Coworking is here to stay, but its evolution will continue to shape the industry
Coworking has entered deeply into the the commercial real estate lexicon, and by all accounts, the industry seems better off because of it. What started as a niche a decade or so ago, today is a budding industry, growing and fragmented with one global player dominating the space and the news. The industry is evolving, and it seems like it will continue to do so as innovation continues to enter the space and transform the industry further.
Keeping track of all things related to coworking, the Global Workspace Association is looking to make inroads across the industry and help operators of coworking spaces with the tools to advance their businesses. Jamie Russo, the organization’s CEO gives us a glimpse into the industry and its goals ahead.
Who is the Global Workspace Association? Where are you based, and what are some of the top priorities of the organization strategically?
The Global Workspace Association is the professional association for members of the flexible office industry including shared workspace operators, corporate real estate professionals, asset owners, real estate investors and service providers.
Two of our strategic initiatives: 1) Partner with organizations like NAIOP to advance the engagement of asset owners in the flexible office industry; 2) Provide operators with the tools they need to stay current/competitive and connected in a very quickly evolving landscape.
We are a non-profit funded by membership dues, our annual conference and educational programming throughout the year.
What was the impetus behind your formation? Why is there an association like this?
We were incorporated in 1994, long before the term “coworking” was coined in about 2007. Originally serving the “serviced office”/executive suites operators, we are now focused on supporting all shared workspace operators, asset owners, investors, service providers and end-users of shared workspaces.
Landlords will get deeper into figuring out how to evolve their portfolios to be more flexible.
In your eyes, what characterized 2017? Was it the year that shared workplace really made an impact on the industry and why?
I think 2017 was the year that the consumerization of real estate went mainstream. Brookfield invested in Convene, IBM opened a WeWork managed corporate outpost in Manhattan, Hines and EOP issued RFPs for shared workspace operating partners, Tishman Speyer launched “Zo,” a high-amenity concept that aims to make its portfolio highly desirable and competitive.
Shared workspaces are one offering that satisfies some needs of some real estate users, but I think the real shift is that consumers have a whole new set of expectations around how commercial real estate should work and what it should offer and the market is starting to respond.
We often refer to WeWork as prototypical shared workplace location, but how big is the industry today?
There are 14,000 shared workspaces globally today. That number is projected to hit 30,000 by the year 2022 (Steve King, Emergent Research). Shared workspaces in this particular census are defined as those that include community areas, not just private offices. In the US, there are about 20 brands that have more than 5 locations. It’s still a very fragmented market.
How many of the shared workplace locations/business are profitable?
We conducted a survey in 2017 that asks a number of detailed financial questions. It’s a doozy for an operator to complete. All but 2 of our about 300 respondents reported profitability.
You’ll see reports in mainstream media stating that most shared workspaces are unprofitable. The results are based entirely on respondent make-up. Early coworking spaces were primarily open-seat with few private spaces, meeting rooms and amenities. The consumer preference (more small businesses and corporate users) has really shifted to demanding more private space (offices, team suites), phone rooms, meeting rooms, shared amenities and social/collaboration/common areas.
Generally, spaces that offer more private offices/team suites fill up faster and are more profitable. There are certainly examples of open-plan spaces in hot (expensive) real estate markets such as New York and San Francisco that are viable but that model is generally not sustainable in smaller markets with more affordable real estate.
Much of the concern for this category of business is that it had not gone through a recession and really tested the longevity of the model. Do you see that as a concern?
Categorically, the long-term demand for flexible, user-centered workspace is here to stay.
When JLL launched its high-rise product in 2015 they indicated that, according to their research, more than 500,000 U.S. businesses occupy office spaces that are less than 5,000 square feet, and that average has fallen over the last few years to 4,100 square feet.
This is an indicator that market demand in general is for smaller floor plates. Coworking is the first iteration of an answer to the pent-up marketplace demand for more flexibility, shorter terms, access to better workspace design and no personal guarantees on a lease!
There are operators that have signed traditional leases that are essentially arbitraging the market, and if they signed at a level that requires a very high level of occupancy (say 95 percent) to be profitable, they may struggle. That is one of the many reasons we will see the landlord/operator relationship continue to evolve. With the right alignment in interests, a management agreement between a successful shared workspace operator and a landlord with a forward-looking appetite to offer flexibility can reduce the downside risk for both parties in a down economy.
What will 2018 look like? How will it take the industry forward?
Landlords will get deeper into figuring out how to evolve their portfolios to be more flexible. We’ll continue to see landlord/operator partnerships (joint ventures/operating agreements) and an “ecosystem mentality” that looks at optimizing a building/campus portfolio to meet evolving consumer demands. It’s not just about putting an isolated coworking space on the fourth floor of a building to check the flexibility box. The thinking is moving towards looking at how the operator can align with the building management to create community, stickiness, to have a marketing story, to have a longer life cycle with any given tenant.
What are some of the goals of your organization in the new year? How broadly (locally, statewide, nationally) will those goals be applicable?
One of our goals is to help evolve the landlord engagement in flexible office offerings. To that end, we’re partnering with NAIOP (the Commercial Real Estate Development Association) to co-host the Flexible Office Conference in Austin, TX, 9/12-9/14. It’s a unique opportunity to bring together shared workspace operators and landlords/developers under one roof and advance those relationships and shared knowledge.
Are there some really exciting projects of which you are aware that we should know?
I watch everything that Convene does. There’s a new franchise group called Fueled Collective that I think has an offering that hit at the exact right time – it’s a mix of workspace and social club – sort of an “every man’s SOHO House.” And I’m very interested to see how the Hines and EOP search for shared workspace operating partners evolves.
What worries you about this industry in 2018 and beyond?
I’m worried for landlords that aren’t adopting a marketing mindset for their portfolios and looking at how consumer preferences should shape their decision-making.
I worry about operators that are not launching with a model that is lined up with demand in their marketplace as the consumer bar is getting higher every day.