- 2018 has become a milestone year in which commercial real estate took a significant step into the flexible workspace industry
- One of the first landmark deals involved Blackstone Group and The Office Group, and the trend has since grown considerably
- Property owners are now looking for new ways to partner with coworking operators, which presents numerous opportunities for our sector
2018 marked the year the commercial real estate industry started paying serious attention to coworking. The coworking industry has experienced exponential growth over the past 3-5 years and in that time it has revolutionized the way people use, lease, and interact with office space.
Commercial real estate is now crossing over into the coworking industry. We saw the first stage of this in 2017 when Blackstone Group took a majority stake in The Office Group and British Land announced the launch of their new flexible workspace offering. Things have moved fast since then and CRE’s entrance into flexible workspace has led to a shift in the way the industry operates.
Since modern coworking first started back in 2008, most coworking operators have operated in a traditional way. The operator would lease space and it sub-let it in the form of memberships. While this is still common practice today, leading coworking operators are using CRE’s interest in the industry to their advantage.
5 Ways CRE is Crossing into Coworking
This shift is altering the business model of various operators, especially when it comes to lease commitments and negotiations.
- Regular lease agreements. Operator signs a lease and sub-lets the space to members. There are three types of leases: full service, plus electric, and Triple Net (NNN). You can read more about these here.
- Management Agreements. Operators have taken note of CRE’s interest in coworking and they have started to negotiate management agreements. Property companies are interested in this model as it doesn’t require them to operate a business that’s outside of their core focus — there’s more to coworking than physical space. This is similar to the way the hospitality industry works; the property company enters into a management agreement with a hotel provider and the hotel is responsible for fitting out and running the hotel. The property owner gets a cut of the earnings. This model is advantageous for flexible workspace operators as it provides them with an added layer of protection should an economic downturn hit, as they won’t have any long-term lease commitments.
Suggested reading: Are Management Contracts the Future of the Flexible Workspace Industry?
- Property Owners Operating their Own Flexible Workspace Brand. In the aforementioned models, property companies and flexible workspace operators see each other as allies or partners. In this model they see each other as competition. Coworking has become the office of choice for companies large and small; property owners are now aware of this and to prevent losing their long-standing clients and in order to attract new ones, they have started to add coworking to their portfolios. Reports have also concluded that allocating a certain percentage of space to coworking can raise the value of a building. Property companies that are already offering a coworking service include British Land, Tishman Speyer, GPT Group, and Dexus. On a similar note, Brookfield, Onex, and other private equity groups made offers to acquire International Workplace Group (IWG), while CapitaLand took a 50% stake in The Work Project.
Suggested reading: Should Property Owners Delve into Operating a Coworking Space?
- Landlords Custom-Build Properties for Flexible Workspace Operators. This is a creative way in which property groups are responding to the growing demand for coworking and flexible workspace. Property groups are asking what operators need from the space and they are willing to build a space that meets those criteria in order to rent it to flexible workspace operators. One example of this is The Henley Group, which is taking this approach in Germany and the Netherlands.
- Brokers also Want a Piece of the Pie. Just as property owners have realized the value and potential of coworking, so have brokers and real estate services providers like Savills and CBRE. This approach has caused a bit of debate and controversy, especially after CBRE announced its new coworking brand Hana earlier this year. On the flip side, WeWork entered into broker turf this year when it launched its own brokerage service.
CRE’s entrance into coworking marks a new era for the flexible workspace industry. Existing flexible workspace operators will need to partner with property owners or find creative ways to secure their space in order to ensure long-term success. Over the past year competition has intensified and we’ve seen increased M&A activity; this will continue at a higher pace in the coming years as property groups become increasingly active and seek to gain a stronger foothold in the industry.