At a Fortune 500 company, real estate is the second-largest expense after the company’s people. At least once a year, the CFO asks the vice president of corporate real estate three questions: what space the company needs, where it needs that space, and what that space will cost over the next year.
I recently talked with Mark Gilbreath, the CEO and founder of LiquidSpace, an online workspace marketplace, about how large companies make these decisions. He told me that if a company or its broker calls a coworking space at all, the company has usually made its big real estate decisions already, in a planning meeting the coworking operator wasn’t part of.
Very few coworking operators will ever be in a meeting like that. He believes corporate real estate buyers are the coworking industry’s biggest opportunity for growth over the next three to 10 years. He also believes a large amount of corporate demand for flexible workspace is still untapped.
Today, a corporate real estate team plans its leases with one set of tools and handles flexible workspace separately, if it handles it at all. New software lets a team plan its leases and its flexible workspace together. For coworking operators, that change could mean more requests from large companies.
How a corporate real estate team answers the CFO today
To answer the CFO’s three questions, the vice president of corporate real estate usually calls the company’s broker or hires a consulting firm such as McKinsey or Deloitte. The vice president then waits weeks or months for the consultant’s report. The report recommends leases, or in Mark’s words, it comes back with “a lease-shaped answer.”
Once the company decides to lease, it negotiates each lease through emails and meetings with its broker. The real estate team then tracks the signed leases in spreadsheets.
Lease software is built for a decision made once every seven to 15 years
Corporate real estate teams can choose from many lease administration products. Lease administration software tracks when each lease comes up for renewal and how much it costs. Most of those products are simple databases where a company logs each lease. A corporate lease runs seven to 15 years, and the big decision about each lease comes up once in that time: renew the lease, change the amount of space, move, or give the space up.
Flexible workspace agreements are much shorter, and a company can make decisions about them whenever it needs to. If the CEO needs a meeting room for an urgent meeting that afternoon, the real estate team can find and book one in minutes. If the company needs an office for a team in a new market and doesn’t know how many people it will need there in six months, the real estate team can start on a month-to-month agreement. Lease software is built for a decision that comes up once every seven to 15 years, but flexible workspace needs decisions all year. Mark called this a catch-22, because the short terms that let a company decide quickly also give the real estate team more decisions to manage.
Why corporate real estate plans leave out flexible workspace
Mark said most large companies still run their real estate the way they did in 2016. He said the way people work, and what a company needs from its office, has changed a great deal since then. In his view, the staff and the software large companies use to manage real estate were designed for long-term leases. The spreadsheets used in planning meetings probably list flexible workspace as an exception, if they list it at all.
Brokers are another reason companies leave flexible workspace out of their plans. “Every broker knows that flex exists,” Mark said. “Some actually participate in the process with their clients. Few to none have an economic motivation to do so.”
Plenty of brokers understand what flexible workspace can do for a client. As I see it, though, a broker who can recommend a long-term lease, even one the client doesn’t need, usually will. The vice president of corporate real estate wants something different from what the broker wants, because the CFO wants to know how optimized the company’s real estate can get.
Large companies booked on-demand space first after the pandemic
Mark said the first kind of flexible workspace large companies used more after the pandemic was on-demand space. On-demand space is workspace and meeting rooms booked by the hour or the day. A company could start using on-demand space quickly, without a long commitment or a build-out. On-demand space also let a company support employees who no longer lived near an office. Some of those employees moved from Manhattan to Long Island and ended up an hour and a half from the corporate campus. Others were hired in markets where the company had no office at all.
A little more than a year ago, Mark and Ben Wright gave a talk in San Francisco about the growth in coworking and in on-demand use since COVID. Since that talk, I’ve told operators that the hockey stick is in on-demand use, meaning that’s where the growth is steepest. Some of that on-demand business comes from local customers, and some comes from online marketplaces.
On-demand growth helps operators, because a coworking space can have high office occupancy and still not be profitable. A space like that needs revenue from its meeting rooms and from other services too, and companies that book by the hour or the day are one source of that revenue.
A platform for planning leases and flexible workspace together
On October 27th, Mark’s company announced an expansion of its workplace platform for corporate real estate teams. Answering the CFO’s three questions is only the first of four parts of a corporate real estate leader’s job, and the platform covers all four:
- Decide how many seats the company needs, and where.
- Get the space, through a lease or a flexible workspace agreement.
- Keep track of the space, including notice dates and monthly rent.
- Decide which employees can use which spaces.
A flexible workspace agreement has deadlines just as a lease does, such as the date to give notice before it renews. On the platform, a real estate team can do all four parts of the job for both its leases and its flexible workspace with one set of data. The platform also gives the team data on what flexible workspace costs. With that cost data, a team weighing a lease renewal can also price a flex hub. A flex hub is a dedicated team space in a coworking or flexible office location. Mark’s company said it sees cost reductions of 80% or more again and again among large companies that right-size their real estate, meaning they cut their space to what they need, and use flexible workspace.
What software like this could change for coworking operators
Mark expects flexible workspace to appear in more corporate plans as more companies use software like this. He also expects operators to get clearer requests when a company chooses flexible workspace. In one of his examples, a company moves out of a lease it doesn’t fully use and into a dedicated team space in a coworking location. In another, a company has been booking space by the hour or the day for its 100 people in one market. Instead of signing a 10-year lease there, the company commits to a dedicated space. In both examples, the company will know how much space it needs before it contacts an operator. The company will also know what flexible workspace costs in that market. Flexible workspace prices are often lower than what a company pays to keep an office it doesn’t fully use, and in his words they’re “dramatically lower.”
He expects the growth from here to come from dedicated offices. Some of it will come from individuals who switch from booking by the day to renting a single office. He sees the bigger need in companies that put teams of 10, 20, 50, 100, or 300 people into a flexible team space instead of signing a 10-year lease.
Corporate buyers already have a real estate budget
When I work with operators on their sales process, one of the biggest problems is leads who want an office for $300 a month. A company that already pays for real estate typically isn’t looking for a $300 office. A company is used to spending $10,000 + per employee per year to provide office space.
Many operators ask me about outbound marketing, meaning calling or emailing companies that haven’t contacted the space. The companies with real estate budgets probably won’t pick up the phone when a local coworking operator calls them. When operators ask me how to get business from those companies, my first suggestion is usually to list the space on online workspace marketplaces. Marketplaces have teams of enterprise salespeople behind the scenes generating demand for coworking products and services. They’re doing the work for you. An independent operator can still do local outbound work as well, targeting local companies that an enterprise salesperson wouldn’t get to.
The corporate requests coworking operators can expect as planning changes
Mark said that 15 years ago, brokers never considered flexible workspace. Coworking operators never had a way to market to the largest corporate buyers. Even so, coworking kept growing over the last five or six years, while the rest of the office market was flat or down. In Mark’s words, “the underlying value proposition was so strong it grew anyway.”
He expects corporate real estate buyers to be the coworking industry’s biggest source of growth over the next three to 10 years. As more corporate real estate teams plan their leases and their flexible workspace together, he expects flexible workspace to get “into the plan more and more rather than just being the leftovers.”
If he’s right, more coworking operators will hear from corporate real estate teams that have compared a flex hub with a lease renewal and know how much space they need before they call.
Some of those requests will be for six people, and a six-person request can fill several empty offices in a coworking space. Others will come from companies that want a dedicated space for a team of hundreds instead of signing a 10-year lease. Some companies will start with on-demand bookings of workspace and meeting rooms, and that revenue helps a space that has high office occupancy and still isn’t profitable. An operator with team offices in several sizes, meeting rooms that companies can book by the hour or the day, and a listing on the marketplaces where corporate buyers look for space can take any of those requests.
This article is the written companion to this episode of the Everything Coworking podcast. For my full conversation with Mark, listen to the full episode.
