2017: Setting The Stage For Tomorrow’s Workspace Market

• 2017 marked the year coworking grew up and became the leading driving force behind office sector growth.
• Community took a backseat in the coworking world as operators realized the importance of services to keep them in business.
• Property Groups, franchise, and partnerships allowed coworking operators to finance and power their growth and global expansion plans.

This article was written by essensys

With 2017 coming to a close, let’s look back at the most important stories that defined the coworking and workspace industry.

First, however, we must recall that back in 2016 coworking was still finding its place within the office sector. It was referred to in abundance as a “revolution,” a trendy–yet not always profitable business model. 2017 marked a new chapter for coworking. It was the year that proved that coworking wasn’t only the revolution of a trend, but rather that it was a definitive step in the evolution of workspace.

In 2017 coworking grew up. It went from a niche term for an open-space, community-focused yet unprofitable workspace model to today’s leading driving force behind office sector growth. Below we define the most important trends we saw in 2017 and the newsmakers that made them happen.

CRE Took a Piece of the Pie

With a valuation of $12.6 trillion, the commercial real estate industry has undoubtedly been instrumental in growing the value of the flexible workspace market, which attracted some of the largest global property owners in 2017.

Real estate giant Blackstone went full-speed ahead into the flexible workspace market, acquiring the UK’s The Office Group for £500 million. Similarly, the Carlyle Group, a global asset manager, made  a £150 million investment in the Uncommon workspace brand based on the vision that the demand for new concept working environments will continue to increase.

Global Cross-Market Expansion

This year also saw the quick and easy overseas expansion of international coworking brands through partnerships. For example, Chinese operator URWork and Serendipity Labs joined forces at the end of this summer for a partnership that would establish the second largest coworking network globally, giving each brand’s members access to the other’s network of locations overseas.

London-based global coworking concept Second Home is finding its way to North America via a joint venture between two Chicago real estate companies. Currently Second Home has three locations, with another one on the way in London, and their debut space in East Hollywood in the future.

Workbar, a Massachusetts-based coworking operator, recently announced a partnership with a Japanese real estate company, Apamanshop. The collaboration agreement will result in new Workbar locations to the existing network of coworking spaces while also facilitating expansion into new U.S. and international markets for the Japanese brands.  

Fast-Track To Growth Via Partnerships

One of the biggest announcements in 2017 was that of US telecommunications company Verizon and coworking brand Alley NYC inking an agreement to bring coworking spaces, run by Alley, to vacant space within Verizon’s real estate portfolio. This headline was one of the first to highlight asset holders capitalizing on the opportunity to repurpose underutilized space by adding flexible office options. Washington, DC was the first city to see an Alley, powered by Verizon, location.

Unique financing became an opportunity path to growth for coworking brands such as 25N and Common Desk, run by Mara Hauser and Nick Clark, respectively. Both brands have leveraged partnerships with property development companies to expand their brand to new locations, with more sites on the horizon.

Big Brand Expansion

While smaller regional brands began their expansion alongside new flexible workspace market players, such as asset managers and property developers, big-name brands were putting more stakes in the ground across the globe. We Work is a prime example. They now have 200 locations across 19 countries and 58 cities, with more in the pipeline, and a valuation of $20 billion.

Meanwhile, Spaces, the sister coworking brand of longtime business center operator Regus, has been flexing its muscles around the globe. New Spaces locations in 2017 include Toronto, Atlanta, Rosslyn, LA, Chicago, San Francisco, Philadelphia in North America and Bath, Uxbridge and London in the UK.

U.S. markets such as Atlanta, St. Louis, Charlotte, Nashville, Tampa, and others saw the expansion of Brooklyn-based workspace operator Industrious. They offer a WeWork alternative in the increasingly competitive market with a focus on delivering a premium yet welcoming workspace product for a target member that is slightly older and more mature than the standard WeWork member.  

The frequent news of space providers as WeWork, Spaces, and Industrious inundating the market so quickly made 2017 an exciting yet tense year for workspace operators.

Running a business is a challenge in and of itself, and dealing with increased competition can add some fuel to the fire. However, this year workspace operators learned valuable lessons from this situation. On the one hand, battling the vast competition encouraged the importance of differentiating their brand and service offering and amenities to stay competitive. On the other hand, rapid expansion of coworking has educated the public about flexible workspace, relieving them from doing it themselves and spending money in generating increased interest. As a result, the addressable market has increased, driving up demand.

Community Took a Backseat

Since the inception of coworking, the creation and nurturing of community within the workspace has been a fundamental driving factor for its growth. Entrepreneurs, freelancers and remote workers craved social interactions that they left behind after abandoning office life.

On one hand, community can attract initial customers and create a stickiness that keeps them in the space. But early on, the community-based coworking model proved difficult to make profitable and operators realized that community is vital, but it won’t keep them running. In 2017, the focus of community to a backseat to another revenue-driver: services.

Services And  Amenities For All

Coworking and serviced office providers realized the vital need to focus on customer service and offering amenities that result in happy members, increased retention, and higher occupancy rates. Providing easy-to-access services helps to keep operators relevant in a market where shared workspace offerings are increasingly making their way into real estate portfolios. For example, 2017 was the year that coworking met hospitality. Residential buildings and hotels raced to offer shared workspace for their residents and guests. Naturally, freelancers and home-based workers living in residential buildings welcome the ability to stay close to home without going too far or even paying a premium. Likewise, hotels increase value-added amenities to guests who need a place to work while traveling.

Unique Acquisitions And Mergers

An intense year for competition and market growth, 2017 saw a slew of unique fusions by way of acquisitions. Most recently, with less than a month before the end of the year, expanding Dallas coworking brand Common Desk announced the acquisition of local coffee shop Method this month as a strategic approach to differentiate their brand.

In other acquisition news, longtime west coast operator Pacific Workplaces acquired pioneer coworking brand NextSpace this year, bringing their portfolio to a total of 19 workspaces. DC-based global incubator network 1776 merged with coworking operator Benjamin’s Desk. The union intends to bring more resources and networking synergies to startups and entrepreneurs and stimulate communities along the east coast.

In one of the most notable headlines of this year, WeWork bought veteran community platform Meetup, leaving inquiring minds anxious to know what this union of community, technology, and workspace will bring to 2018, and they purchased the Lord and Taylor building on 5th Avenue in Manhattan, suggesting a new and dynamic approach to mixed-use real estate planning.

Corporate Coworking Made Its Mark

We’ve seen significant milestones this year that indicate a climbing tendency towards shared and coworking office uptake by corporates. For starters, one of the first and largest corporate and coworking marriages was between IBM and WeWork.

Smaller operators and other corporations aren’t far behind the trend. Workplace strategists in enterprise companies are increasingly opting for shared workspace as a long-term strategy to not only reduce real estate and overhead costs, but also to offer more value and a better environment to their employees. Corporate coworking may have gotten attention in 2017, but it’s sure to take flight and generate larger opportunity for operators in the year to come.

Deep Pockets Fueled Coworking Growth

Back in 2014, the workspace industry was valued at $4.76 billion and is forecasted to grow to $9.41 billion by 2019. In the meantime, the financial drive within the market was evident this year with headlines of big brands announcing millions of dollars in funding, keeping valuation predictions of on track. For starters, Industrious secured $25 million to bolster growth throughout the U.S. while distinguishing their premium product from WeWork.

Knotel, leaders in what they call headquarters-as-a-service, secured $25 million in investment to dedicate to expanding its portfolio to 40 locations and continuing to expand its service model which links tenants and property owners. Meanwhile, fellow New York-based operators Convene and Bond Collective announced secured investment for their respective growth strategies. Convene will focus on delivering services and amenities to fulfill tenant demands that landlords cannot easily satisfy, while Bond Collective will expand its current six locations to 30 accessible and sophisticated workspaces by 2020.

While these operators have their eye on national expansion, The Yard, who secured a $15 million credit line this year, is focused on expanding its current eleven NYC locations with new sites along the east coast.  

Franchises Paved The Way To Expansion

While external funding allows operators to grow quickly, other brands are adding to their portfolio by way of franchises. Workspace operator Office Evolution and Venture X are growing their respective brands across the U.S. by offering a replicable workspace model to franchises. In 2017, Office Evolution revealed it had signed its 101st franchise license to expand its operation throughout the U.S, responding to the forecasted increased demand for flexible space due to growing numbers of entrepreneurs, remote and freelance workers.

What’s To Come

Whether it was via cross-market expansion, partnerships, acquisitions or a franchise approach, 2017 was a year of explosive growth for the shared workspace market. The modern workplace is no longer driven by the physical structure of a workspace, rather the needs and demands of today’s worker. The influx of CRE players, deep pocket investment, and corporate adoption of coworking, 2017 has set the stage for what will be yet another phase in the evolution of the workspace market. Stay tuned for an industry-influence perspective on what 2018 will bring to the office industry.

For more industry highlights stay tuned to the essensys blog at blog.essensys.tech.