Flexible workspace — also referred to as coworking — is firmly established as an alternative to longer-term office leasing. This approach can accommodate a wider range of users than the traditional linear sequence of lease, build, furnish and manage, performed by the occupier’s organization. The use of the bundled approach offered by flexible workspace suppliers is growing at a frenetic pace. In our January 2019 U.S. Flexible Workspace Outlook Report, we noted that the flexible space inventory across the 19 markets we surveyed increased by almost 50% in the 18-month period ending in Q2 2018 to a total of 27.2 million square feet.
Aggressive expansion and increasing competition are driving continued evolution in the flexible workspace sector. Operators and landlords are striving to distinguish their offerings as occupier demands evolve and they become more familiar with the benefits. The conventional office supply process serviced by traditional real estate services companies is contending with threats and opportunities, such as changes to lease accountancy, increasingly mobile working, and the desire for rapid responses to quickly changing business requirements. These pressures are encouraging the development of alternative leasing models that blend flexible and traditional spaces in innovative ways.
But there is not a one-size-fits-all flexible workplace model that works for every organization. In this article, we detail the many forms — both experience models and financial models — that flexible workspace providers are developing to fit the highly variable space types and activities occupiers require to enable their business objectives. We also present a matrix that quickly shows occupiers the different options available in the current marketplace depending on the scale and type of operating environment they require.
Different Customer Types Require Different Product Types
From single person entrepreneurs to large scale enterprises, potential users of flexible workspace run the gamut of entities and individuals looking to leverage the product type. There are a wide variety of different customers for the vast selection of different forms the product takes. For sake of ease, here are the basic buckets of user types:
- Single person entities: The customer that originally led the demand for flexible space, entrepreneurs with little or no capital who require maximum flexibility and need a space and services to help get their fledgling ideas off the ground.
- Small organizations: As those fledgling ideas start to grow, more people join the “firm”, and the small business/company requires space and amenities to conduct day-to-day operations but may lack the capital or the managerial bandwidth to obtain workspace through the traditional time and capital intensive method.
- Subsets of enterprises or business units exploring/deploying a business strategy: Crossing the line between companies not fully capable of deploying the capital required to fit out their own space and those that can, this group is using flexible workspace to achieve a particular goal. These may include a business unit that wants to attract and retain a specialized skillset or provide a different type of space, a business unit establishing a beachhead in a new market or project teams with a short/fixed lifespan.
- Enterprises: Large-scale corporations that have multiple locations across geographies. These organizations often first use flexible workplaces to replace small locations or to test out new geographic markets. Flexible workspace providers are increasingly trying to appeal to these customers with more customized, dedicated workplace options that simplify their management of multiple small locations across a broad geography.
Different Experience Models Support Different Business Objectives
Experience models, which range from providing traditional shared coworking desks and private offices to servicing high-end event venues where every need is catered to, are offered by a plethora of a service providers. Differentiation in product type, atmosphere and fit-out, operational support and the geography served are what distinguish the various offerings apart. Shown below, these spaces range on a privacy continuum from shared/unassigned/bookable space to dedicated/assigned space, the usage of which is largely dictated by scale of the operation.
- Amenity space – Meeting rooms, drop-in coworking space, services, etc., often delivered by a provider on behalf of a landlord. Convene is considered one of the leaders in the space as it was the first to bring it to scale.
- Mainstream flexible office: While encompassing a wide gamut, these types of spaces are communal in nature, designed to have a high worker density, and offer physical flexibility, in which unassigned desks and offices are used as needed, based on the level of subscription. WeWork is the dominant player here, although it does provide other models based on client preferences. Other providers include Industrious and Serendipity Labs, plus localized and niche-specific operators.
- Dedicated/assigned space: Private workspace with access to shared facilities’ amenity space. Think of a private and assigned “office” placed within a mainstream flexible office facility, as described above. Firms that use this type of product are looking to take advantage of the shared amenities a flexible office provides while having access to private space for focus work.
- Managed suites/floors: Essentially catering to the enterprise and business unit set of occupiers, these spaces are dedicated to a single user but are built out and managed by the flexible office service provider. Usually, users of this size will design, fit-out and transact their space either using their own resources, that of a service provider or a hybrid of the two. In this model, the flexible office provider is the outsourced provider, from beginning to end. Simply provide the requirements, such as people, location and length of term, and the flexible office service provider takes care of it in one turn-key solution.
Many Different Reasons to Use the Product
We’ve covered the reasons for using this product type before — but briefly, below is a description of the different reasons:
- Flexibility of lease term and size: Coworking environments allow flexibility of size and term to their occupants; 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. Options include short term (month-to-month), medium term (six months to 18 months) and occasionally longer term.
- Reduce capital expenditures: While the end user ultimately pays the amortized costs of the fit-out embedded in the rate they pay; they aren’t paying for all of it up front. This financial feature offers an additional layer of flexibility to the end user.
- Participate in creative environment: Traditional corporate environments can be stale. Flexible working environments typically aren’t. Work from home also doesn’t work well for some people.
- Access innovation/start-up community: Similar to the above, 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 coworking and established firms, by extension, should want to as well.
- FASB/IASB 13 changes: New accounting regulations requiring firms to disclose real estate lease obligations may drive more companies to utilize the flexible workspace sector, allowing companies to take less core space with traditional long-term leases. Instead, they’ll rely more on flexible workspace operators to provide the space to accommodate temporary headcount swings or service smaller locations. A term of less than one year is the key here to take full advantage of this accounting change.
- Amenities: Companies realize that they don’t always fully utilize their amenity spaces. Occupiers are increasingly looking to either a landlord or an operator to provide access to amenity spaces such as meeting rooms, training facilities and breakout areas that can be used as needed
Plotting Different Customer Types Versus Different Experience Models
Different customer types, different experience models and different rationales for using the product type all play a role in designating what space gets taken, where it gets taken and what financial model is deployed in order to pay for it.
The matrix below describes the different models and presents a way to think about how to put together a deal with the various service providers to meet the business’ needs.
As we discuss the matrix, there are two important concepts to keep in mind: the continuum of “shared” space to dedicated space, and the decisions a firm makes as it matures as to whether they end up in a traditional office, a flexible work environment or, more likely, a combination of the two.
Individuals or small companies may find shared open space sufficient for their operations. However, as companies grow, the may require dedicated space to house proprietary equipment or to support day to day continuity. Others may prefer space which they can lock up and leave work in progress.
Enterprises may use flexible office as drop-in or convening space if their workforce is usually mobile. Once they scale in a location or have staff who are largely office-based, they may seek some private assigned space, while still taking advantage of the communal amenities and workplace services provided. Providers are increasingly competing upon multiple variations of shared and dedicated space, and it is the ability to increasingly customize that space for specific tenant needs that is increasing the attractiveness of these providers to enterprise customers. In a large multi-location portfolio, a mix of both traditional office space and flexible office space is becoming more common.
The first matrix shows the user entities on the x axis, and the product types on the y axis. The second matrix shows which service providers provide which services and experiences.
**Competitor Matrix is not exhaustive, but indicative of what occupiers would typically see in the U.S.
Three firms provide all types of space to all user types. IWG, formerly known as Regus, has a long-standing history of providing all different product types to all different types of user in all types of markets. WeWork, with significant financial backing, can be found globally in most Tier 1 cities. Convene, by starting with an emphasis on providing conference and amenity space, has carved itself a niche by being an alternative to WeWork. Other providers, specifically breather and Servcorp, see opportunities in providing high quality amenity and touchdown space to all user types, while Knotel focuses strictly on fitting out and managing space on behalf of businesses. Industrious both fits out and manages space for organizations, depending if they want their own separate suite or floor.
Implications for Deploying a Flexible Office Strategy
Deploying a flexible office strategy across an entire portfolio will undoubtedly impact the following key corporate real estate functions for occupiers:
- Portfolio Management
- Lease Administration
- Project Management
- Employee Engagement/Workplace
We will discuss these issues in subsequent articles. As a baseline, understanding the types of users, types of experience models, reasons for using flexible office and the continuums of shared and dedicated space will help occupiers to determine which mix of flexible and traditional office is right for them.
About the Authors:
This article was co-authored by Martha O’Mara, Senior Vice President, and Ron Zappile, Vice President, both in Colliers’ Corporate Solutions Strategy and Innovation where they focus on delivering high quality portfolio and workplace optimization plans for corporate and institutional clients.