offered by the company, the traditional suite office
space is the most traditional type of space – with separate offices connected to a shared
communal amenity area – that Regus is famous about and has long been the leader since a long
time (Colliers US, 2019)37.
Concentrating on IWG, one of the main reasons that confirms its outstanding performance is
the provision to customers a choice of workspace solutions through different brands,
recognizing that there is no ‘one-size fits all’ solution and hence offering different formats and
workspaces to accommodate the varied needs of their clients (IWG Annual Report, 2019).
37U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
+
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L IN
DEP
END
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E
-
39
As a result of putting big efforts on this multi-brand core business, last year IWG has launched
through Regus a franchise model putting the company as the first serviced office provider to
enter the United Kingdom (UK) franchise market. A multi-million-pound agreement, made in
partnership with franchise experts ACCA Office Ltd, which will see the development of 10
new top-of-the-range Regus centers in the UK over the next four years (Property Funds World,
2018)38 . As said on Regus franchise platform the model is viewed as a key to its growth
strategy, enabling the company to enter new markets as well as increasing the presence in those
that it already operates (Regus Franchise UK, 2019)39.
Some of the main characteristics required by Regus to become their partner as franchise are: to
open at least 5 Regus locations over 2-3 years; standalone or multi-let buildings, from 700 to
1000 sqm; creation of 120-200 workstation; locate in the town center, business park or roadside
locations (Regus Franchise UK, 2019). One might think that the requirements are quite
challenging, but as the company is relying its growth strategy on other players, the need for
mitigating risks related to the brand use is considered essential.
The “occupier or landlord?” trend identified for WeWork can be also applied for IWG. In 2018,
the company has received take-over proposals from at least three big private equity groups:
Lone Star, TDR Capital and Starwood. (Savills, 2018)40, the topic will be further discussed in
this paper.
38 Property Funds World. (2018). Regus enters UK franchise. [online] 39 Regus.co.uk. (2019). Franchise information. [online] 40 Workspace as a Service (WaaS) - Trend or necessity?. (2018). Savills.
40
2.4. FLEXIBLE WORKSPACE USERS
All the sectors are using flexible workspace nowadays, anyhow, it’s possible to observe a major
presence of some specific sectors like technology and professional service firms. A research,
conducted by Colliers International Survey41, showed that in markets with higher density of
technologic firms (represented by more than 3% of the jobs in this sector), the flexible
workspace stock is circa 2% of all office inventory. Moreover, the result has been similar, but
less significant, for markets with high proportion of Professional Services (1,8% of office
stock) and High Wages (1,9% of office stock). While, for other markets, the flexible workspace
represents only 1,1% of all office stock, approximately 80 bps less than the other results.
Q2 2018
Total Flexible Workspace Share 1,6%
Tech Markets* 2,0%
Professional Services Markets** 1,8%
Other Markets*** 1,1%
High Wage Markets 1,9%
* Tech market = 3%+ of jobs in information services
** Professional services market = 8%+ of jobs in professional or business services
*** High Wage Market = Average income from employment 20%+ Above U.S. average Figure 17: US Flexible workspace share of total office inventory in 19 leading markets (Source: Colliers International
Survey, 2019)
Another figure that proves its phenomena it’s the membership of WeWork divided by industry,
according to Morgan Stanley Real Estate Investment research42, in 2017 the main members
renting flexible space through WeWork were Information and Communications Technology
(ICT) – accounting for almost 40% if considering the following sectors together: “Software”,
41 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL. 42 Coworking, Friend or Foe?. (2018). Morgan Stanley - Real Assets Research & Investing Team (MSREI Strategy).
41
“Advertising, Public Relations”, “Media, Arts, Rec.” and “Tech Services” – followed by
professional services with 21% – as finance and legal (MSREI Strategy, 2018).
Figure 18: ICT and Professional Services dominants on WeWork Membership by Industry - 2017 (Source: MSREI Strategy
2018)
Many individuals and companies are searching to keep flexibility to be ready to respond once
the market changes, this approach can be observed in the high number of firms that are basing
their business in project-teams, which is always able to stop and restart when required, in terms
of their size and staff/skills composition, in this case the main suited solution has been to use
flexible workspace options (Colliers International, 2019)43. Moreover, the reduction of upfront
costs is another significant motivation to attract members, a central London occupier once said,
“It is cheaper for us to take space in flexible workspace than renegotiate to extend our lease for
another 6 months” (Cushman & Wakefield Research, 2018)44. Hence, one might expect that
43 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL. 44 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
21%
15%
11%7%
6%
5%
4%
4%
4%
23%
WeWork Membership by Industry - 2017
Finance, Legal, Prof Services
Software
Advertising, Public Relations
Media, Arts, Rec.
Tech Services
Education
Gov't & Healthcare
Science & Eng.
Consumer, Retail
Other
42
the main users of flexible workspace are, through coworking, freelancers and independent
professionals, and through serviced offices, start-ups and small and medium-sized enterprises
(SMEs).
A good indicator to understand the typical users of flexible workspace is to analyse the take-
up deals’ size. In Europe, through the data tracked by Savills45, the average deal size was 3,600
square meters, in which 42% of the deals were between 0 and 1,999 square meters, which
clearly represent the stronger presence of figures such as start-ups and SMEs.
Figure 19: Smaller offices still dominate the flexible workspace sector (Source: Savills, 2018)
Furthermore, it has been tracked 12 deals, out of a total of 224, composed by over 10,000
square meters, which were in the most part done by WeWork. The trends show that flexible
workspace operators are actively attracting to their centers also larger occupiers, like
consolidated firms, which tends to be the next step to driver the sector’s growth (Cushman &
Wakefield Research, 2018)46. Even if the sector is mainly occupied by freelancers, the numbers
have been decreased, in 2012 they represented 55% of all memberships, but in 2017 it came
45 Workspace as a Service (WaaS) - Trend or necessity?. (2018). Savills. 46 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research.
42%
24%
17%
9%
8%
Flexible Workspace Take-up by Size - Europe (in sqm)
0 - 1,9999
2,000 - 3,9999
4,000 - 5,9999
6,000 - 7,9999
8,000 - 10,0000
43
down to only 41%, in the other hand employees and employers together increased 1200 bps,
achieving 52% of all memberships (Deskmag, 2017)47.
Figure 20: Professional Status of Coworking Members (Source: Deskmag, 2017)
According to CB Insights48, the percentage of WeWork members who belong to a company
with more than 100 employees increased 400% from 2010 to 2017, representing today 12% of
WeWork’s membership, while freelancer share of membership decreased from 68% to 39%.
Figure 21: WeWork Membership by Professional Status (Source: CB Insights Research 2017, Author)
47 Deskmag's Coworking Statistics. (2017). MEMBER DEMOGRAPHICS. [online] 48 CB Insights Research. (2017). The WeWork Report. [online]
55% 50% 42% 41%
13% 16%14% 16%
27% 25% 36% 36%
6% 10% 8% 7%
0%
20%
40%
60%
80%
100%
2012 2014 2015 2017
Professional Status of Coworking Members
Freelancers Employers Employees Other
68%39%
29%49%
3% 12%
0%20%40%60%80%
100%
2010 2017
WeWork Membership by Professional Status
Employee at a large firm with more than 100 employees
Employee at a small firm with fewer than 100 employees
Freelancer / Independent Worker
44
Moreover, in 2017, the research shows that 50% of the members worked in companies with
less than 100 employees. Traditional firms, including consumer businesses and tech titans
from IBM to Spotify, have also started to use flexible workspace, managing their real estate
strategy in a smarter way (The Economist, 2018)49.
49 The Economist. (2018). Big corporates’ quest to be hip is helping WeWork. [online]
45
3. FLEXIBLE WORKSPACE SWOT ANALYSIS
The flexible workspace business model is based on the interaction between providers and
landlords and providers and tenants, which gives rise to complex characteristics. This chapter
includes a glossary of main features and complexities regarding this business model based on
the concerned relationships. The business model is mainly represented by weak lease covenants
and high management complexity due to the wide range of amenities and services offered.
Hence, reviewing the literature, the goal of this chapter is, through using a SWOT
methodology, give the basic knowledge of flexible workspace business model because it’s
possible to conclude that overseers of flexible workspace often need to be familiar with its
issues to understand how to respond to it.
3.1. SWOT ANALYSIS MOTIVATIONS
“The attempt to improve corporate strategy development process has fostered a range of
approaches which have enjoyed different levels of support and popularity over time, one of the
most popular is the SWOT analysis” (Terry Hill & Roy Westbrook, 1997)50. The SWOT
analysis is a proposed qualitative and analytical tool which focus on both internal and external
features of the organization.
For the purposes of this thesis a SWOT analysis has been developed in order to better assess
the overall impact on the flexible workspace in corporate real estate. The main motivation of
adopting it is that analyzing from the flexible workspace business model point of view which
are the strengths, weaknesses, opportunities and threats of its business model is an effective
way to provide a panorama of the basic knowledge that professional investors need to be aware
when developing their strategies to deal with this sector.
50 SWOT analysis: It's time for a product recall. (1997). Terry Hill & Roy Westbrook.
46
So, basically the thesis focuses on the business model of flexible workspace operators, because
professional investors can better understand:
1. Strengths: which internal factors of the flexible workspace, in terms of product and
operator, can drives its growth through attracting more demand and keep supply
competitive?
2. Weaknesses: which internal factors of the flexible workspace, in terms of product and
operator, can be improved and pushes demand to still lease traditional office?
3. Opportunities: which external conditions and trends of the flexible workspace, in terms
of landlords, users and overall market, may positively impact it?
4. Threats: which external conditions and trends of the flexible workspace sector, in terms
landlords, users and overall market, may negatively impact it?
47
3.2. OVERVIEW ON THE FLEXIBLE WORKSPACE SWOT ANALYSIS
The swot analysis developed is represented below, the following chapters will detail each
feature.
INT
ER
NA
L
STRENGTHS
Differential offering
• Business flexibility
• Services and amenities
• Upfront costs reduction
• Creative environment
• Community attraction
Flexible supply chain
• Serviced office
• Coworking
• Hybrid and alternative models
WEAKNESSES
Product vulnerabilities
• High occupancy harm effects
• Confidentiality and security
• Company image in own space
Operator fragilities
• Low Credit Rating
• Profitability issues
EX
TE
RN
AL
OPPORTUNITIES
Business environment
• Traditional real estate offering
• Digital infrastructure
• Sharing economy
Catalyst factors
• Gig economy
• Startups and SMEs boost
• Increase big companies’ adoption
• New accounting regulation
Landlords entering the sector
• Flexible approach strategy
• Buy strategy
• Join venture strategy
• Build strategy
THREATS
Economic downturn
• Impacts on business
• Vacancy rate risks
Market saturation
• Increase in competition
• Supply scarcity
Investors uncertainty
• Capital implications
• Corporate real estate control
Figure 22: Flexible workspace SWOT analysis (Source: Author)
48
4. FLEXIBLE WORKSPACE STRENGHTS
A completed list of strengths made up through reviewing the bibliography concerned has been
described below. As it can be seen in the SWOT figure in the beginning of the chapter, it has
been divided into two subcategories in order to better classify them:
1. “Differential offering”: describes the strengths related to the “product” offered by the
operators with respect to their clients i.e. which characteristics of flexible workspace makes
it competitive through pushing potential members to adopt it;
2. “Wide range of income stream”: describes the inherently strengths of the operating the
business through offering a vast number of flexible workspace typologies i.e. how the
diversification of income and the capacity of attending demand new requirements enables
them to be competitive and grow.
4.1. DIFFERENTIAL OFFERING
Many companies and entrepreneurs are adopting flexible workspace, either expanding their
use, for a wide range of reasons from tactical and operational to creative and strategic, both
quantitative and qualitative. In general, for tenants, the main factors in adopting it gravitates
around flexibility and immediate availability, amenities, technology and community (MSREI
Strategy, 2018)51.
A survey conducted by CBRE52 gives some hints of the main reasons for occupiers using
flexible workspace, as it can be seen below. Even if the need to reduce costs and flexibility
remain the main reasons, there’s been a strong increase in the community and innovative
environment motivations for new members adopting flexible workspace.
51 Coworking, Friend or Foe?. (2018). Morgan Stanley - Real Assets Research & Investing Team (MSREI Strategy). 52 EMEA Occupier Survey 2018 - Optimizing User Experience: The Personalized Workplace. (2018). CBRE Research.
49
Figure 23: Reason for Using Flexible Workspace Survey (CBRE Research 2018, Author)
This chapter focus on the main features of flexible workspace product that attracts and
motivates potential occupiers to adopt it in their real estate strategy. To do so, the chapter has
been divided in the following subchapter: business flexibility, services and amenities, upfront
costs reduction, creative environment and community attraction.
4.1.1. BUSINESS FLEXIBILITY
“Flexible space solutions are lease agreements that can be procured quickly, with flexible terms
and little to no capital improvement required” (CBRE Research, 2018)53. As can be expected,
business flexibility is one of the main strengths of the present business model.
Once businesses need to provide flexibility to an already establish workforce to try a new
location, to establish a branch in a new market, accommodate project teams with a fixed and
relatively short lifespan flexible workspace might be a key solution (Colliers International
Survey, 2019) 54.
53 The Property Value Implications of Flexible Space U.S. (2019). CBRE Research. 54 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
0% 10% 20% 30% 40% 50% 60%
Reduce costs
Need a short term space solution
Increase flexibility in leasing terms
Promote innovation
Attract and retain talent
% of Occupiers
Reason for Using Flexible Workspace Survey
2018
2017
50
Basically, it offers the option to rapidly expand or shrink portfolios on the margins, in addition
its “swing space” feature can also be adopted to manage office space if the firm requires to
access fast hiring or tamp down headcount quickly (Cushman & Wakefield Research, 2018)55.
Options include short term (month to month), medium term (6 to 18 months) and longer terms
(more than three years) (Colliers International Survey, 2019). Moreover, flexible lease
agreements enable tenants to grow or to shrink when needed, which isn’t usually possible when
leasing real estate through institutional landlords, while can have a great impact on flexible
workspace operator’s cash flow (MSREI Strategy, 2018).
Another creative solution that business flexibility can enable takes place when corporate
occupiers partner with flexible workspace operators is “to manage and monetize unused space”,
this can be done transforming them in flexible workspace, which can be used by the own
company or subleased to a single tenant in a traditional sublease structure (Cushman &
Wakefield Research, 2018).
4.1.2. SERVICES AND AMENITIES
Flexible workspace operators are targeting to “integrate vertically with other businesses and
services in order to provide a wider range of benefits to their users”. One of the greatest
competitiveness of the business is the shift of “how we use, occupy and operate space”, giving
rise to the “space as a service” that those players promote, in which real estate is less product-
focused, and “more provide access to features and services on demand” (Cushman &
Wakefield Research, 2018).
The business lies on the internet to straightforward connect with their potential new members.
The search for any kind of product (from a hot desk to a meeting room) is done through their
55 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research.
51
website, in which options can be easily compared, and even better is that the space can
“typically be arranged at short notice” (JLL Research 2017). This represent a big advantage for
flexible workspace because doesn’t matter if you are a company or a single person to reach
their products it’s just matter of minutes, there’s no need to struggle with brokers or lease
agents, so it’s perceived as faster and cheaper for potential new members.
Another reason that explains flexible workspace operator’s impressive performance in the
market is the unique selling points that they offer further than the building standard amenities:
beers-on-tap, coffee, bike storage, WiFi, printing, onsite staff, phone booths, many pet friendly
and community activities/event (Cushman & Wakefield Research, 2018).
Anything from “lunch and learns”, networking events to meditation sessions are on offer in
their spaces, this kind of service improves the promotion of the community culture both within
the building and within the wider network.
Usually there’s the “Member App”, it has been created to assist the collaborative and
community-drive values of the company, offering it they provide their membership with access
to their in-house app, which can be used to book meeting rooms, RSPV to events or access to
social feed.
One of the key selling points is business services, basically many of them takes advantage of
leveraging power and partner with Human Resources (HR) and healthcare providers on behalf
of their members, which from one side meets the requirements of traditional corporates and in
the other hand helps young companies to focus on their own core business (Cushman &
Wakefield Research, 2018).
52
Furthermore, they offer broad services like virtual offices, including a professional mailing
address, phone answering, office equipment, and drop-in meeting and office space (HOK,
2016).
As an example, a list of services and amenities provided by WeWork has been reported here to
better understand the wide range that those operators are providing to their clients, which
enhances their capacity of attracting new members.
Space Services Perks “Above and beyond”
• 24/7 building
access
• Common areas
and lounges
• High-speed Wi-
Fi
• Conference
rooms
• Phone booths
• Kitchenettes
• Front-desk and
guest reception
• Business-class
printing
• Mail and
package
handling
• Cleaning
services
• Building
operations
• Streamlined
billing process
• Microbrewed
coffee and herbal
tea
• Fruit-infused
water
• Craft on draft
• Events and
conferences
• Unique spaces
(e.g., rooftop
lounges)
• Desirable
neighborhoods
• On-site support
from a Community
Manager
• Flexible
membership
agreements
• Access to book
rooms at other
locations
• Unlimited guests
• Connect with
members through
the Member
Network
• Option to add
space as you grow Figure 24: Amenities & Services – WeWork (Source: WeWork, 2019)
4.1.3. UPFRONT COSTS REDUCTION
Even if flexibility costs – it has a higher cost per square meters than traditional real estate – in
the long run it might help reduce overall commercial real estate costs (Cushman & Wakefield
Research, 2018).
53
It provides reduction of capital expenditures, once the end-user ultimately pays the amortized
costs of the fit-out, they won’t pay for all of it up front nor for it all at once, this financial
feature offers an additional layer of flexibility to the adopter and mitigate its risks (Colliers
International Survey, 2019).
Moreover, in opposite to traditional leases, within flexible workspace there’s not exactly need
to struggle with forecasting space, which usually has as consequence the preleasing of buffer
stock to fit future expansion, generating in the short run underutilized space which is not cost
efficient. Then, as flexible workspace provided right-sized portfolios, it might also represent
cost savings for its adopters (Cushman & Wakefield Research, 2018).
An interesting analysis made by JLL56 in Hamburg comparing flexible workspace and
traditional office can be used to explain better all this feature, independently of the city. For
companies in a new market when taking the decision to rent a serviced office space or
traditional office, the result shall be based on a cost and qualitative factor. The assumptions for
this analysis are:
- The company is searching for 10 workspaces in the Hamburg City Center for a term of
three years;
- The company is newly formed and doesn’t have an office in Hamburg, hence no furniture
or office equipment is available;
- No rental guarantees are considered.
- It’s important to emphasize that the model comparison there’s no intention to be exhaustive
or suitable for every case, but it’s a representative model on the decision-making with
reasonable assumptions that might represent the reality.
56 Coworking - Analysis of flexible workspace, for example in Hamburg. (2017). JLL Research.
54
Traditional office Serviced office Pre-contract costs Legal advice € 5.000 - Tenant fit-out (furniture) € 25.000 - Additional tenant fit-out for IT cabling € 10.500 - IT and telecommunications equipment € 15.000 € 12.000 Incentives -€ 3.240 - Refurbishment (regular and at termination) € 7.500 - Set-up fee - € 2.000 Subtotal € 59.760 € 14.000 Monthly costs Net Rent € 3.000 - Service charges € 525 - Membership fee - € 4.800 Subtotal € 3.525 € 4.800 Total for 3 years € 186.660 € 186.800
Figure 25: Case study: Traditional vs Serviced Office – Costs assumptions (Source: JLL Research 2017, Author)
Looking at the results, it’s possible to conclude that the traditional office agreement generally
means high upfront costs during the setup, mainly due to costs that are not present in the flexible
workspace model, for example legal advice, initial costs for equipment, fit-out and more
complex costs that may come out on case by case, in the example above, the upfront costs were
+327% higher in the traditional office than in the flexible model.
In some cases, this kind of costs are even financed – not be considered in this model – which
can make costs higher in the long run, moreover a great portion might be “lost” at the lease
termination, for example, the tenant’s fit-out. Otherwise, the monthly cost for the membership
is higher than for the traditional office, as expected, because flexibility comes at a cost, in this
case study the difference accounts for +36% higher in the flexible model. In conclusion, for
this example, after three years, both models reach the same total costs of circa € 187,000.
55
Figure 26: Case study: Traditional vs Serviced Office - Costs analysis (Source: JLL Research 2017, Author)
So, when focusing only on the cost analysis, in the case study, one might select Serviced Office
model because it takes three years to the model become more expensive than the traditional
one. On basis of the cost analysis, if the decision maker focuses on time factor, the decision
would be: adopt the flexible model if the contract term target is lower than 3 years; or adopt
the traditional way if the contract term target is higher than 3 years. For start-up or small and
medium-sized enterprise, the interest might be higher for alternatives with “efficient processes,
lack of up-front investment costs and level of flexibility”, but it might have a consequence in
the future, because the flexibility has its premium cost.
4.1.4. CREATIVE ENVIRONMENT
The creative environment provided by flexible workspace is attracting a huge number of new
members since, as concluded by well-established body of academic researches (Becker and
Sims of Cornell University) and commercial surveying (HOK, Gensler, and other) the diverse
environment cultivates innovation and productivity (Colliers International Survey, 2019)
€ 0
€ 50.000
€ 100.000
€ 150.000
€ 200.000
€ 250.000
€ 300.000
0 6 12 18 24 30 36 42 48
Tota
l Cos
t
Months
Case Study: Traditional vs Serviced Office - Costs Analysis
Traditional office
Serviced office
56
because it provides environments that connect members and provide access to leaders and
influencers (Cushman & Wakefield Research, 2018).
The new generation that expects to change job within “2-3 year timeframe” view companies
“offering well-designed/cool” offices as more desirable emplacements to work (Colliers
International Survey, 2019), but incredibly the flexible workspace is showing itself as an
alternative “that makes them want to stay”, because this “is a lifestyle location akin to a
member’s club for business with a carefully curated client base and events calendar to create
an environment for business opportunities to flourish” (Cushman & Wakefield Research,
2018).
For many companies, a strategic way to improve innovation and collaboration can be done
through relocating “specific teams or departments” to flexible workspace in order to “develop
a separate culture”, because it encourages employees to network with a wide range of
companies that “may be future partners or customers” (Cushman & Wakefield Research,
2018).
4.1.5. COMMUNITY ATTRACTION
The possibility to access innovative and start-up community is also a strong attraction feature
the flexible workspace, similar to the creative environment, firms want to be close to innovators
and start-ups, both to benefit from their ways of thinking and to potentially invest in them, as
incubators and accelerators usually utilize flexible workspace, hence firms will be willing to
use so (Colliers International Survey, 2019).
According to a survey conducted by PwC57 in 2015, “73% of organizational leaders are
concerned about the availability of skilled labor”. The generation that’s entering in the market
57 Annual global CEO survey. PwC. (2015).
57
feel are attracted to the “feel” of flexible workspace environment, so basing on “employee
experience in a highly competitive job market”, through offering workplace outside the
traditional “corporate” office and still in a desirable location, companies might choose it as a
strategy to attract and retain talents (Cushman & Wakefield Research, 2018).
In fact, flexible workspace help attract younger workers, according to JLL58, more than 75%
of flexible workspace locations are in urban and mixed-use submarkets that cater to today’s
millennial workforce. Colliers International Survey59 calls it as “talent wars”, that can be
considered the final important reason for firms targeting flexible workspace. Before, companies
were driven mainly “by location of senior executives and the rank and file workers followed”.
Now it seems to be different, since companies are in high competition to attract the best talents,
“they must be creative about their working space to draw them in, with amenities that appeal
to younger workers”, boosting the demand for flexible workspace.
58 Shared workspaces. JLL Research (2016). 59 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
58
4.2. FLEXIBLE SUPPLY CHAIN
Flexible workspace is a generic concept that covers an increasingly number of new products
that are offered in the market. Reviewing the main market researches and operators websites,
it’s possible to conclude that the main subgroups are serviced offices and co-working, which
are often used indiscriminately, however, the various business models which have emerged
over time and the current wave of innovative providers all have distinct features. In additions,
as flexible workspace is a “big umbrella” for those sub-products, also its business model is
becoming more and more hybrid and complex, where the main differences lay on the social
interaction, collaboration between workspace users, space dedication and so on.
Figure 27: Total Flexible Workspace Supply by Model - Top 20 European Flex Markets (Source: JLL Research, 2017)
In fact, its flexible supply chain enabled operators to create a wide range of flexible workspace
typologies and operate with economies of scale, meaning a great advantage when operating
because it amplifies the income stream sources through adapting its offering as demand
changes, which mitigating risks and improving the grow capacity. “Some of those services look
similar to what established real estate services firm provide, such as project management,
facilities management, leasing support, and PropTech solutions” (Cushman & Wakefield
Research, 2018).
21%
34%
45%
Total Flexible Workspace Supply by Model - Top 20 European Flex Markets 2017
Co-working
Hybrid
Servicedoffice
59
Figure 28: Wide range of flexible workspace means diversified income stream (Source: Deskmag 2018, Author)
As the chart above shows, the goal of this chapter is, through reviewing the available literature,
describe analytically the main typologies of flexible workspace, highlighting its main
differences in terms of features and showing market relevant information when possible, to
better understand how it can help operators to be competitive due to the vast range of income
stream sources produced by the wide range of alternative solutions that it offers, jointly with
its capacity of offering always new products. A summary of the main typologies of flexible
workspace has been described below.
8%4%
8%
10%
27%11%
33%
Wide Range of Flexible Workspace Means Diversified Income Stream
Other amenities
Virtual office services
Events
Meeting
Shared Office
Combined membership plans
Coworking
60
SERVICED OFFICE HYBRID MODEL CO-WORKING • Fully fitted furnished
space, in segregated conventional offices
• Allocated space
• The largest part of the space is allocated fully fitted out private offices and the remaining share (10-20%) for co-working space (not allocated)
• Typically, open plan-shared communal setting
• Shared space-not generally allocated
• Occupied on a license • Fixed price for the
license per desk/office for an "all inclusive" offer
• Occupied on a simple lease contract or membership contract
• Occupied on a club membership
• Price per workspace on a time basis (hourly, daily, etc.)
• Includes various amenities: reception services, internet access, refreshments, meeting rooms (some may be chargeable)
• Includes internet access, printer/copier, post, IT, cleaning refreshments, meeting rooms and a curated calendar of events (some may be chargeable)
• Includes internet access, refreshments, meeting rooms and a curated calendar of events /some may be chargeable)
Figure 29: Flexible workspace main typologies (Source: JLL Research, Cushman & Wakefield Research, Author)
4.2.1. SERVICED OFFICE
In terms of timeline for flexible workspace variations, first came serviced offices in the 1980s
through a host of providers offering private offices (typically cellular offices for one or more
workstations), meeting rooms, shared staff and amenities, through a flexible lease agreements,
short or longer terms (typically a minimum of one year, though some are shorter) and space for
five to 40 employees (HOK, 2016)60. In addition, other optional services and infrastructure are
available to book flexibly on various terms.
It’s also known as executive suites, and it’s the most traditional type of space with separate
offices connected to a shared communal amenity area, designed to bring professional
60 Coworking: A Corporate Real Estate Perspective. (2016). HOK.
DEDICATED - SHARED
61
atmosphere, mainly located in premium office buildings that tenants could not otherwise afford
(HOK, 2016), Regus has long been the leader in this format (Colliers International Survey,
2019)61.
Usually, this business centers have been highly suitable for temporary workspaces or for short-
term expansions of large companies. In general, the space is a fully fitted furnished in
segregated conventional offices, in which the occupation is usually allocated and made up on
a license, with one fixed charge for the duration agreed covering all operating costs (usually ln
a cost per desk basis). If from one side this model is more recognized to be focused on private
sphere and business environment, with high level of services and a more seriousness approach,
in the other side it is seen as too standardized fit-out and low representative status for client
meetings (JLL Research, 2018).
4.2.2. COWORKING
Notwithstanding the 30-year legacy of IWG/Regus’ executive suites model, the modern
conception of flexible workspace – coworking phenomena – only took hold less than a decade
ago with the launch of WeWork. With so little history, and so much of the recent growth, the
impact on the broader office market and its performance over the course of the business cycle
are still unknown (Colliers International Survey, 2019). Mainly after the Global Financial
Crisis, coworking has initially became famous because of the new wave of start-ups and
entrepreneurs looking for an affordable and tailored approach to the workplace, once this
concept of flexible workspace has as key feature: the provision of collaboration between the
tenants (JLL Research, 2018)62
61 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL. 62 Disruption or Distraction - Is flex space here for good, or just the latest real estate fashion? (2018). JLL Research (EMEA).
62
While offering a wide spectrum, this model is communal in nature, projected to have high
worker density and offer physical flexibility, in which desks and offices can be moved around.
The dominant provider here is WeWork, although it does provide other models based on client
preferences (Colliers International Survey, 2019). This features can be achieved at different
levels and ranges, from small talk to the exchange of ideas and short-term mutual support, all
representing a genuinely new approach through its workplace design and amenities – i.e. all
the necessary infrastructure for short and longer-term work projects, such as reception area,
conference rooms, lounge, post and secretarial services, and an eatery – there the cultural
collaboration, openness, knowledge sharing, innovation and the user experience are the
priorities. Anyhow, the latter is not obligatory, but is often a reason and the explicit added value
in the leasing of space in a co-working environment. According to JLL, in 2017 pure co-
working brands account for just 21% of total flex space in the Europe’s 20 largest flexible
office markets, however, the demand for this space is underlined by a 21% growth in co-
working space in the same year. In general, co-working offices are typically open plan-shared
communal setting, in which the occupation is shared and not allocated through a club
membership, priced per workspace on a time basis (i.e. hourly, daily, monthly and so on).
4.2.3. HYBRID AND ALTERNATIVE MODELS
Moreover, the term “co-working” is also used by operators in business centers when space is
laid out as both private offices and a special open space or community area for co-working in
its narrow sense, which comes to be known as a hybrid model, which caters not only to
freelancers, start-ups and SMEs, but also, increasingly, larger organizations. This model
combines e accumulates advantages elements of serviced offices and co-working space, as the
simple lease contract or membership, flexible contract and termination of fully fitted or
customized workspace/offices, reduced fixed costs and access to pay-as-you services of high
level of services palette (reception, post, IT, office cleaning, catering, etc.) and infrastructures
63
(conference, printer/copier, reception, eatery, etc.) and long business hours (24/7). Usually,
there’s an area of 10 to 20% of all space for coworking in an open-plan format, and the largest
part of the space is used as private offices in various sizes (JLL Research, 2017). The rationale
for targeting the latter is clear, it’s the key income component for the operator and a very
important factor for the retention of workspace users who wish to work in private offices whilst
its company expands, once larger companies has the potential in offering to operators more
resilient income streams and much larger and stable marketplace.
The actual market share of flexible workspace typologies might not be realistic in some years
ahead, serviced offices are becoming less appealing to today’s occupiers who are seeking
flexible space, and operators obviously are changing their business model in response to the
trend (JLL Research, 2017). According to Cushman and Wakefield, operators are turning to
enterprise solutions to provide an end-to-end service from sourcing the property to ultimately
operating the office, for example WeWork have launched a new initiative, aimed at companies
of any size, whether they want a single-person satellite office in a new location of 500-person
headquarters, theoretically offer an entire building to a single tenant and manage the custom
build-out of the space.
It’s even more interesting that not all operators follows the leasing model, some own the
property and manage it in a 360° way, offering to customers, that want their own space but
don’t want the inconvenience in managing it, a high range of tailored flexible solutions, solving
the disadvantages that persist in the existing products. It’s giving rise to a more complex
version of the hybrid business model, through the operator complete control over the customer
experience and enabling it to invest in refurbishments and redevelopments to adapt to evolving
demand needs, focusing on the main key income stream and diversifying additional services
and customization, that provides a prime further revenue. At an economic of scale point of
view, operators can leverage on their comparative size, providing high level services at a
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discount, and users, mainly small businesses, benefit from it, focusing on their core business
while others take the administration strain. It clearly shows that office sector is in a certain way
following the retail trend, in which real estate focus is becoming less on the product and more
on access to features and services on demand (Cushman & Wakefield Research, 2018). In
some cases, the hybrid model aims to offer an extremely high-end space and services usually
fitted for C-suite users, attracting both individuals and companies that need a level of amenities
on a global scale for executives who travel often. There’s no global leader operator for this
model, anyhow its focus is to avoid the mainstream solutions and provide a consistent
experience across locations (Colliers International Survey, 2019).
The workplace is increasingly becoming more digital and mobile, hence the corporate need for
flexibility and an efficient way to work with leasing accounting changes is growing too, hence
as a result some other variations of the hybrid model growing in popularity have been observed
in the market (Colliers International Survey, 2019). The first one is the Flex & Core model, in
which the occupier lease space on a long-term lease for their core operations together with
flexible workspace to accommodate volatility in future. One of the main issues to be decided
here is how the core space is leased, i.e. through a flexible workspace operator or directly with
a landlord on a traditional lease. This model presents an important advantage in terms of cost
savings: when the operator takes down a large amount of space and passes a portion of the
discount to the tenant; when coworking provider can achieve economies of scale on fit-out and
yield lower effective costs for the tenant in comparison to traditional leases. Therefore, in terms
of price for flexibility, mobility and opportunity to flow capital expenditures through operating
expenses this leasing model is becoming increasingly attractive (Colliers International Survey,
2019).
Another alternative model that’s has been experienced it the City Campus, basically this model
enables firms with a mobile workforce to access drop-down space globally. It has a great
65
potential in becoming popular among sales and other client-facing teams, through businesses
that consist of a main headquarters and satellite locations but with reduction of its physical
footprint, the model allows this kind of firm to place a percentage of its staff onto a digital
platform through hot desk of even private office space, spreading itself across multiple
locations within a flexible workspace operator’s portfolio. A variation of this model – that tends
to be providers by smaller and more regional operators – is the Suburban one, in which the
spaces are spread around well-located suburban nodes that offers both transit access and more
walkable districts, guarantying greater flexibility to workers. Both models’ attraction lies on
the capacity of the operator’s digital platform, its ability to link with existing business on
planned technology and on its market coverage (Colliers International Survey, 2019).
Flexible workspace is evolving into different directions, as might be expected in such a new
industry. Different new business models are coming up, with wide spectrum of service and
flexibility, and aiming different users. For example, WeWork now has an enterprise division
focused on serving the needs of larger corporations, and another targeting mid-sized companies
(Colliers International Survey, 2019)63. New operators are coming out, “catering to specific
sectors like biotechnology or construction”, which could especially support firms and
individuals which are seeking to make businesses among flexible spaces – including spaces for
yoga enthusiasts, musicians, seniors and the LGBTQ community, among others – including
amenities that goes from “workshops, seminars, networking sessions to shared equipment and
career tools” (Colliers International Survey, 2019). According to the Colliers Research, for
example, in New York The Wing offers a women-only membership policy, largely inspired by
the #MeToo movement, it had proven to be a great success, even if under investigation of the
Commission on Human Rights due to possibly violating antidiscrimination laws.
63 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
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5. FLEXIBLE WORKSPACE WEAKNESSES
Following the same reasoning for the strengths, a completed list of weaknesses made up
through reviewing the bibliography concerned has been described below. As it can be seen in
the SWOT figure in the beginning of the chapter, it has been divided into two subcategories in
order to better classify them:
1. “Product vulnerabilities”: describes the weaknesses related to the “product” offered by the
operators with respect to their clients i.e. which characteristics of flexible workspace push
potential adopters back when considering renting it;
2. “Operator fragilities”: describes the inherently weaknesses of the operators themselves i.e.
which characteristics of operators that can prevent them to be competitive and growth.
5.1. PRODUCT VULNERABILITIES
To illustrate the vulnerabilities of the flexible workspace, it has been used the same case study
from JLL, during the chapter “Upfront costs reduction”. For taking the decision of which space
to use, also further factors than costs need to be considered, as each firm has specific
requirements the list cannot be exhaustive, and those factors can be determinant when choosing
which model fits better. For an instance, the serviced office model offers higher flexibility in
terms of contract and space, while the traditional office guarantees “confidential environment,
security aspects and a higher degree of planning and cost certainty”, which isn’t so easy to
predict within the flexible model because there’s “greater dependency on the operator” and
“short-term contracts make it difficult to plan the future” (JLL Research, 2017).
Moreover, the qualitative decision factors can be decisive right before analyzing any type of
short or long-term costs, because of the specific company’s requirements. For example, when
the company is seeking “confidential environment and lend the company consistency and
67
professional status in the market”, the traditional office might be the best alternative, even if
the up-front costs and setup procedures being higher.
5.1.1. HIGH OCCUPANCY HARM EFFECTS
According to a Colliers survey64, flexible workspace has important impacts on the building
itself. From one hand the flexible operators are those that can most increase portfolio
performance, through increasing the level of occupancy which give rises to higher income per
square meters. From the other hand, this feature can lead to important consequences for the
building, since occupancy comes at a cost, which are mainly associated with the much greater
population density of flexible firms compared to more traditional tenants and might culminate
in keeping away new members.
Figure 30: European average gross workspace per employee trend 1994 - 2018 (Source: PMA 2019, Author)
64 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
0
5
10
15
20
25
30
35
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Gros
s sq
uare
met
ers
per e
mpl
oyee
Decrease in Average Gross Workspace per Employee
Paris Berlin Frankfurt Munich Amsterdam
Milan Madrid Stockholm London
68
Usually, office density changes depending on the sector and have been coming down in recent
year as firms try to optimize their floor plans to economize on their occupancy costs. Before,
firms typically lease at 20 to 25 square meters per worker, in some cases now the range has
dropped to the ratio of 13-16. In the typical flexible workspace environment the average drops
to just 5-6 square meters per worker, this has critical consequences because housing a
population with three or four times as many workers per floor compared to typical traditional
offices a few years ago has tremendous burden on the building’s infrastructure – for example,
elevators waits get longer and HVAC system requires more energy to cool the building and
wear and tear on the carpets and floors is greater (Colliers International Survey, 2019).
There can also be more subtle operational impacts, as many flexible workspace operators
attract unconventional workers who may not provide the image desired for more conventional
office buildings, a classic problem regards the fact that new media and tech companies tend to
encourage office dogs, which could lead to dog clauses on the lease negotiation. Issues of
control and liability include avoiding the office turning into a kennel, health code violations,
general distractions and employee safety (Colliers International Survey, 2019).
According to the case study developed by JLL65, the analysis can be taken also in terms of size
of space occupied, that is, on the number of workspaces, using the relation between the average
cost per additional workspace and the number of workspace target by the company. To do so,
the research uses theoretical curves, in which the fixed prices per workstation in flexible
workspace are subject to a discount with a greater number of spaces, so “the average cost fall
in steps”, while the traditional office’s curve falls incrementally as the number of workspaces
increases.
65 Coworking - Analysis of flexible workspace, for example in Hamburg. (2017). JLL Research.
69
As the curves are theoretical the goal of the research isn’t to find out the value of workspaces
that equalize average cost of traditional and serviced office, but reasoning on the concept it’s
possible to conclude significant consequences from the model: if the firm decides to increase
the number of workspace of at least one unit in the future, the final decision might change.
Within the traditional office, one more workspace might be simple to add – decreasing the
average cost per workspace – or, in the case that there’s no “expansion reserve”, it might be
necessary to relocate to a bigger office if the existent one is saturated – new costs would appear
like “relocation costs, further pre-contract costs and a higher overall rent”. While for the
flexible model, the flexibility allows the tenant to expand or shrink easily, if there’s availability,
but flexibility comes at a cost, and the model shows that for high numbers of additional
workspace the flexible model might become more expensive.
Figure 31: Case Study: Traditional vs Serviced Office - Idealized curves for additional workspace (Source: JLL Research
2017, Author)
To conclude, the analysis proposed by the research represents the wide range of factors that
can be considered when the decision-maker of a company needs to select one of the alternative
Ave
rage
cos
t per
wor
kspa
ce
Number of workspaces
Idealized curves showing costs per workspace
Serviced Office
Traditional office
70
available. Last but not least, the model proposes that “more workspace and the longer the lease
term, the more attractive a traditional office becomes” (JLL Research, 2017), it might seem
true but it’s important to highlight again that the case study isn’t exhaustive and each case
needs to be analyzed within its peculiarities.
5.1.2. CONFIDENTIAL ENVIRONMENT AND SECURITY
After the World Trade Center event on 11/09/2001, the security standards in commercial office
buildings became more demanding, mainly in the central markets. The flexible workspace
features characterized by “open, 24/7 and drop-in nature” (HOK, 2016)66 it’s obvious that
there’s a higher “footfall and activity in common areas such as corridors and staircases, even
outside regular office hours” (JLL Research, 2017). So, if there’re unknown occupiers in the
building, the “security and locking systems” are essential factors, even though it may be a
vulnerable environment to users that are aware of catastrophic events or trivially concerned
about security problems related to robbery. Because this kind of events could be highly costly
for the entire market, the potential adopters may still choose “more secure, controlled
environment” as their business office (HOK, 2016).
In fact, for big companies, when going in a new market, even if searching for cheaper solutions
at the beginning, data protection and visibility remains as a threat, so more dedicated flexible
solutions seems more attractive (Cushman & Wakefield Research, 2018).
To confirm this vulnerability, an interview conducted by Colliers International EMEA67, asked
PwC how they are reacting to the changing dynamic in the office market caused by the
emerging flex sector. They answered that the company is not standardly ready to utilize these
sorts of flex space, because “compliance and data security are primary concerns and PwC work
66 Coworking: A Corporate Real Estate Perspective. (2016). HOK. 67 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
71
is undertaken almost exclusively within PwC’s leased estate, on client site or from home
working”.
This represents one of the main disadvantages that avoid some users of choosing this model of
flexible workspace is the lack of private sphere and confidentiality added to the dangerous on
poor responsibility amongst users towards furniture and communal space, that enables leakage
of knowledge and competition if competitors might also be present.
5.1.3. COMPANY IMAGE IN OWN SPACE
One of the main concerns when adopting flexible workspace – nevertheless if it’s a hot desk
or a fully tailored office space – regards the possibility of losing the “chance to build and
reinforce” the company’s culture, as it’s usually achieved through traditional real estate
(Cushman & Wakefield Research, 2018). In fact, further than challenge of data protection,
flexible workspace promotes little visibility for workspace user’s corporate identity (JLL
Research, 2017).
If from one hand, the flexible workspace attracts the new generation, on the other hand the
young employees could question the firm’s “long-term commitment to the location” (JLL
Research, 2017)68. In addition, it’s not only about having its own headquarters, but “the
question is if the service delivery standards will be met or not”, which can have greater impact
on employee’s and customer’s view (Cushman & Wakefield Research, 2018).
Moreover, for finance authorities, it’s not so obvious that an address of a tenant within a flexible
workspace center is a legal business address, once clear criteria must be meet such as “access,
company signage, letterbox and recognizable workspace”. For the tenants, if their office within
68 Coworking - Analysis of flexible workspace, for example in Hamburg. (2017). JLL Research.
72
a flexible workspace is “not recognized and no VAT ID number is issued” it means that it
cannot be considered commercially active (JLL Research, 2017).
Furthermore, some researches have showed that firms and entrepreneurs might refuse the
adoption of flexible workspace model because of the following reasons. According to a
Harvard University Study69, on the basis of two field studies of Fortune 500 multinational
corporate headquarters, the research found out that open office decreases the amount of face-
to-face interaction by about 70%, while increasing electronic communication by the same
percentage, resulting that people actually tend to interact less in a shared space. Besides, the
same study observed that too much information, too many distractions and too many people
reduce rather than increase productive interaction. In addition, a study conducted in the
University of California, Irvine70 found that it takes an average of about 23 minutes to return
to your original task after an interaction, so for many the flexible workspace might be
“overstimulating”.
69 Ethan S. Bernstein, Stephen Turban, “The impact of the ‘open’ workspace on human collaboration.” The Philosophical Transaction of the Royal Society B, 2 July 2018. 70 Gloria Mark, Daniela Guidth and Ulrich Klovke, The Cost of Interrupted Work: More Speed and Stress,” University of California, Irvine, School Information & Computer Sciences.
73
5.2. OPERATOR FRAGILITIES
“Inclusion of flexible space has the potential to increase and diversify a building’s income
stream because these tenants theoretically command higher rental rates and improve effective
occupancy relative to a traditional office lease” (CBRE Research, 2019). However, there’s been
seen some repulse to investors and landlords with respect to the operator’s fragilities, this
chapter tries to summarize the inherently weaknesses of the operators, that prevents them be
competitive and growth.
Reviewing the literature concerned, the main reasons refers to two factors that are extremely
connected: the low credit rating of those operators and the profitability issues when operating.
The first one prevents the sector growth because many landlords perceived them as not reliable
avoiding accommodating them in their spaces. While the second one is a vulnerability in terms
of operational profit, which can lead many operators to bankruptcy if thing are not working as
expected.
5.2.1. LOW CREDIT RATING
The insolvency of several Regus business centers in 2003 – in which the company declared
bankruptcy when during a recession when its revenues fell down while rent payments were still
due – might still alert many landlords and professional investors, because for them flexible
workspace operators are not so attractive due to their “short credit history and the new and less
well-known, and only recently established, business models” (JLL Research, 2017).
Basing on real facts to prove this features, to date, within the central markets flexible workspace
operators have entered predominantly through leasing existing properties, beyond the
immediate need of space, the main reasons for that might be the lack of good credit rating and
poor reliability in the business from developers’ view (JLL Research, 2017). According to
74
CBRE71, the low credit rating of flexible workspace is related to the lack in “longer-term
commitments and rigid restrictions from their users that provide income security under
traditional office leases”. These weak covenants generate fear from both investor and landlords
because it’s too early to predict how this “variable income stream will impact flex operations
during economic downturns”. Not only, another factor is that currently there’s little
transparency regarding those operators, their rental revenue and effective occupancy is not so
clear once they are mainly private companies and don’t disclosure so many information, which
deteriorates their credit rating (CBRE Research, 2019).
At the end of the day, flexible workspace operator is supposed to be view as another common
tenant that is leasing space within a landlord’s property, so it’s concerned with leases being
broken. The most part of the flexible workspace providers are companies without “substantial
credit histories”, and in case business goes bad they might try to give up on their spaces. It’s
not only about small operators, even “larger and well capitalized firms” might try to break a
lease on unprofitable centers in some locations (Cushman & Wakefield Research, 2018).
Michael Emory, CEO of Canadian office owner Allied Properties REIT, who says that he will
not lease space even to big players like WeWork (Bloomberg, 2018)72 stands: “If you’re going
to commit your space for a term of 10 years, you want to make sure that your tenant is credit-
worthy and they’re going to be there tomorrow, the next year and the year after that”.
5.2.2. PROFITABILITY ISSUES
An analysis developed by HOK 73found that 23% of flexible workspace centers are
unprofitable So, another important weakness comes out when trying to determine the break-
even point of the business model, once flexible workspace operators in the main operate at a
71 The Property Value Implications of Flexible Space U.S. (2019). CBRE Research. 72 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back. (2018). Bloomberg. 73 Coworking: A Corporate Real Estate Perspective. (2016). HOK.
75
low margin and low volumes.. The profit tree developed is not exhaustive, but it’s a useful
framework in the evaluation of the causes and impacts on the flexible workspace profitability,
as it will be explained, the figure below highlights in red the main factors that can generate
profitability issues.
Figure 32: Profit tree of flexible workspace business model - in red the causes of profitability issues (Source: Author)
From the revenue perspective, flexible workplaces income is derived from two streams:
“license/membership fees and the bolt on services”. As a benchmark a profitable operator will
be seeking circa 80% of revenues from rental fees, which confirms that the business profits are
heavily reliant upon volume of memberships (desk or private office), here represented by the
level of space occupancy (Cushman & Wakefield Research, 2018). Another source, Green
Street Advisors74, says that flexible office space generates positive cash-flow once occupancy
hit 75%, furthermore, to illustrate the problem, in London the research says that most operators
74 Greenstreetadvisors.com. (2018). Co-working: Good or Bad for Office?. [online]
Profit
Revenues (+)
Price
Desk
Private Office
Amenities
Meeting / Events
Volume
General amenities and services
Renting meeting spaces / events
Renting Desk / Private Office
Costs (-)
Variable
Food and drinks
Marketing
Maintenance
Fixed
Equipment
Wages
Operating costs
Rent of location
76
“were able to achieve 90% occupancy within a year”, while “break-even occupancy is closer
to 60% in the highest-rent markets where operators can garner larger rent spreads”.
According to Deskmag75 survey in 2018, the revenue coming from renting the space – desks,
memberships and private offices together – totalized circa 70%, nevertheless the age of the
center, which confirms the dependency on this income stream to make it profitable. In the other
hand, additional services and amenities – e.g. meeting and events spaces, virtual office services
and other amenities, such as conference room bookings, IT and telecoms services, events,
beverages and food services – are seen as plus source of revenue, but its function is mainly of
being an attractive to increase occupancy level (Cushman & Wakefield Research, 2018), the
Deskmag data presented below presents that all those generators of revenue together represent
only circa 30% of total income.
75 Opening Coworking Spaces & The First Year Post-Launch. (2018). Deskmag.
77
Figure 33: Revenue Stream Percentages of Flexible Workspaces - By age of center (Source: Deskmag 2018, Author)
One of the strategies to improve volumes and margins is to benefit from economy of scale,
diversely operations and management expenses become intensively demanded, explaining why
still the market share of pure co-working model is the lowest used one and hybrid model has
become most present (Cushman & Wakefield Research, 2018). To prove it, according to
Cushman & Wakefield, there’s a strong linear relationship between the number of members
and the level of profitability, in which the typically value of profitable occupancy is quoted
about 80 to 85%. Another strategy is to improve density rate, the BCA report showed that in
the UK operator are seeking densities of 5 m2 per desk and in some cases down to 3 m2.
WeWork is planning to adopt in its new centers a density rate of about 3 to 4 m2 per desk
(Cushman & Wakefield Research, 2018). Additionally, to occupancy rate, the others key
10%4%
10% 7%
2%4%
6%3%
8%9%
7%6%
9% 12%8%
9%
25%36%
25%
23%
7%
7%
10%20%
39%28%
34% 32%
< 12 13-36 37-60 < 60 months old
Revenue Stream Percentages of Flexible Workspaces - by age of center
Other amenities Virtual office services Renting event and class spaces
Renting meeting spaces Renting private offices Combined membership plans
Renting desks
78
factors that influence the revenue successful are location and split between dedicated office
space, co-working and service areas (meeting rooms, common, eatery, etc.).
Figure 34: Share of Costs Types of Flexible Workspaces - by age of center (Source: Deskmag 2018, Author)
From the cost outlook, real estate fixed cost – renting the property – is the highest operating
expense for the business. According to Deskmag survey, this cost reaches easily 40% of
operating expenditures, again nevertheless the age of the center, which is significantly higher
than for traditional corporate renting its headquarters. So flexible workspace operators need to
“look after their own timetable and cost control” (JLL Research, 2017). If from one side
increase the occupancy increases the volume and then revenue generation, from the other side
it can increase operational costs – from “physical systems such as HVAC and elevators to
services such as security and cleaning” (Cushman & Wakefield Research, 2018). Real estate
leasing and operational costs together represents more than 50% of total costs, and almost total
fixed costs.
2% 2% 1% 1%6% 5% 5% 3%
7% 5% 4% 6%
5% 5% 3% 3%
4% 6%4% 5%
6% 8%7% 7%
16% 16%17% 18%
17% 16%19% 15%
37% 37% 40% 42%
< 12 13-36 37-60 < 60 months old
Share of Costs Types of Flexible Workspaces - by age of center
Other Food and drinks Equipment
External marketing Wages for owners Maintenance
Wages for staff Operating cost Rent of location
79
The rent paid by the flexible workspace operator depends on many factors – operator type,
scale and location are the main ones (Cushman & Wakefield Research, 2018), but it has a
significant impact on the profitability when the operator is setting up a new center, due to the
lack of revenue volume. So, a strategy followed by operators is to request incentives for the
landlord, “in the form of rent free period and contributions towards subtenants fit-out costs”,
which means that the operator have to provide a “high level of upfront services” and “accept a
certain level of risk”, in the other hand, owner will request long-term lease contracts and
stabilized rent relatively high in comparison to standard tenants (JLL Research, 2017).
80
6. FLEXIBLE WORKSPACE OPPORTUNITIES
A completed list of opportunities made up through reviewing the bibliography concerned has
been described below. As it can be seen in the SWOT figure in the beginning of the chapter, it
has been divided into three subcategories in order to better classify them:
1. “Business environment”: describes the opportunities related to the overall market
conditions that push potential adopters to adopt flexible workspace.
2. “Catalyst factors”: describes the trends of the overall market that may create opportunities
for the flexible workspace to support the sector growth.
3. “Landlords entering the sector”: describes the opportunities for the sector to expand due to
landlords entering the sector, i.e. how landlords are entering to it, and how it can promote
the sector expansion.
6.1. BUSINESS ENVIRONMENT
The business environment changes and conditions can be considered the primary source of
opportunities when evaluating possible positive impacts on the flexible workspace sector. The
chapter will explain how the conditions of the business environment supports flexible
workspace growth.
6.1.1. TRADITIONAL REAL ESTATE OFFERING
First, the fact that many central offices market are characterized by traditional leasing based on
expensive rents and long leases, the arrival of flexible solutions represents for firms an
alternative to keep being agile and competitive, stimulating its demand (Cushman & Wakefield
Research, 2019)76 The sensitivity to price differentials also influences the growth of flexible
workspace from market to market, because in less expensive markets the price differential
between setting and fitting out one’s own space in opposition to using an flexible operator is
76 Coworking Hotspot Index. (2019). Cushman & Wakefield Research.
81
minor, in addition, the overall commitment is also usually lower, both together results in less
overall risk pushing users to avoid flexible workspace (Colliers International Survey, 2019).
Figure 35: Correlation between high rent and number of flexible workspaces (Source: Colliers International EMEA 2019,
Author)
6.1.2. DIGITAL INFRASTRUCTURE
“Growth in the number of open office workspaces/sq ft will approach an exponential scale, in
line with wider technological trends” (JP Morgan). Another condition in the business
environment that is leveraging flexible workspace demand is the presence of high-quality
digital infrastructure – proliferation of cloud computing, VPNs, super-fast Wi-Fi and 4G
connectivity.
It’s essential to “invite” those operators, as long as it has showed that technological advances
have had a great impact on the transformation of working and office life being a key factor in
the rate of business growth and as a great opportunity for the self-employed, enabling work to
be carried out anywhere and at any time. “Thanks to advances in technology”, the new
generation will probably not have any strong connection to “working in headquarters office
when work can be performed from almost anywhere” (Colliers International Survey, 2019).
R² = 0,8117
0
200
400
600
800
1000
1200
0 20 40 60 80 100 120 140
Num
ber o
f fle
x w
orks
pace
cen
ters
Prime CBD rent [€/sqm/month]
High Rent Price as a Flexible Workspace Driver
82
Anyhow, this has not resulted in vacant offices or the dominance of the home office, as they
offer limited social contact or the opportunity to exchange ideas. Flexible workspace is
transforming the classic cellular office to open-plans layouts which offer communication and
concentration zones and is additionally efficient is terms of desk-share-ratio and property-
related costs savings (JLL Research, 2017)77.
6.1.3. SHARING ECONOMY
The sharing economy mentality is a new condition within business environment that is
fomenting flexible workspace demand. It “refers to the shared of use of resources” (JLL
Research, 2017), like “how Airbnb matches heads with beds” or Uber matches passengers and
rides, flexible workspace “can match workers and workplaces” (HOK, 2016)78.
The trend is based on the advantages that sharing can bring up such as “reduce fixed costs and
makes better use of resources”, besides that “social aspects such as alternative consumption
and production models also play a role”. Flexible workspace represents the place to work in
this business environment because it “offers a pricing model orientated towards the pay-as-
you-use model” which enables the user a “high level of flexibility and reduces fixed costs”
(JLL Research, 2017).
77 Coworking - Analysis of flexible workspace, for example in Hamburg. (2017). JLL Research. 78 Coworking: A Corporate Real Estate Perspective. (2016). HOK.
83
6.2. CATALYST FACTORS
Beyond the business environment, catalyst factors represent significant trends that will push
flexible workspace’s demand.
An interesting questionnaire with flexible workplace operators developed by Cushman &
Wakefield on 2018 has been reported below, it shows their opinion about which sectors are
driving their businesses demand.
FREELANCER
SMALL
BUSINESS
TEMPORARY
PROJECT
LARGE
BUSINESS
START-
UPS
2015 - 2017 +12 +17 +8 +5 +13
2018 - 2020 +14 +18 +10 +13 +16
Figure 36: Sectors driving demand for flexible workplaces (Source: Cushman & Wakefield Research - based on
questionnaires)
6.2.1. GIG ECONOMY
The so-called “gig economy”, when “individuals are actively seeking temporary or contract
jobs”, is an important catalyst factor for the sector. During the last economic cycle, there’s been
seen decline in the number of traditional office workers and an increase in freelance and
contract office workers, for example, part time, contractual and self-employed “agile-working”
positions rise in number to closely match the number of full time employment levels in Europe
(Colliers International. 2019). A survey of 9,000 knowledge-based workers across the United
Kingdom, United States and Germany, over half said that they would consider changing to a
freelance or on-demand model of work over regular employment if it were offered
(Enterprisegroup.hu, 2019) 79.
79 Enterprisegroup.hu. (2016). The Way We (Really) Work – Unify study of 9000 knowledge workers | Enterprise Group [online]
84
This phenomenon impacts on the business’ willingness for flexibility, reflecting further in their
real estate strategy that they adopt. According to Cushman & Wakefield Research, there’s a
positive correlation between the number of self-employed and the increase in flexible
workspace take-up. This correlation starts with the interest of the companies “in contracting
out more of their assignments rather than hiring workers directly”, since within flexible
contracts there’s no need to provide benefits and the “contracting firms frequently do not
provide office space to their contract workers”, so self-employed workers are “perfect
candidates for flexible workspace” (Colliers International Survey, 2019).
Furthermore, the entrepreneurial behavior is critical as a demand factor since it’s driving job
growth in many cities, which captures the operator’s attention as entrepreneurial people require
flexible workspace to use as they growth the firm.
The potential growth, as described by Cushman & Wakefield Research, will continue to
accelerate, relying on the growth of the technological sector, a prosper start-up environment
and projected-based businesses, with freelancers employment of a 6% growth expected
between 2018 to 2020 (Cushman & Wakefield Research, 2018).
6.2.2. STARTUPs AND SMEs BOOST
In this sense, the attractiveness of flexible workspace is also indicated by the rising presence
of the start-up and small and medium-sized enterprises (SMEs) sector, accelerators (finance
and business administrative support to start-ups) and young companies in technology-
orientated and creative segments, who in particular to benefit from low marginal cost and high
scalability, they target this kind of workplace for their businesses (JLL Research, 2017).
Furthermore, the business model evolving lays on the expectations of the workplace, for start-
ups and SMEs, who initially face uncertain growth and cash flow expectations, shared flexible
85
workplace rather than signing up to a long-term lease is the key attraction (Cushman &
Wakefield, 2018)80
The increase of this firm size is a trend consolidated across all the major cities in Europe.
Countries and cities under governments that are increasingly supporting and funding start-ups
and SMEs aiming to stimulate economic growth through flexibility and innovation will have a
higher probability of attracting flexible workspace operators (Colliers International, 2019)81.
In the United States the job growth in office-using industries – information, financial activities,
and professional & business services – confirms the increasingly driven by business with fewer
than 50 employees, in 2017 small firms accounted for 89% of new job growth, up from 69%
in 2000 (Cushman & Wakefield Research, 2018)82.
Figure 37: Small Companies Create Office-Using Jobs in United States 2017 (Source: Bureau of Labor Statistics)
6.2.3. INCREASE BIG COMPANIES’ ADOPTION
“Companies increasingly see flexible office space as a key element of their corporate portfolios
and expect to make far greater use of this type of space over the next three years than they do
80 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 81 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL. 82 Coworking and Flexible Office Space - Additive or Disruptive to the Office Market? (2018). Cushman & Wakefield Research.
49157
433
12
8
61
0
100
200
300
400
500
600
Information Financial activities Prof. & Business Services
Number of New Jobs in Office-using Industries (2017) by Company Size (Thousands)
Under 50 Employees 50+ Employees
86
currently. Indeed, it is the most popular asset type for future expansion” (CBRE Research,
2018)83. It’s not just start-up and millennial demand driving the accelerated pace of flexible
space growth, consolidated companies are also starting to adopt flexible workspace within their
real estate strategy.
Traditional corporate is considering flexible workspace as part of their real estate strategy in
order to optimize their portfolios, consolidate their office spaces and drive productivity (JLL
Research, 2018)84. They represent an important client group for flexible workspace operators,
because usually they search for “a large number of workspaces over the medium and longer-
terms” (JLL Research, 2017). So, renting for this type of tenant means for them “stabilize rental
income” and accelerate their growth in the future through “de-risking the weaker covenants of
young companies by supplementing them with established firms with greater financial
strength” (Cushman & Wakefield Research, 2018), furthermore “large companies are also good
advertisements for other workspace users” (JLL Research, 2017). As an example, WeWork
reported that 20% of the revenues globally come from enterprise clients that typically take a
lease for 1-3 years (Cushman & Wakefield Research, 2018)85.
According to JLL Research86, established companies are willing to use flexible workspace,
even in the coworking format, for several reasons, due to the “improved innovation,
collaboration and community, to business development and growth objectives”. The research
has segmented the flexible market into three different consolidated occupiers’ categories:
Conservative, Experimental and Visionary.
83 EMEA Occupier Survey 2018 - Optimizing User Experience: The Personalized Workplace. (2018). CBRE Research. 84 Disruption or Distraction - Is flex space here for good, or just the latest real estate fashion? (2018). JLL Research (EMEA). 85 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 86 Disruption or Distraction - Is flex space here for good, or just the latest real estate fashion? (2018). JLL Research (EMEA).
87
Conservative • Low percentage of flexible space in the current portfolio • Zero or limited expansion anticipated in the future • Key obstacles to widespread adoption: Culture, coverage, security and compliance concerns, specialized space needs
Experimental • Low to moderate percentage of flexible space in the current portfolio • Forecast to reach up to 10% and beyond in the next 3-5 years • Experimental expansion; pilot and trail phase; analysis of use cases and different providers’ solutions • Open to benefits and ideas of innovation, but also focused on challenges and limitations
Visionary • Significant usage can be observed • Clear and ambitious plans for a widespread adoption of flexible space, reaching upwards of 20% of the portfolio • Innovative and bold approach and scale of use • Focused on benefits and value of flexible space, with a vision to mitigate any risks
Figure 38: Consolidated occupiers' categories in flexible workspace (Source: JLL Research, 2017)
JLL has interviewed some established firms across industries that are increasingly using
flexible workspace, and according to them, as the market will see “larger and more
traditional” firms adopting this concept, there will be a strong shift on the adoption curve
even for more conservative firms. The most companies that they had interviewed are still in
the experimental phase of adoption, but vigorously testing it to understand how they can
expand even more, so the conclusion is that big companies share on flexible workspace is in
take-off phase, but the potential growth is very high.
6.2.4. NEW ACCOUNTING REGULATION
According to Colliers87, the Financial Accounting Standards Board (FASB) and International
Accounting Standard Board (IASB) changes that is taking place in 2019 will push firms to
disclose real estate lease obligations, increasing the visibility of company’s real estate strategy,
pressuring them to optimize their portfolio, through transforming previously inefficient spaces
87 The Flexible Workspace Outlook Report 2019 - EMEA. (2019). COLLIERS INTERNATIONAL.
88
into functional ones and accountable to the company’s bottom line. It’s expected that the
requirement will increase over than $2 trillion of debt to company balance sheets (Colliers
International, 2019).
Because short-term agreements and membership, like those offered by flexible workspace
operators, will usually not be considered by the FASB and IASB as debt obligations (Colliers
International, 2019), it might represent a great chance for the flexible workspace sector, once
tenants will be motivated to take less traditional space and increasingly rely on an operator to
provide access to amenity spaces to solve portfolio performance.
Specifically, the International Financial Reporting Standards (IFRS) 16 provided a new
definition of a lease for accounting function: “if the contract conveys the right to control the
use of an identified asset for a period of time in exchange for consideration”. This definition
suggests that flexible workspaces are very expected to don’t be included in the scope of the
regulation. Moreover, it says that, in general, leases or licenses under 12 months will not be
included in the rental liability (Cushman & Wakefield, 2018). A step-by-step to identify if the
lease agreement is taken into the new accountability regulation has been developed below, once
any of the questions described have negative answer, the agreement sits out of the IFRS 16
definition, and it won’t be capitalized as a liability.
Figure 39: Identification of the lease agreement within the new IFRS 16 (Source: Cushman & Wakefield Research 2018,
Author)
Once the sector will expand and show more resilience, flexible workspace operators will
intensify product offering sophistication, in line with the demand for optimized portfolios,
IDENTIFIED ASSET?
CUSTOMER OBTAINS ALL
ECONOMIC BENEFITS FROM
USE?
CUTOMER DIRECT USES?
LEASE UNDER IFRS 16
89
providing high quality amenities, even in short-term agreements to match multinational
corporation’s real estate strategy (Colliers International, 2019). So, it’s expected that operators
will hold the property interest (freehold or leasehold) and provide to the tenants “spaces and
services”, which won’t be considered within the new accounting regulations, once the operator
will substitute the area leases to the tenant within the space (Cushman & Wakefield Research,
2018).
A survey conducted by Cushman & Wakefield, with landlords in the United Kingdom (UK),
showed that one third of the respondents agreed with the fact that the change in lease accounting
regulation would impact positively on the demand of flexible workspace in detriment of the
traditional leased space, two thirds believe that it was likely to result in a shift in demand, while
no one answered that it will not have effects in the future demand.
So, the conclusion is that the change in the accounting regulation will improve both the
probability of buildings providing amenity space and flexible workspace attractiveness for
firms. But this might increase the memberships, single desks and short-term suite offices
demand, while long-term agreements, like three-year deal for private office within a flexible
workspace location, is very unlikely to sit outside of the FASB and IASB obligations (Colliers
International Survey, 2019).
90
6.3. LANDLORDS ENTERING INTO THE MARKET
Until very recently, traditional landlords have approached to the flexible workspace sector only
through leasing space on long-term leases to operators (Cushman & Wakefield Research, 2018)
88. A survey, conducted by Cushman & Wakefield on 2018, showed that all landlords
interviewed declared they are increasingly, in the near term at least, leasing to flexible
workspace operators portions of their properties, and that it represents a higher share of their
portfolio in comparison to five years before. In addition, the research shows that in London the
average exposures to flexible workspace of landlords’ portfolios are of less than 2%, while they
had affirmed of having about 3%.
Investors’ interest in potential investment property that are let to flexible workspace is not
exhaustive since due diligence results that must be analyzed case by case. Anyhow, it’s said
that “the use type itself is generally acceptable” (JLL Research, 2017). For example, The Rhone
Group – private equity company – launched a new fund to purchase properties let to WeWork,
showing trust in the concerned business model (Bloomberg, 2018)89. While, WeWork Chief
Development Officer, said he’s “unconcerned by entrants such as Tishman and CBRE, saying
more companies in the area helps solidify flexible space as an asset class” (Bloomberg, 2018).
Reviewing the lecture regarding this matter, it’s possible to conclude that there are four main
strategies that the investment professionals can follow:
1. Flexible approach: landlord keeps traditional but with a more flexible approach;
2. Join-venture: landlord makes partnering with a flexible workspace operator;
3. Buy: landlord purchases shares of a a flexible workspace operator;
4. Build: landlord sets up their own flexible operation.
88 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 89 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back. (2018). Bloomberg.
91
Adopting those strategies, corporate property owners will probably increase flexible workspace
sector competition for established operators. Hence, further than market saturation and
economic downturns, the greatest fear of flexible operators in the future might be that landlords
– even if it’s not their core business – being in a better position to make a major step into this
sector once the can lay on their “real estate portfolio to scale, funding and take the risk”
(Cushman & Wakefield Research, 2018). So even if it’s a threat for operators, it can also be
considered an opportunity for the flexible workspace sector.
The goal of this chapter is to describe the opportunity for the flexible workspace sector when
landlords take a bigger step into the sector, highlighting each of the strategies using real track
record of their adoption. In general, for landlords with higher structural vacancy in their
properties adding a flexible workspace or “partnering with an operator in a revenue based rent
structure, may be a natural way to raise property income and increase tenant engagement”
(MSREI Strategy, 2018)90.
6.3.1. FLEXIBLE APPROACH STRATEGY
For many landlords and investment professionals keep traditional but shifting to a more flexible
– through shorter, flexible leases – approach might be easier and less risky rather than making
the big step of entering into the sector, this is explained because join the market without scale
and expertise that would be a “shot in their foot” (Cushman & Wakefield Research, 2018)91.
This kind of approach is based on how landlords can be more “user friendly” to their tenants,
according to Cushman & Wakefield, there are several ways of doing it, but mainly those
behaviors have been identified as flexible workspace features that are reachable also for
traditional investment professionals.
90 Coworking, Friend or Foe?. (2018). Morgan Stanley - Real Assets Research & Investing Team (MSREI Strategy). 91 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
92
One of them that’s hitting now is to capitalize on the latest technology to create a more
engaging user experience, meeting its expectations. This strategy lies on digital platforms
available on the market aiming to enhance tenant’s experience, through a wide range of services
and amenities – for example, service partnerships covering human resource, travel services,
common areas and wellness – (Cushman & Wakefield Research, 2018).
In some more mature markets, like the United Kingdom (UK) and the United States (US),
there’re already some platforms calling attention. One of them is the District Technology, the
platform, through a tailor-made app based on big data, targets to partner mainly with property
owners and enterprises to improve landlord-customer relationship, increase engagement and
utilizations of the spaces and services and facilitate cross company opportunities (District-
tech.com, 2019)92. From one hand, for the tenants the app provides high control over company
events, employee and department directories, company-wide notifications and client services.
On the other hand, it enables property managers to access portfolio performance analysis in
terms building events, companies directory, facilitates and spaces used, services, building
information (District-tech.com, 2019). A great track record of this partnership took place in
London, in which District Technology has partnered with BlackStone (landlord) and Enjoy –
Work (the development) at Chiswick Park, to create a mobile-first community platform for the
12 buildings of the development, hosting tenants like Ericsson, Danone, Virgin, AXA, Regus,
Mitsubishi and so on (Enjoy-work.com, 2019)93. The people benefit from District’s app
through booking events, reading park news, signing-up sporting activities, get discounts on
nearby restaurants and services and connect with other tenants and employees (District-
tech.com, 2019).
92 District-tech.com. (2019). Case Studies – District. [online] 93 Enjoy-work.com. (2019). Who - Guests. [online].
93
6.3.2. BUY STRATEGY
This is one of the main strategies observed and emerging until now in the market, because it
concerns not only traditional landlords but also investment companies, like private equity
funds. The strategy is basically purchasing interests of flexible workspace operators, financing
them to improve their economic situation, so they can expand on economy of scale.
Recently, a huge deal took place on the market regarding the buy strategy. In the early 2017,
the BlackStone (landlord) acquired the majority interest of The Office Group (flexible
workspace provider), putting an enterprise value of circa £500m (Blackstone.com, 2017)94. At
that moment, The Office Group had 36 offices in the United Kingdom, mainly in London,
accounting approximately 85,000 square meters, in 2018 the company already expanded to 39
locations, increasing the total area in almost 50% (Bisnow.com, 2018)95.
Another case is the SoftBank, WeWork’s largest investor. At the end of 2018, they signed a $3
billion warrant to buy more shares in a deal would value WeWork at at least $42 billion -- more
than double the value of any publicly traded U.S. office landlord (Bloomberg, 2018)96.
6.3.3. JOINT VENTURE STRATEGY
Partnering with specific flexible workspace operators might be an alternative strategy for
landlords, as it has been seen for flexible approach, this strategy lies on the fact that investment
professionals might not have the scale neither the expertise to take a major move to the flexible
workspace sector, so a joint venture can be considered an easier and less risky approach,
complementing or shifting the invested properties with respect to their tenants, providing
strengths both for the landlord and for the operator (Cushman & Wakefield Research, 2018).
94 Blackstone.com. (2017). Blackstone Invests in TOG. [online] 95 Bisnow.com. (2018). [online] 96 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back. (2018). Bloomberg.
94
Equity Office has partnered with coworking firm Industrious to operate space in some of its
properties (Colliers International Survey, 2019).
A practical example of this strategy is the case of the 50:50 joint venture called The Station
Office Network made by Network Rail (landlord) – one of the largest rail estates in the United
Kingdom – and The Office Group (flexible workspace operator) – an innovative provider of
high quality, design-led, flexible offices and meeting rooms. The partnership has been created
to provide flexible workspace for users at some of the busiest rail hubs in the United Kingdom,
aiming to “enhances the passenger experience and taps into the growing trend of flexible and
mobile working by providing convenient, design-led work and meeting spaces at major
transport hubs, allowing people to work seamlessly while on the move” (Network Rail Media
Centre, 2014)97.
6.3.4. BUILD STRATEGY
Some landlords and investment professionals are taking a bigger step into the flexible
workspace sector, further than making flexible approaches, joint ventures with operators or
buying them, the last strategy might be building in-house flexible workspace operators.
The challenge for any corporate property owner to set-up its own flexible space is to shift its
core business (own and rent properties) to focus also on necessary supply chains in place to run
a profitable operation (Cushman & Wakefield Research, 2018).
This challenge is not so simple but can be very profitable. As it has been seen before in this
paper, operating flexible workspace is mainly a matter of margin-play, which requires specific
know-how to achieve the break-even point and keep business turn-overgrowth. Many operators
97 Network Rail Media Centre. (2014). Network Rail and The Office Group announce next phase of growth for The Station Office Network joint venture. [online]
95
interviewed by Cushman & Wakefield, revealed that in their opinion traditional landlord lack
of those skills, which can be a risk for them to take that big step into the sector.
Reviewing the track record of this strategy, the most significant one may be the British Land
(landlord) case. The company is one of the Europe’s largest listed real estate investment
companies, owning and managing a portfolio valued at £19,1 billion – British Land Share’s
accounts for over 70% (Britishland.com, 2019)98. In 2017, British Land has launched Storey,
“a new brand providing flexible workspace for ambitious and growing businesses as well as
larger organizations seeking additional space on flexible terms”, to fill the customer’s needs,
providing offices for companies employing between 20 and 70 people (Britishland.com, 2019).
Other landlords planning flexible workspace operations include Hines and Silverstein
Properties. Tishman Speyer, one of the world’s largest private landlords, has launched its own
flexible workspace brand, Studio, at its 600 Fifth Avenue location, with immediate plans to
several other markets in the US and abroad (Colliers International Survey, 2019).
98 Britishland.com. (2019). Home. [online].
96
7. FLEXIBLE WORKSPACE THREATS
A completed list of threats made up through reviewing the bibliography concerned has been
described below. As it can be seen in the SWOT figure in the beginning of the chapter, it has
been divided into three subcategories in order to better classify them:
1. “Economic downturn”: describes the threats related to how the sector would react during
an economic downturn and its consequences into the overall office market that might
impact now the flexible workspace development.
2. “Market saturation”: describes the threats of the overall market related to the expansion of
the flexible workspace, i.e. which trends and conditions of the market can prevent the sector
to growth in a harmonic way.
3. “Investors’ uncertainty”: describes the uncertainties in the sector from the investor point of
view, and why it can impact on the sector growth.
7.1. ECONOMIC DOWNTURN
The vast range of small operators and the low level of maturity of the sector brings up the
question of what impact will an economic downturn have on flexible workspace. Furthermore,
the impressively growth of the sector might see an abruptly break, and all stakeholders will
understand better the effects of plateau growth for the business.
The chapter goal is to understand the threats that a recession would cause in the flexible
workspace sector that might prevent now players of investing on it. Secondly the chapter focus
on the overall office market, to explain the risks that a huge take-up on flexible workspace
would cause also outside the sector.
97
7.1.1. IMPACTS ON BUSINESS
According to Colliers Research on 201999, the expectations are that we are nearing the end of
this long business cycle, with economic and job growth likely to slow and maybe turn negative
by 2020. Hence, a key question facing the office sector is how flexible workspace will behave
during a downturn.
The demand for flexibility is very unlikely to disappear in a recession, because large occupiers
might see the alternative as a solution for their portfolios since in an economic downturn, they
may cutdown traditional lease and optimize through flexible space and margins. While, there
may be a detriment of weight’s demand by freelancers, entrepreneurs, and small business
(Cushman & Wakefield Research, 2018). Moreover, Cushman & Wakefield believes that the
leading operators are more conservative with their “pro formas”, so they might have cash
reserves through the raised venture capital, also the wide range of service offerings might
continue to generate income even during a downturn. Anyhow, for example, one of the main
operators, WeWork, lost $723 million during the first half of 2018, while it earned $764 million
in sales; in 2017, it recorded a loss of $933 million.
Anyway, the conclusion isn’t exhaustive once the flexible workspace sector has a little history
and lack of track record it’s hard to predict the real consequences in an economic downturn,
mainly for the smaller operators, as it has been seen in the overall market chapter, that represent
a big market share in many cities. As the business model is based on short leases and heavy
amount of tenants characterized by individual entrepreneurs and small, thinly-capitalized start-
ups, a more volatile cash flow in the event of a recession, compared to traditional landlords
who opt for longer lease terms with higher-credit firms who are better positioned, might give
99 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
98
some indications of the effects of a downturn, showing that it might be very vulnerable to an
abrupt decline in revenue (Colliers International Survey, 2019).
Moreover, flexible workspace operators usually rent their units through a long-term leasing
with landlords, but rent it out in short-terms, which means that in a downturn if their rents are
fixed while their achievable revenues decline due to falling rents it increases dramatically the
risk for landlords through a domino effect starting in the downstream of the corporate real
estate supply chain that would probably reach its upstream. WeWork, for example, creates a
special purpose vehicle (SPV) to each lease deal that they close, this means that each individual
location could “fold without leaving the company itself with much risk”. The holding company
only guarantees “the lease for about six to 12 months on a 15-year agreement, according to
documents associated with WeWork’s inaugural bond offering” (Bloomberg, 2018)100.
That’s why many flexible workspace operators are increasingly targeting larger firms, in part
to diversify their revenue base with better-capitalized tenants, in this way, they can maintain
their occupancy through the cycle, though likely at the cost of lower rents as market conditions
soften (Colliers International Survey, 2019) and try to show to their landlords their financial
resilience that hasn’t been proved yet. The only conclusion that can be made here is that a
recession would likely slow flexible workspace “meteoric growth”, in some areas, where
smaller operators concentrate the most market share, may feel more the economic impact. But
as the whole majority of flexible workspace across the world is managed by the two largest
and best capitalized providers, the “risks to the industry as a whole are small” (Cushman &
Wakefield, 2018).
100 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back. (2018). Bloomberg.
99
7.1.2. VACANCY RATE EFFECTS
Another important problem that is also related to the income stream proportionated from the
flexible workspace regards the sector’s vacant rate. Until now, market volumes and landlord
benefited from the powerful leasing growth that flexible workspace has experienced, but some
evidences show that total supply levels are being masked, as occupancy rates don’t take into
account the whole building – in which spaces like meeting rooms and membership space are
excluded (Cushman & Wakefield Research, 2018)101. As the flexible workspace share of office
take-up increased abruptly in regions like Europe, “jumping from less than 2% in 2015 to over
7% in Q1 2018 and to up to one fifth of the total activity in some markets” (Savills, 2018), the
problematic regarding real vacancy emerges. As flexible workspace take-up is “simply a
transfer from one type of landlord to another and, while the space they take is removed from
availability and therefore counted as net absorption, the space is still on the market” (PMA,
2018)102, in a case of economic downturn this might represent a problem to the overall office
market.
The chart above tries to answer the following question “how much might flexible workspace
add to vacancy if in an economic downturn?” through revealing the vacancy rates plus some
realistic proportion of the flexible workspace share of office stock, without this picture there’s
a misleading outlook of the demand and supply situation in some markets. It means that
vacancy in the office market hides a shadow space, considering that many operators, like
WeWork and Regus, revealed a real occupancy of 80% (Cushman & Wakefield Research,
2018), with the data above provided by Colliers, the average increase in the vacancy rate is up
to 35 basis point (bps). In the case of an economic downturn, supposing that demand for flexible
workspace decreases impacting on the occupancy level, reaching a level of 60% (just to
101 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 102 Flexible offices in Europe. (2018). Property Market Analysis (PMA).
100
illustrate the problem since “Regus’s occupancy rate reportedly sank below 60% in 2003, when
the company underwent a significant restructuring of the business” – Cushman & Wakefield
Research, 2018), the average increase in the vacancy rate goes to 70 bps. It’s important to
conclude also that the city vulnerability depends on the to the impact concerned in the case of
an economic downturn depends on the flexible workspace share, higher it’s higher can be the
impact. The chart shows cities like Rome that considering the 80% of occupancy its shadow
adds only 4 bps to the vacancy rate, in the other hand, cities like London and Amsterdam the
impact is around 100 bps. The conclusion here is that investors might be aware of flexible
workspace because it hides important information regarding the overall office sector.
Figure 40: European office vacancy including flexible workspace in 2018 (Source: Colliers International EMEA 2019,
Author)
0%
2%
4%
6%
8%
10%
12%
14%
European Office Vacancy Including Flexible Workspace 2018
Space occupied by flex workspace [2018, % of stock] Vacancy rate [2018, %]
101
7.2. MARKET SATURATION
A questionnaire conducted by Cushman & Wakefield shows that stakeholders of the office real
estate market believe that there’s still more growth capacity within the market. Moreover, the
questionnaire revealed that operators believe that the “stabilized” market share of flexible
workspace will account to more than 15%, while landlords think it would stay between 5 to
10%. The flexible workspace operators’ view is quite challenging, for example, in London this
would only be achieved if the actual stock more than duplicate within the next years –
additional 1,4 million square meters (Cushman & Wakefield, 2018). The chapter focus on the
market saturation threat, analyzing the main factor that might saturate flexible workspace and
limit its expansion.
7.2.1. INCREASE IN COMPETITION
For companies and entrepreneurs willing to enter in the flexible workspace market as operators,
it’s known that it has a relatively low entry barriers, which from one side might look as positive,
but this condition, as seen in other markets, represents that competition can also be high and
that market can easily reach a saturation level.
One of the big issues is the low levels of differentiation presented between many operators that
just entered in the market, where in their spaces it’s generally made up by similar facilities –
desks, IT connections and meeting rooms - which increases the difficult to set them apart from
each other. In other words, it shows that the operator must have the capacity to innovate and
stay ahead of the competitors, otherwise the product might become obsolete and uncompetitive,
affecting the occupancy levels, and then business performance (Cushman & Wakefield
Research, 2018)103
103 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
102
The expressive increase in competition within the central markets shows that, from one side
operators benefit if major flexible workspace brand comes into the market, because it improves
the overall sector’s advertising. But, once “there’s no formal commitment as the contract terms
are short”, there’s a significant “danger that workspace users will relocate to newer coworking
spaces”. Some strategies to retain tenants is to provide “regular and attractive events with
current themes for the various target groups” or promote more networking among the members,
which can be beneficial for them. It’s very important to approach the members like this mainly
in the first months, because it’s said that “after the company has been a member for one year,
the likelihood of retention tends to increase” (JLL Research, 2017).
Moreover, once the flexible workspace market is getting more mature, merger and acquisition
(M&A) activity among operators is expected, this happens mainly because to expand and offer
a wider range of options to clients while capitalizing on economies of scale, developers,
investors and operators tends to grab on networks and leverage on current, so probably leading
operators might acquire local operators to expand their networks (Colliers International Survey,
2019).
For flexible workspace, as any other sector, those business casualties – M&A and restructures
– might reduce marginally the sector growth (Cushman & Wakefield Research, 2018)104.
Cushman & Wakefield estimates that around 140,000 square meters of flexible space has
ceased to operate over the last 10 year. The track record confirms the threat, for example, the
Rainmaking Loft announced recently the closing of the St. Katharine Docks due to the huge
propagation of competing operators in London and because WeWork leased the same building
104 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
103
as them (Business Insider, 2017)105. In addition, British Land terminated Regus’s lease in a
London Building to allow them to expand their Storey offering (Cushman & Wakefield, 2018).
7.2.2. SUPPLY SCARCITY
As it’s all about real estate, an important factor that might saturate the market is the scarcity
nature of supply. The limited availability of space across the major cities – where flexible
workspace is more likely to growth in significantly scale – represented by scarce and reducing
volume of office stock can narrow the capacity of the sector to expand, because not only prime
location matters, but operators aim specific products pushing them to search for “pre-lets, off
market space or purchasing buildings”.
In the case of existing properties their requirement of space layouts suited to flexible concept
play important roles – for example in terms of “depth of space and amount of natural light” and
“unique selling proposition features such as industrial charm” (JLL Research, 2017), which
usually don’t match with their requirements of small tailored spaces (Cushman & Wakefield
Research, 2019). As demand for space increases, so also do the competition among operator,
impacting significantly their business, for example, through the decrease of incentives provided
by landlords, which can be economically tragic for them when setting up a new flexible
workspace center.
Furthermore, even if there will be a shift of landlord strategy to a more flexible one is one of
the main paths that might still spin the sector’s expansion, through accommodating flexible
workspace in greater share within their real estate portfolio, new developments or becoming a
flexible operator (Cushman & Wakefield Research, 2019). In number terms, an interview
conducted by Cushman & Wakefield showed that developers in London would accommodate
105 Business Insider. (2017). Coworking space Rainmaking Loft is shutting down in London after WeWork moved in above it. [online]
104
flexible workspace in their new developments, but only a portion of it, which they consider
20% being the optimal amount. If all the speculative office development in pipeline over the
next 5 years in the English metropole could adopt 20% of its space to flexible workplace, over
300,000 square meters would be added to the 75,000 square meters already foreseen, resulting
in a flexible market share of around still 5,5% by 2022 (Cushman & Wakefield, 2018).
Furthermore, the entrance in the market of WeWork really disrupted the growth pace, for
example, in Central London, taking out WeWork “from the equation” of flexible workplace
growth rate, the percentage terms in 2007 – 2012 has been very similar to the one in 2012 -
2017 (Cushman & Wakefield, 2018). It’s very hard to expect that another operator will arrive
in the market and drive an expansion like what WeWork has done and is doing. Cushman
expects the pace of growth to start to slow down as the sector reaches maturity and that market
share of 10% could be reached by 2030 in cities like London.
105
7.3. INVESTORS’ UNCERTAINTY
The recent increase in the interest of institutional investors in adopting flexible workspace
within their portfolios gives rise to important questions, the main ones are the implications on
long-term capital, through the impact on property’s value, and the future disruption of real
estate corporate business control.
Figure 41: Proportion of Central London multi-let building let to flexible workspace operators - since 2012 (Source
Cushman & Wakefield 2018, Author)
The chart representing the proportion of multi-let buildings let to different shares of flexible
workspace in Central London is a good representation of the actual situation of investors’
uncertainty with respect to flexible workspace. Many of them are still assessing the potential
risks when adopting flexible workspace within their property investments one due to the risk
of the long-term investment, and to push back against flexible workspace growth due to future
risks in terms of corporate office business control. This chapter will focus on those matters,
explaining why investors’ uncertainty is a threat for flexible workspace sector growth.
68%
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Proportion of Central London multi-let building let to flexible workspace operators (since 2012)
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7.3.1. CAPITAL IMPLICATIONS
Once the asset is let to a flexible workspace operator, investors exercise due diligence on “credit
ratings and look particularly at the third-party usability of fitted-out space and possible
reinstatement obligations”, if the results are negative there might be an adverse impact on the
transaction price (JLL Research, 2017).
A survey conducted by CBRE106 showed that many investors assumed to be not fully convinced
about the sector, but some that did tend to have positive outlook on it. Hence, they’re still
valuating how much of flexible workspace to include in their portfolios, because they believe
that higher share of flexible workspace in the property might lead to worse long-term capital
value.
Figure 42: Investors are cautious about high share of flexible workspace in their investments (Source: CBRE Research
2018)
106 Americas Investor Intentions Survey (2018). CBRE Research.
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% of investors that think it will increase property value% of investors that think that it will reduce property value
107
According to another survey conducted by CBRE in 2018107, most investors believe that until
20% of flexible workspace share within the building is the optimal proportion to enhance its
value. In the other hand, investors consider that if flexible workspace proportion is over 40%,
the value is negatively affected, even if for some lower grade office buildings, the value has
been increased when the quantity of flexible workspace was higher than the optimal reference.
In terms of EBITDAR margins, Green Street Advisors108 states that flexible workspace model
can generate more than 1.5x the yield of a traditional office lease. However, the study reveals
that during transactions acquirers asked higher cap rates for properties with flexible workspace,
offsetting the EBITDAR advantage.
Until today, the transaction track record regarding properties with flexible workspace inside is
very limited. One of the main reasons for it is because the sector hasn’t met its maturity and
most investors don’t consider purchasing buildings let to flexible workspace. In the next years
the historical factor will be clear, once take-up numbers for flexible workspace has been
growing, the probability of observing transactions with property presenting high amount of
flexible workspace will be higher (Cushman & Wakefield Research, 2018). Anyhow, the
available information shows that building with high portion of flexible workspace transacted
usually were sold with a higher cap rate in comparison to its peers, demonstrating a discount
on its value (Cushman & Wakefield Research, 2018).
A research conducted by CBRE109 in the United States compared 31 sales transactions of office
buildings with at least 10% of flexible workspace proportion (flex transactions) against 104
transactions with no flexible workspace. For each flex transaction there were five similar
107 Building Value: Coworking and Property Valuation. (2018). CBRE Research - Valuation Series. 108 Greenstreetadvisors.com. (2018). Co-working: Good or Bad for Office?. [online] 109 The Property Value Implications of Flexible Space U.S. (2019). CBRE Research.
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transactions without flexible workspace (peer transactions) in terms of: geographic proximity,
building age, size and quality, date of sale and other factors.
Initially, the research shows that as share of flexible workspace within the property increases,
cap rates initially decrease until a plateau (a theoretical “optimal” level), and then it increases
again. It has been developed a draft of the research chart below, the chart is only representative,
that is, the curves are theoretical: the trend line represents the flex transactions dispersion, while
the two lines represent national average curves of transactions without flexible workspace
within the properties for a certain asset class.
Figure 43: Higher concentration of flexible workspace are correlated with higher cap rates (Source: CBRE Research 2019,
Author)
The reasons for higher cap rates when share of flexible workspace is too high are several.
Firstly, the amount of perceived risk of who’s acquiring the asset associated to the high
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Higher Concentration of Flex Space are Correlated With Higher Cap Rates
Trend Line Average Class A Average Class AA
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concentration of flexible workspace pushes the differential cap rate. This risk is related to the
low credit rating of flexible workspace caused by the lack of strong covenants, so properties
with high share of it are recognized as riskier than others with small share of the total rent roll.
According to Cushman & Wakefield110, the tension is still prevalent among traditional
landlords, mainly because of the lack of reputation and covenant strength of many flexible
workspace operators and the risk related to an economic downturn on the income stream based
on short-term agreements, once the fixed liabilities would deteriorate the business profitability
in case demand weakens. With the fast expansion seen in the last years, a lot of stakeholders
are expecting that the “bubble may burst”, which would let a lot of property owners with empty
portfolios or hard negotiations on break leases. Those matters together may impact significantly
the property value, since a valuation based on future cash flows may use that information on
its assumptions.
As alluded before, the correlation of flexible workspace shares and building characteristics is
another key reason to explain the differential cap rate. Within the research data, in class A
buildings, often located in CBD area, flexible workspace proportion was limited by 30% of the
total rentable area, while those that exceed 60% of its proportion in tenancy terms were usually
small, not so appealing buildings located in emerging submarkets. Then, real estate
fundamentals such as size, quality and location present correlation with the share of flexible
workspace, influencing the research results.
Furthermore, when comes up to different markets, the differential cap rate is a consequence of
obvious difference in the average cap rate of each market. In the research, the three flex
transactions with 100% of flexible workspace presented the higher cap rates because they took
110 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research.
110
place on secondary markets, in which average cap rate are typically higher than national
average.
So, besides the first reason that seems relatively reasonable, the fact that flex transactions had
cap rates lower than national and market averages, meaning that those buildings were
transacted in a price higher than the average, can be misleading because usually flexible
workspace is located in “active investment markets and in high-quality buildings” and the
correlation can be determinant for the final result.
To avoid effects of market area and building characteristics on the cap rate performance, the
research compares the “flex transactions” with their relative peers (located within the same
market and submarket, same type of construction and roughly the same size, age and quality).
Figure 44: Most flex transaction outperformed or were on par with peers (Source: CBRE Research 2019, Author)
The results revealed a slightly increased cap rate for flex transactions in comparison with their
peers, on average of 28 basis points (bps) higher. Comparing all flex transactions with their
average peer transaction, only 10% had a lower cap rate, while 45% had a cap rate similar
45%
45%
10%
Most Flex Transactions Outperfomed or Were on Par with Peers
Equal performance Higher cap rate Lower cap rate
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(around 25 bps of difference) and 45% had higher cap rates. The result seems to converge to
the hypothesis that high concentration of flexible workspace decreases property’s value,
Finally, the research analyzed the correlation between cap rate performance and concentration
of flex space as a benchmark. To do so, it has divided the flex transactions in two groups: those
with share of flexible workspace lower than 40% and those with higher than 40%. The results
showed that increase in cap rates was more evident when there was a high concentration of
flexible workspace tenancy, in the flex transactions with more than 40% share over than 64%
had higher cap rate than their peers, and the average flex cap rate was 46 bps higher than the
peer average within this group. In the other hand, the group of flexible workspaces share lower
than 40% presented circa 67% of the transactions on par with their peers, while the average
flex cap rate was 12 bps higher than the peer average within this group.
Figure 45: Lower share of flexible workspace have minimal impact on building value (Source: CBRE Research 2019,
Author)
Lower cap rate7%
Equal performance
66%
Higher cap rate27%
Share of flexible workspace < 40%
Lower cap rate14%
Equal performan
ce22%
Higher cap rate64%
Share of flexible workspace > 40%
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The conclusion of the research is that “real estate fundamentals remain the most important
consideration for investment, regardless the presence of flexible workspace”. Once the property
has high quality characteristics, located in a prime zone with a strong business market,
moderate amount of flexible workspace might not impact building’s value. However, the
conclusion is not exhaustive, mainly because the sample is limited in terms of flex transactions.
So, regarding the value of buildings with a majority share of flexible workspace, the quality
and location of the real estate asset is still the prevalent factors to ensure property value, it
happens because the covenant of flexible workspace providers can’t still be compared with
consolidated companies as tenants. A strategy to overcome this problem is the higher price
asked by landlords, in order to compensate the higher risk caused by the income insecurity
jointly with the profit-sharing lease agreement which in many cases landlords don’t do, then
not sharing additional revenue in positive moments (Cushman & Wakefield Research, 2018).
When it comes to portfolios with low to medium share of flexible workspace (such as 20%),
the institutional investors may benefit from having it on their properties, because it can be
considered an attraction factor for current and incoming tenants, which may impact positively
on property’s value, through the higher rents achieved and the enhanced building’s visibility.
Apart from the higher rent collected by the flexibility price, the advantages of accommodating
flexible workspace in an optimal portion are several: provision of amenities and services,
possibility for tenants to grow inside of the building or project-base necessity. Furthermore, a
presence of a high brand flexible workplace operators can improve the building visibility,
attracting conventional consolidated tenants that are searching for this kind of environment,
because it enables them “to mix and associate with the flexible workplace brand, its clients and
its clients’ guests” (Cushman & Wakefield Research, 2018). But again, the lack of hard data
supporting these views make hard to conclude absolutely that there’s an optimal share of
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flexible workspace that can increase building’s value, because it depends on further
characteristics, mainly location and quality, that determinant for property value.
7.3.2. CORPORATE REAL ESTATE CONTROL
The flexible workspace sector growth and its potential to keep expanding the “footprint and
deal size” might mean a risk for landlords and investment professionals in losing the office real
estate market control. It’s represented by the creation of a competition in the upside of the
corporate real estate supply chain that hasn’t seen before. It’s coming out because flexible
workspace operators change the tenant’s mind in terms of what to expect from their real estate,
which puts traditional landlords and investment professionals under pressure. So, as the flexible
wave expansion and attractive growth numbers has raised up the real estate sector, it’s
generating opportunities for traditional landlords to shift their portfolios and review their
strategy (Cushman & Wakefield Research, 2018). Initially, in many top office markets, the
flexible workspace operators competed for taking tech tenants, but now they are leasing the
most space also for law firms, investment banks and other major traditional uses of office space,
this fact gives to them enormous bargaining power when negotiating their master leases.
Beyond just the flexible leases themselves, flexibility and service offerings are influencing also
traditional office leases, once tenants are demanding shorter and more flexible lease terms,
becoming increasingly prevalent, especially for growing or more volatile divisions, forcing
more landlords to offer flexible solutions like common amenities (Colliers International
Survey, 2019)111.
When considering entrepreneurs, freelancers and start-ups, the traditional landlord didn’t feel
worried about the flexible workspace big wave. Once operators started aiming at consolidated
corporates and becoming more attractive than the traditional way, the panorama changed
111 U.S. Flexible Workspace and Coworking: Established, Expanding and Evolving. (2019). COLLIERS INTERNATIONAL.
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abruptly. The shift for big firms to consider flexible workplaces as a real estate strategy has
become one of the main concerns to conventional landlords (Cushman & Wakefield Research,
2018)112. As explained before in this paper, flexible operators anticipated the demand from
larger occupiers to accelerate their growth, since this kind of tenant de-risk the flexible
covenants of small companies and individuals, allowing greater financial strength. But this
market movement created a conflict of interests, because flexible operators encroached directly
their traditional landlord territory (Cushman & Wakefield Research, 2018). According to Green
Street Advisors113, the flexible workspace sector growth has great potential to impact
traditional office landlords because their facilities generally require less space - about 7 square
meters per worker compared with 16 square meters in traditional offices. Furthermore, flexible
leases for consolidated companies tend to be “six months to five years, much shorter than the
typical lease term of five to 15 years”. The net effect, according to research, is to “undermine
the stability and security of cash flow for landlords and create more churn among tenants as
the shared working space approach spreads from small businesses to large ones.”
“A lot of people originally thought of the shared office-space providers as bringing tenants,”
said Tony Malkin, chief executive officer of Empire State Realty Trust Inc., owner of New
York’s Empire State Building. “But I think now we’ve seen -- particularly with WeWork and
other providers’ expansion into the enterprise solution -- that it’s much more about disrupting
the relationship of tenants to landlords, of tenants to brokers, of brokers to landlords.”
(Bloomberg, 2018)114.The uncertainty with respect the corporate real estate control is that
evident that there’s demand for landlords taking the business into their hands. The brokerage
CBRE Group Inc. launched last year a business called Hana that will “help landlords create
their own flexible offices”. Andrew Kupiec, Hana’s CEO, says that “landlords want to be a
112 Coworking 2018 - The flexible workplace evolves. (2018). Cushman & Wakefield Research. 113 Greenstreetadvisors.com. (2018). Co-working: Good or Bad for Office?. [online] 114 WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back. (2018). Bloomberg.
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part of the rising demand for that type of space, they want it done in a way that they’re put in
control and they have transparency”. Hana will operate separately from CBRE’s brokerage
business, where WeWork is a client (Bloomberg, 2018).
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8. CONCLUSION
The aim of this thesis was to introduce the flexible workspace in corporate real estate to
investment professionals. First, the thesis concludes that the sector isn’t something new, it
exists approximately since the half of the last century, but it achieved a significant position
mainly after the financial crisis of 2007–2008. Obviously, the flexible workspace business
appeared because entrepreneurs saw an opportunity due to the apparently demand for
flexibility, the motivations for using it are several, but it can be concluded that they are all
based on the changes of how people work and the real estate strategies of companies, which
have been boosted once technology development enabled more effective ways to do business
and economic recession periods push individuals and firms to improve the use and allocation
of resources. The definition for flexible workspace is not exhaustive, since its offered in a vast
range of models and with numerous different features, anyhow it can concluded that a good
way to define it that in comparison to traditional model it refers to office space that can be
leased fast, with tailored solutions in terms of lease duration and space layout, offering a diverse
number of services and amenities, where people and companies once sharing common spaces
tends to interact and network in higher intensity. Finally, it concludes that this different
approach calls the attention of professional investors and traditional landlords, which is the
main motivation for the thesis, since asset allocation is essential for creating long-term value,
in general these players are curious and cautious about the recent meteoric growth of the sector,
from one side it might mean a great opportunity to invest if the sector keeps it trend, from the
other hand it can be disruptive because great part of the operators have not proved its financial
resilience and even more “apocalyptical” effect lies on the competition for corporate real estate
control.
In the second part, the thesis illustrated the current snapshot of the sector around the world,
revealing that the footprint of flexible workspace stills represents only circa 1% of total office
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stock, but there’s been seen a rapid expansion of the sector, some leading cities recorded a
stock share over 5% and annual take-up share of 2 digits. Anyhow, another conclusion is that
there’s a higher concentration of the sector in two central markets: Europe and United States.
Then, when focusing the attention to those central markets, it has been possible to see that the
heterogenic dispersion is not only about continents but within them some countries and cities
display more protagonism than others. For example, looking at the proportion of flexible
workspace with respect to the overall office sector, in terms of stock and take-up, it manifests
higher maturity in the cities of the United Kingdom – such as London, Bristol and Birmingham
– and the Netherlands – mainly Amsterdam – rather than the rest of Europe. While in the United
States, primary markets like New York lead the numbers for flexible workspace in comparison
to the other markets in the American territory. It can be concluded that the reasons for the
concentration in those markets lie on their economic strength, dynamicity and innovation due
to capacity of attracting business investment and the scale in terms of office stock: London and
New York are the only Alpha++ cities in the World according to the GaWC Ranking 115 , while
Amsterdam is famous for being an innovative hub always ahead for new trends, and specially
for the flexible workspace sector, it’s the birth place of several operators. Moreover, the thesis
concluded that there is a huge number of flexible workspace providers operating, but two of
them are represent outstanding performance and dominates the sector: IWG and WeWork. The
first is one of the oldest operators in the market, that survived some bankruptcies and passed
through a financial restructuration in the early 2000 proving its resiliency, while the second
was only found in 2010, but its impressive expansion has been responsible for the abruptly
sector’s growth, for example it became the largest tenant in New York exceeding companies
like the immortal J.P. Morgan. Finally, the thesis concludes that there are some specific type
of individual, firm and sector that is most adopting flexible workspace as their office. For
115 Lboro.ac.uk. (2018). GaWC - The World According to GaWC 2018. [online]
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individuals those that work in the so-called gig economy – freelancers – are the individual
stereotype of flexible workspace uses; for firms those that are using more are startups and small
and medium-sized enterprises (SMEs); and for sectors there’s been a higher concentration of
Information and Communications Technology and professional services industry.
In the third part, the thesis shifts its outlook from a market approach to a more analytical one,
from which important conclusions for investment professionals have been made about the
flexible workspace business model. Through a SWOT analysis, the thesis concludes that there
are important internal factors related to the flexible workspace product and the operators that
can positively and negatively impact the sector. First, regarding the product itself, it’s possible
to affirm that the fact it offers differential features in comparison to the traditional office
offering for their users is determinant to consolidate and attract more demand, those distinct
characteristics are: business flexibility, services and amenities, upfront costs reduction, creative
environment and community attraction, through which tenants don’t need to concern about
forecasting real estate future needs and can easily expand or shrink, focus on their core business
and still have access to complex assistance, reduce initial capital investments allowing even
small business and individuals to have their own space, promote innovation and business
activity through intense network with customers and partners and attract and retain talent. The
other side of the coin, that is, the vulnerabilities of the product that might repulse new adopters
are: high occupancy, lack of confidentiality, security and company image, those elements can
block firms and individuals of leasing flexible space because they represent problems of
productivity for employees, risks regarding the loss of confidential data once you might share
the space with competitors and the fact that many firms search in a headquarter a sort of strong
representativity to the market. Regarding the business operation, it can be concluded that the
main strength is the capacity of the business to adapt so fast and create innovative solutions as
their demand needs changes, it also improves the wide range of revenue sources, which can
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prepare the business to always satisfy their customers’ needs and mitigate income risks in a
possible recession, while its main weaknesses that can impact deeply the sector is the operator
low credit rating profile, which inhibits a lot of landlords to welcome flexible workspace
operators within their properties and profitability issues regarding the business running,
because as it’s based on margins as fixed costs are very high – mainly due to real estate leasing
– the volume of leasing activity within a flexible workspace center needs to reach a high levels
in order to first break-even and then keep profitable.
Once the thesis looked to external factors regarding the flexible workspace business model,
that is: overall market and landlords, insights regarding opportunities and threats having been
made about the sector. With respect of the overall market, first it can be concluded that there
are some conditions – here called “business environment” – already existent that may positively
impact the sector – the actual offering of traditional real estate, digital infrastructure and sharing
economy – because once demand compare the high price in prime areas and typically long term
duration of traditional office they might choose flexible solution, the technology development
permitted the new ways of doing business and all the support behind flexible workspace to be
what’s it today, and the sharing economy boosts the sector once resource allocation can
improve companies and individuals to run their operation in more costly effective way. Also,
it can be concluded that there are trends in the market – here called “catalyst factors” – that
might increment the sector growth, the first two trends – gig economy, startups and SMEs boost
– can help to consolidate the sector because they deal with increase in the typical users of
flexible workspace as it has been seen in the second chapter: freelancers and independent
workers and startups and SMEs, while the increase big companies’ adoption of flexible
workspace can support the sector because this kind of tenant brings more security income for
the business operation, and finally the new accounting regulation will push firms to rethink
using flexible workspace once in many cases it will sit out of the new lease definition, whilst
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traditional leases will become a liability on their balance sheets. From the other side, it can also
be concluded that market represent a threat for the sector development. In the case of an
economic downturn recession, impacts can be tremendous mainly for the smaller operators,
which represent a great part of them, and the fact that summing actual vacancy rate and the
flexible workspace share with respect to office stock, it can be detrimental for the overall office
market, which may push investors and landlords acceptance of those operators in their
buildings. A further conclusion is the market saturation threat, the low barriers to enter in the
market and the low differentiation among many operators increase in competition within the
sector, then, as it gets more mature, merger and acquisitions processes will naturally take place
because the largest operators might buy local ones to take a next step of expansion, but for the
sector as overall it will break the growth rate. The fundamental nature of real estate – supply
scarcity – also play a key role, as the competition increase, the fact that flexible workspace
searches for specific locations and building characteristics, the lack of alternative will slow
down the sector.
From the landlords’ side, it’s possible to conclude that the fact they are taking a bigger step
into the flexible workspace market is an opportunity to consolidate the sector. The strategies
are several: approaching tenants with more flexible terms and offering services and amenities
or through developing an in-house operator, it’s not so easy as it looks, since it goes beyond
their business core, anyhow traditional landlords can also partner with operators or buy one
and scale on their real estate portfolio and finance capacity. In the other hand, it has been
concluded that investor’s uncertainty with respect to flexible workspace business is a key threat
for the sector. The transactions data is still too small to take hasty conclusions, but there are
some evidences showing that high concentration of flexible workspace within a property
decrease its long-term value, it happens due to the risk perceived by investor when acquiring
such properties, because operators represent low credit rating caused by the lack of strong
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covenants, anyhow real estate fundamental, such as location, building characteristics and
market still play a key role. The second investor’s uncertainty is the fear of losing the control
of the corporate real estate business, it can be concluded that this is happening because of two
main reasons: flexible workspace operators are targeting consolidated corporations –
traditional landlord main tenants – and once those realize the lack of customer service, speed
in occupation and hard leasing process in the traditional way, many might move to flexible
workspace, and second, the fact that some flexible workspace are buying properties and then
becoming landlords, which be disruptive for traditional ones.
Finally, it’s possible to conclude that there are strong evidences that the sector will continue to
mature and expand, but “disrupt the office market and traditional landlords’ control of
corporate real estate” is too much in the author’s opinion. For investors deciding to evaluate
this sector as an opportunity to invest, it’s possible to conclude that still knowing the market,
submarket and the asset very well still plays a key role to create long-term, and flexible
workspace proportion within the portfolio might be assessed case by case. Moreover, from the
thesis is possible to conclude that understand the tenants needs for flexibility within the
properties that the investor own is essential to take a bigger or smaller step into the sector, and
some strategies to do this movement are very interesting to mitigate risks such as partnering
with existent operators. In case of leasing to flexible workspace operators, due diligence on
their credit profile and financial capacity is vital, because it’s still very complicate to conclude
the consequences of an economic downturn, anyhow those that are prepared for running during
the recession will probably survive, because flexible workspace is very unlikely to disappear.
122
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