Catching Up With Shared Workspace Trends: A Q&A With Steve King

If you want to know what’s going on with shared workspace trends, ask Steve King. Partner at Emergent Research, King has a data-based perspective on the industry that stretches back 10 years and is steeped in his vast experience studying small business.

I recently spoke with King about what’s driving shared workspace growth, why his coworking forecasts regularly come in under, and how new accounting rules will affect the industry.

Cat Johnson: We’ve talked about coworking several times over the years, about the emergence of the industry and the fact that coworking makes people happier and more productive. Let’s pull back a bit and look at the growth of the shared workspace industry as a whole: What’s driving it and where all of this is going?

Steve King: The big thing right now is that the real estate industry has fully recognized shared and flexible workspaces. The real estate industry is fairly stodgy and has a business model based on the long-term lease, but they’ve recognized that the world is finally changing.

One of the things that’s really surprised me is that it took them this long, however they do seem to be—as an industry—embracing shared workspaces to a much greater degree.

What do you think is behind that?

In large part, it’s driven by the fact that large corporations are now showing more interest in coworking and shared spaces. The IBM deal with WeWork and the stuff Verizon is doing, both of those have triggered a growing interest on the part of major corporations.

Coworking has historically appealed to startups and independent workers. Now what we’re seeing is a third group finally starting to come in, the larger corporations, and a little bit behind that are smaller companies that have traditionally not been in coworking spaces at all. Suddenly we’re seeing the traditional market drivers—startups and independent workers—continue to move into coworking, so that’s helping to drive growth, but now you have the larger firms and even the smaller firms, which are both sectors that are much bigger in terms of numbers and space needs than startups and independent workers.

It’s a second generation of shared workspace growth. The first generation, we got to where we got through, initially, independent workers, then the startups came on and really drove the growth, especially in the larger spaces like WeWork, so that’s continued to happen. Now we’re layering on top these larger organizations and smaller traditional small businesses.

We do a coworking forecast every year and every year we’ve been low. It’s happened again, I think we’ve missed our forecast low again, even though when we look at the numbers we say, “Wow, those are big numbers.”

From your perspective, why do shared workspaces appeal to corporations and large companies?

What’s happening with the enterprises is they’re recognizing they have a base need for traditional space but that they also rent way too much space under these 10-year lease agreements. What they’re starting to realize is that it’s cheaper and more flexible to have their base need filled then, above that, rent flexible space which increases their business flexibility and agility. I suspect we’ll start to see more and more big companies allocating part of their space needs to flexible spaces.

Because of that, the real estate people are seeing that if they have a coworking space in their building, not only does it make the building look cool, but it’s overflow space for their regular tenants. They see that their regular tenants will be more willing to lease a certain amount of space under the traditional 10 or 20-year lease terms, knowing that within the building there’s flexible space that allows them to overflow when needed.

I’ve been watching this industry for a decade and I’ve been waiting for corporations to start to figure this out. That’s what’s happened over the last year—the real estate industry has really woken up. To me, that’s the next tier of growth. I don’t see the industry slowing down in terms of growth opportunities. We were forecasting an expectation that member growth would be in the low 20 percent range per year for the next five years on a global basis. I think that’s now out of date and already way too low.

When you look at your forecast and see that you’re coming in under, is it the real estate people that you’ve underestimated or is it growth in every segment?

We’ve missed international growth to the extent that it has grown. All of our forecasts we caveat by saying we’re not sure anybody knows what’s going on in China. Now, I’m going to say we’re not sure anybody knows what’s going on in China and India. Both of those places are kind of wildcards for a forecast, but certainly China is bigger than we thought it would be at this time. India is actually where we expected.

The main thing that’s driven it has been faster growth than we expected in the shift to big coworking spaces—spaces with more than a couple hundred members. We’ve been using 250 and that’s starting to be too low, in terms of the definition of big coworking. We’ve been surprised at how quickly the bigger coworking spaces have spread. And the spread across the U.S., out of large cities and urban areas into suburban areas and small cities is happening faster than we expected. Those have been the two main drivers.

When I look at our most recent forecast, I think the corporate sector can make such a big difference in such a short period of time. We’re still at about 1.4-1.5 million [shared workspace] members. If you get 10 companies that each move 25,000-50,000 employees which, with big companies wouldn’t be unusual, that affects the numbers too. Going forward, I think we’ve underestimated the growth rate of the enterprise sector.

What else is going on that may affect the industry?

Another thing is a change in accounting rules for lease accounting in 2019. The Financial Accounting Standards Board (FASB) has a new rule around putting long-term leases onto the balance sheet. Historically, one of the reasons you can sign a 10 or 20-year lease if you’re a corporation is it doesn’t show up on your balance sheet so it doesn’t affect your financial ratios.

Starting in 2019, it will now be viewed like debt. Investors and bankers will view that as debt so it changes debt equity ratios. The rule has been finalized but they haven’t finalized how long a term will be a long-term lease but it will probably be anything over three years.

If you’ve got a bunch of 20-year leases, that’s not good. The chief financial officer is going to tell the real estate people that they don’t sign any leases for real estate unless it’s absolutely necessary, beyond whatever that final rule stipulates, unless you really have an amazingly good reason. Corporations are waking up to that too.

Your focus is on small business. How has your work changed as the shared workspace industry has taken off?

We’ve had to shift a little bit of what we’re doing as we’ve had to better understand what large corporations are doing. There are a lot more partnerships between small businesses and large businesses, which have been major hirers of independent workers. The corporate workforce now is anywhere 25-40 percent contingent, up from less than half of that 10-15 years ago. We’re really starting to see it in terms of private talent clouds—corporations setting up their own Upwork-type systems.

The biggest shift for us is that we now have to spend more time understanding what big companies are doing and how that’s impacting our small business sector and our independent worker sector, including coworking.

We’ve long studied industrial structures. We’ve been following something we call the barbell economic structure where there is a small number of global giants in an industry, usually between three and seven, that tend to command well over 50% of the industry’s revenues—usually even more than that, in terms of industry profitability. Then there’s a growing number of very small companies and independent workers in the industry, and a hollowing out of mid-size firms that aren’t agile enough to compete with the small firms and don’t have the skill to compete with the big firms. That industry structure is clear in almost every industry we’ve studied and it continues to exhibit itself in that way.

Besides the next coworking forecast, what else are you working on?

We’re in the middle of a project to understand how independent workers view large corporations, in terms of what makes a large corporation attractive to work for. We call it the Client of Choice Project. Those are the highly-skilled independent workers that are in growing demand because of talent shortages and the worth of talent. Corporations are realizing they have to be an attractive place to work for those folks now, as opposed to just traditional employees. We’re in the middle of a deep dive project on that. We’ll be releasing that to the public, at some point.

We’re also doing a fair amount of work about how automation and AI are affecting knowledge workers.

Any key insights you’ve gained from studying automation and AI?

The big thing is that there’s all this noise about AI eliminating jobs, but we’re just not seeing it. Eventually it could happen, but we’re a long way away from it, based on our work. What we’re mostly seeing is that automation and AI is creating new opportunities for these accountants. They can add more value in their practice if the machine is doing data collection and aggregation and the first layer of analysis and syntheses.

That means in the case of accountants that they can spend more time being advisors for their clients instead of just collecting and dealing with the data. It’s going to require business model changes and, like any technological change, there will be winners and losers and not all accountants will be able to make that transition well. But, for the industry as a whole, the signs are actually very positive. For the last five years, the accounting industry has grown both revenues and profits much faster than the economy is growing, so the argument that the industry is going away, which is being made by some technologists, flies in the face of the data.

We come away pretty optimistic for knowledge workers that automation and AI, at least for the foreseeable future, will be used to augment their work and it will empower them to add more value.

I’m old enough to remember the beginnings of the spreadsheet. There were all sorts of articles and pundits saying we weren’t going to need anywhere near as many financial analysts. What really happened was, the spreadsheet enabled more analysis to be done more effectively and more cheaply. We now have about 10 times the number of financial analysts as we had when the spreadsheet was released.

I’m fairly optimistic on the knowledge worker side. When we get into the less skilled jobs, then the story changes and I get a little more pessimistic about it, but for knowledge workers, the automation is going to be good. We’ve been talking to college students and high school students and accountants in their twenties about how they view automation and they all view it as a wonderful thing. They see that it will remove the drudgery of being an accountant and turn them into analysts, which is what they want to do anyway. They’re not becoming accountants to add up columns of numbers or get a shoebox of statements and type it into the computer.