Everyone wants a piece of the flexible office market. Here’s what you should know before you jump in.
WeWork is the largest private office tenant in London, the second-largest in New York City, and just signed the single largest office lease in Shanghai. The company is expanding quickly, fueled by the $5.8 billion raised across its different subsidiaries.
Over the past 18 months, WeWork added some of the world’s largest (sub) tenants to its list of customers, including HSBC, Bank of America, IBM, and Microsoft. This served as a rude awakening to traditional real estate operators who were busy with Denial, skipped over Anger, and are now focused on Bargaining: Trying to figure out how to defend their existing business without giving too much away.
Perhaps Depression is next, but landlords would do well to skip right ahead to Acceptance: Coming to terms with the fact that the traditional office market is dying — while at the same time, a new office market is coming to life and promises higher revenue per sqf, deeper competitive moats, lower brokerage fees, unfettered financiers, and lots of pilates and free beer.
But capturing all that plenty is not an easy task. In this series, we will examine the key aspects that landlords and innovators should take into account when approaching this opportunity.
Demand & Supply
According to JLL, flexible space currently accounts for less than 5% of office inventory, but could “rise to 30% percent by 2030 due to insatiable levels of tenant demand”.
This will continue to drive densification — allocating less space per employee — and might drive down overall demand (when measured in space, not in actual customers). In one estimate, Green Street Advisors sees a 2–3% reduction in demand for office space by 2030.
The largest office operators are already experimenting with different concepts, in anticipation of growing demand: British Land launched Storey, Swire launched Blueprint, CapitaLand invested in The Great Room, Blackstone acquired The Office Group, Brookfield and Durst invested in Convene, Silverstein launched Silver Suites, Milstein launched Build, and Hines and Equity Office are formally looking for flexible space operators to partner with.
WeWork’s appeal to larger, more stable customers indicates that “flexible space” is somewhat of a misnomer. Flexibility is part of the story, but tenants are expecting much more: A complete solution that addresses their needs and is available more-or-less on demand. Hence, the more accurate term for it is Space-as-a-Service (SpaaS?).
What’s driving demand?
Demand for SpaaS is driven by several deep currents: the changing nature of work, the changing nature of business, the increasing complexity of office space, and the digitization of offline data.
At work, emphasis is shifting towards collaboration and creativity, requiring more than the traditional “desk or meeting” arrangements, including access to inspiring spaces outside the main office. At the same time, the battle to attract and retain the best talent creates incentives for unique and specialized designs and amenities.
At the broader business environment, companies are growing and folding faster than ever before. The automation of processes and jobs means that as tenants become more profitable and successful, they might hire fewer employees and use less space. This makes it more difficult than ever for tenants to commit to long leases and static layouts.
Office design, fit out, and systems are becoming increasingly complex to set up and operate — with a variety of IoT devices, utilization dashboards, energy management systems, elaborate kitchens, and modular furniture. This means tenants are more likely to opt for a turnkey solution that caters to their needs than try to figure it all out on their own or oversee a team of consultants and service providers.
Last but not least, the growing amount of data collected within office buildings gives rise to new revenue channels beyond standard rent payments. This means operators have an incentive to extend their service to the daily needs of each individual user (as opposed to simply worrying about the entity that signed the lease).
Taken together, these trends are likely to continue to drive demand for Space-as-a-Service over the next decade and beyond. At the same time, they require operators to adopt new ways of thinking and develop new capabilities. More importantly, they introduce new strategic dynamics by emphasizing the role of scale, network effects, symbolic value, and the tension between integral and modular offerings. We will look at how these elements come into play in Part 2 of this series.
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