What CRE needs to know about Flexible Workspace

By Amanda Fanoun
07.08.19 ·

While there’s a lot of buzz around coworking, there is still uncertainty around the validity of this asset class – especially among CRE stakeholders. Landlords, building owners, and investment managers, to reference a few, are turning their heads towards flexible space. In many cases, they are testing the waters to evaluate whether coworking is a viable option for their portfolios. The Carlyle Group, Blackstone, Boston Properties and Tishman Speyer are some of the large asset management groups that have rolled out flexible workspace space offerings. Others are still contemplating their approach. Regardless of what of point the adoption curve you’re at, coworking is not going away, and it can’t be ignored.

Here’s what CRE needs to know about flexible space.

It’s not a new or passing trend

Flexible workspace has been around for decades now. It stemmed from an opportunity to optimize vacant desk space in larger offices by way of sublets. It gained more traction on the back of the 2008 financial crisis when freelancers and independent workers left their homes and coffee shops for a shared working environment and community-focused workspace.

What is now more popularly known as coworking, flexible workspace space has gained the attention of CRE stakeholders and REITs. Flex-space is recognized as a viable option to diversify a CRE portfolio, offer more services to tenants, and graduate growing companies to longer-term leases within their portfolio. Corporate and enterprise companies have also started turning to flexible space as a real estate strategy and solution. Incorporating new ways of working, lowering investment costs, reducing overhead, and providing value-added services and a collaborative environment are all reasons why flexible office space is not a trend. In fact, Ropes & Gray are calling it a real estate revolution.

The Opportunity is now

The data proves that coworking is not a trend. Just a few years ago, flexible space represented less than 1% of office inventory. In a recent report based on their data and research, Instant Offices project this figure to rise to 10% over the next five years in response to increased demand in the sector. For real estate stakeholders contemplating an investment in a flexible workspace proposition, the time is now.

Coworking is still in an early adoption stage despite mainstream attention and rapid growth of big brands like WeWork and Spaces. Flexible space is becoming more ubiquitous across the entire real estate spectrum, from mixed-use builds, residential and retail. Landlords and building owners are particularly well-positioned to fulfill the demand for flex-space across global markets. They have both the real estate inventory and the potential customer base at their fingertips. With enterprise occupiers becoming more interested in coworking, increased supply will meet demand as it rises.

Attract and retain tenants

The economy has been quite bullish over the last few years, and we’ve seen the positive impact on the growth of the flexible workspace sector. There is skepticism around how long the economy can rally within today’s climate of global and political uncertainty. From an office perspective, not only are tenants less likely to sign long contracts, but they are increasingly opting for flexible options to proactively position their business to flex up or down with ease and minimal financial risk. In fact, on the back of the 2008 economic slow-down, the flexible workspace uptake gained momentum, indicating it’s a viable solution in both market scenarios.

To stay relevant, CRE stakeholders are looking at flex-space to diversify their portfolios and to better align to tenants. One of the differences between coworking operators and landlords is that operators are better positioned and more focused on engaging tenants and offering an excellent member experience. Attracting and retaining tenants is an essential part of their business model, unlike landlords who have historically approached tenants as a transactional relationship revisited only when the lease is running out.

This approach to tenant management is slowly but surely changing among CRE player. It’s due mainly to the impact flexible space is having in the broader CRE sector. Implementing flexible workspace enables landlords and asset managers to cater to a wider cross-section of the market while offering new services to existing tenants and expanding the customer lifecycle within their portfolio.

Service over Product

As referenced above, we’re seeing a shift in the underlying mindset towards office space and flexible space in general among landlords, building owners, property, and asset managers. Market participants can no longer exclusively categorize space as a product asset class. Coworking uptake in the office sector has resulted in a laser focus on service, hospitality, and member experience. Any building owner, landlord, or asset manager who wants to stay relevant in the sector will need to make strides to improve the occupier experience and meet tenant expectations.

Coworking is stimulating this shift. According to a recent report by Ropes & Gray, coworking is forcing traditional commercial real estate models to evolve. Based on their survey, 89% of respondents agreed that conventional landlords have integrated innovations from the coworking model, such as “real estate as a service”.

Space is no longer an occupier’s only need. Enriching the proposition with additional services and amenities drives more value to tenants while opening new revenue streams for landlords. Technology that facilitates tenant onboarding or move-ins, accessibility to space and additional services, and efficient operations is a critical element for CRE stakeholders to consider when flexing from a product to a service workspace proposition.

Tech-enabled Space

There have been fundamental shifts in CRE caused mainly by where and how people work, changing space consumption dynamics, and the ‘invasion’ and proliferation of flexible workspace. Responding to such disruptions requires looking to what motivated them in the first place: technology. It’s been the enabler for people to work on the go, embrace the gig-economy and reduce overhead costs. Plus, it’s an absolute essential for those with the most significant uptake of coworking space, such as start-ups and ‘traditional’ corporates or enterprise tenants.

Landlords and building owners are not technology people. The reality is that their systems tend to be outdated and certainly not fit to deliver and manage services to multiple tenants within a space. Network security is almost always an after-thought (if a thought at all). For CRE, technology infrastructure and tech services for occupiers were never before a requirement. With the changing nature of work, the booming coworking market, and the evolving nature of traditional CRE models, it now is.

Landlords, building owners, and asset managers exploring how best to respond to flexible workspace and coworking are turning to technology platforms to bridge the gap between a traditional approach to office space and today’s flexible approach. ‘Flexing-up’ a spec suite, building or an entire portfolio requires a purpose-built infrastructure platform that enables a landlord to easily and quickly deliver IT services to occupiers, accommodate moves, adds and changes with little fuss or tech expertise. It’s more, technology, media, and financial companies are becoming most popular among coworking space tenants. Being able to meet their IT needs, which often come with strict requirements from corporate IT departments, is a deal-breaker.

A tech-enabled space goes beyond Wi-Fi, network security, and voice services (yes, companies still request voice systems!). It’s about data and member engagement via technology, being able to report on space performance and sell additional services while billing and invoicing seamlessly across a very dynamic business model. Fast, simple, and smart technology platforms purpose-built for flexible workspace management and IT delivery are a must for any flex-space proposition.

It’s more than community

While the community and collaborative aspects of coworking have been fundamental drivers for its success, the business foundation and services provided in a coworking operation are a top priority. Reliable services, excellent member experience, and flexibility are among the primary concerns for flexible workspace tenants.

Building a community within a shared work environment by way of networking and social events enriches the coworking proposition. However, community is only one part of a much bigger and more complex operation that requires a complete business plan with the right people and systems in place to be a success.