WASHINGTON, DC—Office leasing and tenancy dynamics are changing. Although co-working and flexible workspaces still represent a relatively modest share of overall office occupancy, this type of office space is expanding rapidly. And, the impacts are playing out beyond WeWork and Regus.
Not only are there more providers and more types of players entering the arena, but flexible workspace features, such as shorter lease terms and greater service offerings, are being adopted even in more traditional landlord/tenant leasing. This has resulted in co-working being more widely understood and established in the commercial real estate industry.
To be sure, co-working is now an integral space option for most businesses, according to Ron Zappile, VP, consulting, corporate solutions, Americas, Colliers International, and Stephen Newbold, national director of office research for Colliers International. In this exclusive, Zappile and Newbold recently shared insights into flex space and its impact on commercial real estate.
GlobeSt.com: All eyes seem to be on flexible workspace, now accounting for one-third of office leasing in the last 18 months alone. To what do you attribute this interest?
Zappile: Flexibility and cost savings: As companies strive toward space efficiency, flexible workspace offers an immediate savings as opposed to the time and cost of reconfiguring existing office space or moving to a more efficient premises.
Also, according to the research in our US Flexible Workspaces Report, the average ratio of annual flexible workspace fee to conventional office rents is 3.2:1. It is lowest in high-rent cities at 3:1 and greatest in low-rent cities at 5.8:1. The significantly higher ratio in low-rent cities infers only limited price sensitivity to co-working fees in such cities, with tenants willing to pay more for the flexibility and facilities that co-working offers. In secondary cities, firms may be testing a new location before considering a longer occupancy commitment. Flexible workspace provides the ability to initially take a small amount of space with a shorter lease term.
We have seen most of the growth in this sector come from operators who have secured investment to fuel growth. As such, this has led to significant growth that hasn’t necessarily been linked to occupier demand. However, occupier demand has been very strong with most multinational corporation (MNC) occupiers now factoring in an element of flexible workspace in their real estate strategy. We foresee an opportunity for growth in the top end of the market where operators may deliver more premium products that cater better to MNC demand.
GlobeSt.com: Flexible workspace used to be associated with gig workers but why are providers now shifting focus to target larger corporations and enterprise clients?
Newbold: Several reasons: First, operators are seeking the quality of enterprise user credit, and to satisfy a need to diversify their revenues. As the inevitable downturn in the economy looms, service providers and their investors want to ensure their operations remain profitable. Quality tenants provide stability and longevity.
Another is the ability to attract talent in urban centers in a cost-effective way. Companies can scale for growth under several models and have access to top Millennial and Generation Z talent. Coworking provides flexibility to scale over time as demand increases with lower costs of capital and operating expenses.
Flexible workspace allows larger companies to scale for agile short-term teaming solutions as well. Enterprises can leverage space to house a team for three to six months without needing a lease to support it. In a trend where more episodic teaming and agile product and service development are becoming the norm, this provides a cost-effective solution.
It’s a mutually beneficial relationship. Enterprises are increasingly embracing the flex and core occupational model, where occupiers seek to secure leases on their longer-term space but leverage the flexible workspace sector to accommodate meeting rooms, event spaces, informal meetings and some project teams over the course of their leases.
GlobeSt.com: How are firms using shared space?
Zappile: Firms are using flexible space for the following benefits among others:
- Business flexibility–Businesses may want to provide flexibility to an already established workforce to try a new location or to establish a beachhead in a new market. Space is also being leased to accommodate project teams with a fixed and relatively short lifespan.
- Reduce capital expenditures–While the end user ultimately pays the amortized costs of the fit-out, they won’t be paying for all of it upfront, nor will they be paying for it all at once. This financial feature offers an additional layer of flexibility to the end user and helps shed risk.
- Participate in creative environment–Traditional corporate environments can be stale. Small offices frequently are considered uninspiring, lacking the dynamism of larger hubs. A well-established body of academic research (Becker and Sims of Cornell University and Haynes of Sheffield Hallam University, among others) and commercial surveying firms such as HOK, Gensler, Steelcase and Hayworth conclude that a diverse environment cultivates innovation and productivity.
- Access innovation/start-up community–Similar to what was previously mentioned, firms want to be close to innovators and start-ups, both to benefit from their ways of thinking and to potentially invest in them. Both incubators and accelerators utilize flexible workspace, and firms, by extension, should want to as well.
- FASB/IASB 13 changes–New accounting regulations requiring firms to disclose real estate lease obligations will increase the visibility of a firm’s real estate strategy and increase pressure on corporate real estate departments to optimize portfolio performance, allowing previously inefficient or unused space to become functional and accountable to the company’s bottom line. These changes should benefit the flexible workspace sector, compelling companies to take less core space than with traditional long-term leases. Instead, they will rely more on flexible workspace operators to provide the space to accommodate temporary headcount swings. Occupiers will also increasingly rely on either a landlord or an operator to provide access to amenity spaces. These spaces include meeting rooms, training facilities and breakout areas.
GlobeSt.com: How is flexible workspace impacting traditional leasing models and firms’ occupational portfolios?
Newbold: It’s impacting them in a few ways. First, because the FASB13 changes should benefit the flexible workspace sector, companies will be compelled to take less core space with traditional long-term leases. Instead, they will rely more on flexible workspace operators to provide the space to accommodate temporary headcount swings. Occupiers will also increasingly rely on either a landlord or an operator to provide access to amenity spaces. These spaces include meeting rooms, training facilities and breakout areas.
Additionally, tenants are demanding–and in many cases receiving–shorter and more flexible lease terms. While this is not for everyone or every facility, it is becoming increasingly prevalent, especially for growing or for more volatile divisions. Meanwhile, more landlords are offering common amenities like yoga rooms, free food and tenant parties.
Finally, as previously noted, enterprises are increasingly embracing the flex and core occupational model, where occupiers seek to secure leases on their longer term space but leverage the flexible workspace sector to accommodate meeting rooms, event spaces, informal meetings and project teams.
GlobeSt.com: How are traditional owners responding with their own flexible space and lease options?
Zappile: This portion of the business has come to see flexible workspace as a necessary offering in order to attract and retain tenants. The question of how they provide this product and who operates it typically comes in three flavors:
- Joint Venture–where the owner will partner with a flexible workplace service provider space across the portfolio
- Management Agreement–where the building operator pays a service provider to operate and maintain space within the portfolio
- Shared Revenue Model–similar to the joint venture, but where the building/portfolio owner leaves the management of the operations to the service providers and only shares in a portion of the revenue
Landlords are no longer looking at just offering flexible space, but to leverage the sector for operators that can deliver hospitality-driven amenity spaces for meeting rooms, project space, event spaces, lounge and food and beverage.
GlobeSt.com: Could flexible workspace provide a buffer to landlords as tenants seek short-term, flexible space in the event of a downturn?
Newbold: The short answer is yes. This is one of the reasons why flexible workspace operators have been aggressively pursuing corporates and multi-nationals.