Should Property Owners Delve Into Operating A Coworking Space?

Launching a new coworking brand and entering into profit sharing agreements are the two main strategies property owners are using to delve into coworking.
  • Coworking is the new normal and it has caught the eyes of large corporations and property owners. 
  • Property owners are now actively seeking to enter into the world of flexible work and coworking.
  • George Vogelei from Transwestern explains the strategies property owners are using to delve into coworking and the benefits and risks associated with each.

Coworking is the new normal and it has revolutionized the commercial real estate industry. The flexible workspace industry has set a new standard on how commercial space is used, experienced, and leased. The past couple of years have seen an increase both in demand and also supply of flexible workspace. WeWork has become the largest office tenant in Manhattan and London, JLL predicts that 30% of corporate office space will be flexible, and private investment continues to pour into the industry.

The growth of flexible workspaces caught the eyes of large companies, giving rise to corporate coworking. More recently, it has caught the eyes of property owners and real estate companies, which has changed the relationship between landlords and flexible workspace operators. Some large real estate companies and owners have opted to eliminate the middleman and launch their own brand of coworking or flexible workspace. Others have instead opted to enter into profit-sharing agreements with operators or to acquire existing brands, which many believe is the future of the industry.

Examples of the former include Dexus, the GPT Group, WKO Inc., and British Land, among others. Examples of the latter include Blackstone, which acquired The Office Group; Grosvenor, which partnered with Central Working; Washington Prime Group, which partnered with COhatch; and CapitaLand, which acquired a 50% stake in The Work Project; among others.

Allwork.Space spoke with George Vogelei, Executive Vice President at Transwestern, to understand the opportunities and risks that coworking presents to property owners that are looking into operating their own flexible workspace brand and whether landlords pose a threat or an opportunity for operators.

Allwork.Space: What are some of the key trends you believe are currently shaping the flexible workspace industry?

George Vogelei: I think that the number one trend at the moment is strength of scale; we are seeing large flexible workspace providers become more aggressive to fill their workspaces. Additionally, there’s also increased consolidation activity; larger groups and private investors are buying smaller providers and grouping them together.

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In terms of scale, we are also experiencing the importance of having a robust network; operators are increasingly expanding their footprint beyond key cities like New York and London. Flexible workspace brands that want to survive in the future and compete for larger accounts need to offer a strong network of locations across the globe. This is one of the main reasons why regional operators are going national, and national ones are going international.

We’re seeing property owners and landlords become increasingly interested in the world of coworking. Some have entered into management agreements and others have launched their own flexible workspace brands. What’s your take on both of these strategies?

I think profit sharing is a really smart strategy, both for coworking operators and landlords. It mitigates the risk for both of them. I think the profit sharing model will reach a point where it’ll be quite similar to the hotel model, where the owner of the building gets a share of the profits and the hotel brand runs the space. It’s a smart strategy as it allows each player to focus on their core business and expertise.

Launching an owned flexible workspace brand will provide property owners with more profit, however it involves more risk. This step makes sense for property owners that have a vast real estate portfolio. If we look at what’s driving coworking today, it’s the potential of scale, so property owners that meet the above criteria already take care of the scaling part, especially as it will help them create a strong workspace network.

Yet, launching an owned coworking brand is still a significant undertaking, and property owners should think about it carefully, as it would mean they will get into an auxiliary line of business and it will take away funds, time, and human resource from their core business. Not only is this strategy capital intensive, but it also would mean shifting operations into a more consumer-oriented business. Which is why for local and regional property owners, it makes more sense to go into profit sharing agreements.

Do you see any additional opportunities for established coworking operators now that landlords are more interested in coworking?

There is an opportunity for experienced coworking operators to do consulting with building owners. If owners want to get into the business of coworking, they need to understand what it will take to be successful before they make any investment; having an experienced operator that knows and has overcome the challenges is an important asset.

Anything else you’d like to add?

The industry has gone through phenomenal growth; it’s now a crowded market where consumers are having a hard time understanding the differentiation between one brand and another. This, plus the fact that since the last economic downturn this type of arbitrage hasn’t been present makes it an interesting and fascinating time to watch the industry and see what happens.