- At Disrupt CRE 2019 in New York City, industry experts shared their predictions on what the real estate industry can expect from workplace-as-a-service.
- While the concept has been around for almost a decade, stakeholders such as landlords and brokers still aren’t fully realizing its potential.
- Ryan Simonetti, co-founder of Convene, and Anna Squires Levine, general manager of coworking for Industrious, discussed workplace-as-a-service and its role in the future of work.
One of the major disruptors in commercial real estate is the workplace-as-a-service industry. Now nearly 10 years old, workplace as a service is no longer a fad. It’s here to stay.
However, the concept is still being understood by stakeholders such as the capital markets, brokers, landlords and occupiers.
The notion of real estate as a product has accelerated since 2015 as the number of operators has increased and landlords increasingly seek opportunities to partner, contract or operate flexible workspace.
At Disrupt CRE in New York City, two leading providers of workspace service shared their predictions on what the industry can expect next.
Suggested Reading: 7 Ways Technology Is Disrupting CRE
Here are our takeaways from the event:
1. The real estate consumption model has fundamentally changed.
Until recently, when a company took office space, the landlord provided “a box” and occupiers were responsible for everything else inside the box.
“The expectation was that the occupier would take that box, design, build, deliver their own experience and the landlord didn’t really have to do anything outside of the box,” explained Ryan Simonetti, co-founder of Convene, a leading provider of meeting and workspace.
It also assumed that companies would be able to predict with a high degree of certainty what their business and staffing needs would be in 10 years, something few enterprises can do today.
Following the model adopted by industries such as software and data networking, real estate is shifting from an ownership to subscription platform.
“When you have a fixed asset like an office that’s relatively expensive to build, expensive to maintain, and oftentimes underutilized, those asset classes tend to end up in some sort of outsourcing over time,” explained Simonetti, which is exactly what is happening to the workplace.
“Now, just as a software company will sell you back software, or a data center company will give you access to a server, you can buy into the infrastructure of a Convene or Industrious,” he said.
Such a model allows employers to focus on their employees, landlords to focus on their core competency, and space-as-a-service providers who design and operate the space to create an experience for all building occupiers.
2. Employers are not seeking space. They’re seeking happy, productive employees.
The framing of space as a service is incongruous to how the customers – landlord, tenants, members, users — think about what they’re buying, according to Anna Squires Levine, general manager of coworking for Industrious, a premium flexible workspace provider.
Instead, they are in search of a business outcome.
“What they want to buy is productivity. They want to buy happy team members,” she said.
“At Industrious our mission is to make sure your people have a great day of work and that they’re engaged and productive and you can show up and do what you’re trying to do,” she added.
“We’re getting to the point where companies like Convene and Industrious actually do that better than most companies can do themselves,” Levine said, save for the employees who work in the headquarters of Google or Facebook where “every service you might need is provided.”
“Unless companies are able to invest a tremendous amount in your experience, you will ultimately need another model,” she related.
Expert space-as-a-service providers can deliver a “95% product” that meets a company’s culture requirements, business goals and risk model, she said.
3. The evolution of space-as-a-service parallels the hotel industry which shed its capital-intensive structure to become a brand and management platform.
When brands such as Marriott, Sheraton and ISG first started, they had to own all their own property, and eventually access to capital became their biggest barrier, Simonetti explained.
Eventually they aligned with big institutional investors, including real estate asset managers who would raise money in property vehicles.
As the industry evolved, hotels went from owning and operating properties to the brand and management platforms we know as Marriott, Hilton and Hyatt today.
“The same thing is happening in our industry, which is also happening in co-living,” Simonetti noted.
Convene’s model is shifting to a managed agreement with the building owner, which is typically structured just like a hotel management contract: a percentage of gross revenue and profit-based split.
“The only thing keeping that from becoming the standard is the capital markets,” said Simonetti, who worked in real estate acquisitions and structured finance for hospitality and commercial properties prior to co-founding Convene in 2009.
“The industry is so new that operators can’t predict what’s next,” he said. “Additionally, the debt and the equity markets that drive much of the decision making and behavior from institutional owners haven’t yet figured out how to value the income streams that come from companies like Industrious, WeWork, Convene and others,” he added.
“We’re close. I would say in the next two to three years capital markets will figure it out. Then companies like us will be branded operating platforms that understand how to create value and deliver a magical experience to our collective customers.”
4. Space-as-a-service can deliver landlords greater income and a better tenant experience.
In the future there will be fewer leases signed and more partnership alignments made as landlords realize they can make more money with an outsourcing model, according to Levine, who shared a recent example.
“Industrious opened recently in Fashion Square in Scottsdale,” she related. “In just 10 weeks, the space is nearly full. And the landlord is getting more out of it than when it was a Barneys.”
Although the economics of meeting and workspace vary, it still can generate a 50 to 100 percent premium for the landlord per square foot, according to Simonetti.
“Our workplace product generates anywhere from 2.25 to 3 times what the market rent equivalent would have been,” Simonetti said.
“You can make more money and create a better experience,” he emphasized, noting that a similar scenario happens in residential buildings with premium amenities.
“With Whole Foods and Equinox in an apartment building, everyone pays more to live there.”
5. Operating flexible workspace takes a very different skillset than property management.
In today’s fast-paced and complicated world, it’s more important than ever to focus on core competencies and leverage the competencies of others to remain competitive, the panelists emphasized.
Simonetti and Levine described the unique skill set that pure space-as-a-service providers bring, and the danger of assuming it’s an easily transferable advantage.
“There’s a big difference being in the service business and being in the hospitality business,” maintained Simonetti.
“We always say at Convene that hospitality is the emotional human-to-human delivery of a service experience. That is very different than being an investor, a developer, facilities manager or property management provider.”
“Unless the landlord has operating capability vertically integrated – not in services, construction, design and property management, but in hospitality — they’re really going to struggle to deliver a customer experience that will be differentiated enough to compete with Industrious and Convene,” he stressed.
“Industrious and Convene are true operating businesses in the sense you need to have expertise in the entire value chain,” Levine related.
“It’s not only finding the real estate but designing and building it. Marketing and selling it. And operating it on a day to day basis so your members, whether they signed on for a month or five years, can be happy for 10 hours a day. Every day,” she emphasized.
“And the infrastructure that’s required to do that is incredible quality and consistency. It’s simply not the same output that most landlords have developed.”
While it may be possible for the numerous landlords who have dipped their toe into coworking and flexible space to develop such expertise, the faster, better, higher quality, lower cost outcome would be to not go at it alone.
The most successful landlords will be the ones that partner with a best-in-class provider who can ultimately deliver greater value, the panelists concluded.