essensys kicked off our GCUC webinar series as part of our global sponsorship with a look at Coworking in Numbers. We welcomed Liz Elam, the executive director of GCUC, James Rankin, Research and Insight expert at Instant Offices, and Steve King, a partner at Emergent Research to discuss market data points that help understand market growth, share, profitability, and economic drivers. Missed the webinar? Watch Coworking In Numbers: The Impact of Market Data.
Terminology Defining the Coworking Market
It’s vital to understand how the market is defined and segmented to interpret the data points around growth, maturity, and how supply and demand impact the market. For King, “coworking is a shared space that includes community features that brings people together from a social and a business standpoint.”
For Elam, it’s simple: coworking is focused on a belief in community to make the world a better place. “It’s not so much about selling offices, but about taking care of the people within your space.”
Rankin and Instant Offices prefer the term Flexible Workspace. “Coworking has become a marketing term to describe the feel of the space rather than a strict definition” of the space itself. He noted the data and trend analysis from Google: “people are searching for coworking but don’t necessarily want an open working area.”
Emergent and Instant tended to agree that Flexible Workspace is an appropriate term for the overall industry, while “community coworking” is a subset of the market. Digging further into market segments, Rankin noted hybrid spaces that offer a mix of private and coworking elements in a building or across one or multiple floors. High growth in the market is attributed to this subset of the market. In contrast, Instant noted a recent decrease in Business Centers or Executive Centers as well as less Pure Coworking.
Market Size, Growth, and Drivers
Having clarified the terminology, the discussion progressed to market size and share. In terms of square footage, Instant Offices estimates that flexible space accounts for between 250 and 260 million square feet in Europe and 80 million square feet in the United States. Meanwhile, they track approximately 24,000 physical flexible workspace locations with at least another 9,000 currently being added to their research.
When it comes to market share, a misconception is that large operators such as WeWork and Spaces account for the majority of these flexible workspaces. Setting the record straight, in the United States, the top 10 operators who operate the most spaces, actually only comprises 14% of the total number of physical locations”. The vast proportion of the market is actually made up of independent operators and smaller, multi-city providers.
Both segments of the market are experiencing growth – a mix which hasn’t changed over the years, according to Rankin. The difference is that larger providers are able to scale up more quickly and have been doing so more aggressively. Meanwhile, for smaller operators, thanks to lower barriers of entry to the market, independent operators are able to cater to smaller and niche markets.
Elam noted that in contrast to previous years, independent operators are opening bigger spaces from the start. Operators are opening spaces between 10,000 and 25,000 square feet to respond to growing demand for larger spaces versus the previous 3,000 to 5,000 square feet Operators are opening spaces between 10,000 and 25,000 square feet to respond to growing demand for larger spaces versus the previous 3,000 to 5,000 square feet. The average office requirement, stated Rankin, is between five and six people on average, a figure that has been increasing by one person, year on year. Where operators previously, a team of that size may have had difficulty finding a flexible office, today there is no shortage.
Growth, increased competition, and higher inventory of larger spaces are driving a need for the operators to understand better how to use space-as-a-service and more importantly, how to monetize it.
Corporate Coworking and Meeting Larger Requirements
The discussion seemed to generate a recurring topic: corporates. “Corporate occupiers” range from innovation, marketing and R&D teams to individual remote or teleworkers. Why they choose coworking varies. Some seek to appeal to talent with a collaborative community, cool and modern amenities while others intend to reduce the cost of operational and real estate overhead. Corporations often use coworking to help retrain employees and keep them happier and healthier.
Corporate occupiers are demanding strict technology specifications. Security is a huge deal breaker among corporate occupiers – if they can’t get a private connection or their own Wi-Fi network, they’ll look somewhere else. Secure, compliant and resilient technology services are essential for today’s coworking space aiming to cater to corporate occupiers.
When it comes to space, the majority of corporates prefer to have an exclusive, dedicated area personalized with their own branding, look and feel. While there isn’t a defined percentage of corporates on the market, Rankin stated that 50% of office requirements are for teams of 25 or higher, seeking some form of private space 50% of office requirements are for teams of 25 or higher, seeking some form of private space. King referenced a survey conducted last year that found one-third of coworking members were from organizations with more than 100 employees, which was up dramatically compared to 5 years ago.
Commercial Real Estate and Coworking
According to our panelists, landlords still want to understand what coworking is and what is happening in the industry. Many have already started laying stake to the market with their own flex-space propositions. Rankin referenced CBRE’s Hana and British Land’s Storey. Many however evaluating joint ventures – they provide the space and partner with an operator to run the space. The majority recognizes the importance of a flexible asset within their portfolio but realize they don’t need to get into the business on their own, instead partner with the right operator to run it for them.
Trends to Expect in the Coworking Market
Investment has been on the rise in coworking, according to Elam, especially for those operators who are buying spaces. Niche brands that understand market share and recognize market gaps are also gaining traction. A focus on emotional and mental health wellness will be a big differentiator among operators as the market continues to grow. Consolidation was also noted as a trend to expect in the market – both acquisitions and expansion via consolidation.
Rankin noted the broader trend of market growth in secondary and tertiary cities and towns, citing the Midwest in the United States, North of the UK, and Eastern Europe. What’s significant is the “disaggregation outside of CBD and financial markets where the industry really grew up,” stated Rankin. While coworking is beyond advanced in primary cities across the world, smaller markets have a bit of a learning curve, especially in cases where they must educate the market on what it is.
Rankin also noted the increasing trend within management agreements for landlords to require a white-label approach. They prefer to build their own brand and have a partner run it, rather than adopt their partner operator’s brand.
Profitability, Pricing, and Supply-and-Demand
As the market grows, profitability will depend on your business model – whether own or lease the space or operate on a management agreement. There are different metrics each operator will have to establish for their particular case. Any impact on pricing in the current market is a result of competition and market growth. Rankin suggested pricing changes at this stage in the market are due to a short-term dip, not a long-term trend, as demand is still increasing at a fast rate.
As the industry continues to grow, prices may become more reactive, but Rankin doesn’t see them becoming commoditized. Understanding your market, using data to track pricing and knowing what your customer is looking for keeps you in a good position,” said Rankin. King referenced the need for operators to increase efficiency in order to maintain profitability. “As long as industry growth continues, profitability will continue. Over time, the more efficient operators will push out the less efficient.”
What happens in a downturn? Recessions tend to drive higher levels of efficiency, flexibility, agility, and cost-cutting. Panelists agreed that in a downturn, coworking and flex-space would thrive as it’s less expensive and lends flexibility and affordability to companies who otherwise would look to a traditional space. “The industry is well-positioned to ride out an economic downturn,” said King. Based on modeling conducted at Emergent Research of a potential recession, businesses may suffer in the early part of a recession, but in the mid to late recession, see occupiers shifting to flex-space. The team at Instant Offices noted that the flex-space market started to expand in 2008 during the last recession due mainly in part to a requirement for greater flexibility.
A Scaling Industry
The overarching conclusion of the webinar was the importance of knowing your market and understanding what your customers want. “The industry is in a great spot and market data is instrumental in helping people to understand the market and gain visibility across the industry,” said Rankin. Our market relies heavily on the research conducted by organizations such as Instant Offices and Emergent Research. Understanding growth trends, economic drivers, and occupier demands are vital for operators to extend a better, more service-centric coworking solution to their customers and a run a successful, scalable, flexible workspace operation.