UK Think Tank

A Coworking Conversation

By Yardi Blog Staff on Nov 9, 2018 in Coworking, News

The evolution of the flexible office sector has shaken up the real estate industry and has arguably changed it for the better. Yardi recently brought together a panel of experts in the UK to discuss the many segments of flexible offices and what lies in store for the sector.

Mary Finnigan, head of transactions, real estate, WeWork

Chris Pieroni, operations director, Workspace Group

Adrian Goldney, co-founder, Flexible Office Space

John Williams, head of marketing, Instant Group

Joff Sharpe, head of operations, British Land

Tony Freeth, director coworking, Yardi Europe

Liz Hamson, editor, Property Week – chair

 

LH: With all the different definitions out there, what should we be calling the sector? Should there be a standard definition or does it really matter?

CP: All the definitions out there are very different – hybrid, coworking, flexible, service – and then you’ve got all sorts of issues around whether they are an operator or a landlord and then you’ve got all sorts of issues about what sort of services are offered; whether they are exclusive or not. And it’s really complicated to pull all the data together and try to get an understanding. I’ve got my own view on where we stand in the flexible office market and we didn’t fit into any of the definitions. We’ve decided to just look at the flexible market.

 

LH: So what do you define flexible as?

CP: So we had three different categories – something under three months, and then we stopped at over 12 months. But actually, I think now as larger corporates want flexibility, you might be saying flexibility for them is three years. So I don’t know, but we stopped at over 12 months.

JS: I don’t think the starting point is flexibility; it’s to do with customer responsiveness. One extreme is Ola, who wants to move office every four to six weeks, and the other extreme, you’ve got someone like Deutsche Bank that negotiated a 25-year lease agreement with an esteemed competitor of ours last year. Those extremes have something in common because they both want a landlord or a provider who is empathetic to their business objectives. So I think the language needs to change from lease lengths and all the conventional speak and all this codification of what’s coworking, what’s flexible.

 

What it really comes down to is: is the industry becoming better aligned with the requirements of its customer?

JW: I completely agree. I think it’s all about the customer. However, looking at the definition of the centres themselves, coworking is the shared model where you sit next to a stranger; you work freely and flexibly all the time. It’s kind of the full hipster thing, but we think there are only 156 pure coworking centres in London and 268 hybrids – where there is a private space that goes with it and that describes most WeWorks.

MF: Most WeWork spaces, but it doesn’t describe our company. I’m not distancing myself from coworking – it’s an important part of our business but it’s not the full description of WeWork. We have coworking, we have private offices of various sizes and a huge growth part of our business is what we describe as our enterprise membership so that’s companies with 1,000 members, normally multinational companies such as Microsoft, Citibank and HSBC. We appeal to a broad range of people – 30% of our membership base is enterprise; 70% is a combination of individual entrepreneurs or tech SMEs. We appeal really broadly.

TF: It’s interesting how people use the word coworking because it’s got marketing leverage.

So, for instance, if you look at a staid service office market in the US, they have actually added a little bit of coworking, and rebranded themselves as coworking and given themselves an instant kick in terms of market attractiveness. Not by actually changing their offer greatly, but just adding a little bit of communal space.

 

LH: What impact does the community aspect play in attracting occupiers?

TF: What we see from the technology point of view is the whole lifecycle of the customer. That individual who’s in your space might be a start-up in an early stage or they might be the pioneer from Facebook coming in to your city; you don’t really know. But that customer has a lifecycle of space needs and you see them grow through.

MF: We are providing them with so many tools with which to grow their company and giving them access to all the other members within the community, which again helps them to grow their own businesses. The feedback we’ve had is that 50% of our members are transacting with each other.

CP: That community thing is something that I don’t think is really well understood in the real estate market. We survey our customers a lot and the big message that keeps coming back is: ‘It’s quite lonely in here. I’m trying to grow a business. I want to meet all the other businesses in my field.’ If you create a community platform, they will grow the businesses with you because they will meet other businesses, trade with them and start to grow. An ecosystem is created.

JS: You’ve got to be a little bit careful about generalising. There are multiple segments. So with our Storey product our main occupier has about 50 employees. So if you are an SME that employees 50 people, you have a fairly well-developed ecosystem of your own, which is a very different situation to somebody going in specifically looking for curation on its behalf to help it get going – it’s a totally different experience. Now we know in places like Broadgate, there are clusters of fintech companies that may or may not choose to talk to each other about certain topics, but by the time you have a 50-person company, you’re pretty well developed. You have suppliers, you have customers, you have employees and so on, and they are not looking for a third party to somehow create an artificial ecosystem.

MF: I don’t know if I agree with that. They are limiting themselves by not talking to other companies that can help them innovate their business in ways they may not have thought of before.

JS: Some of these 50-person companies are satellites of even bigger companies so the point to make is not that you can’t create community; my point is you don’t have to choose between it being a good thing or a bad thing. What you need to do is to segment your market and to apply a logic.

 

LH: Who is actually driving the growth in this sector? Is it the occupier? Is it the operator? The landlord?

JW: The numbers would suggest that the real growth area in the market is the 50-plus desks, so that requirement for occupiers in London and in the regions now is massive. That’s where that kind of mid-size-scale demand is coming from and from big companies too. They’re looking for different options. It may be a hybrid office and may be a Storey-type solution. They’re growing faster in terms of demand than SMEs are with their one- or two desk demand.

 

LH: So what impact has the brand had? The demand was there but the product wasn’t, so once the brand came in, it really appealed to these people who don’t like the sound of serviced office. Can a new proposition come in without pushing the brand hard?

JS: The brand has a specific role and I think the WeWork brand is interesting. The Storey brand is to some extent behind the scenes on the basis that if you’re an SME it’s your office and you’re proud of your office and you don’t want the sensation of going into an office that is overtly branded as belonging to somebody else and not representative of your offer.

MF: Again I think that is another slight misconception around WeWork. We are very happy for our members to brand their space within the building. We are certainly seeing some of our enterprise members acquiring larger and larger chunks of space.

CP: The brand thing is slightly more sophisticated than people think. I think on the occupier side, I want our brand in your face if you’re looking for space. If you’re in our building I want you to know you’re in a Workspace building.

TF: You’ve got to think about the investment side of it too because the brand creates an intellectual property asset; a non-tangible value. Look at two recent sales – The Office Group and LEO. Which one got sold to Blackstone? And look at the pricing. The branding is important if the operator is in it to create a value for themselves.

 

LH: It’s really interesting that you bring up that point about the investors being attracted by the brand because that was the big problem with this sector, wasn’t it? You couldn’t really value it.

JS: There’s a lot of confusion in the market. If you compare two very current conversations in the market – WeWork and the Softbank investment and Regus, which was trawled over by no fewer than five private equity companies and they examined it and came to the conclusion that it probably wasn’t the sleeping unicorn they thought it was – the brands are different and products are different. There is also tension between traditional valuation methodologies that are tied into lease lengths and well-covenanted companies, and yet you have the WeWork valuation, which is valued more on things that you’d associate with other types of companies.

CP: I think the valuers have got a real problem because they don’t know how to value short-term income.

JW: They do for hotels so I don’t understand why they can’t in this sector.

CP: We think there is a much stronger security of income from a broad spread of businesses than there is from one company. On the equity side, valuing not the real estate but the business, it’s not really a real estate activity; you are working your customers, you’re growing and contracting. How do the equity analysts value the added value that the management team brings? They take a view on the real estate but what they are not doing is taking a view on the quality of the management. But that’s what’s pushing some of the values on the business side – people are seeing the management teams that have got vision for the future and it’s got nothing to do with the real estate.

 

LH: There are so many players now in this market. Do rents not have to come down at some point?

JW: In London we have reached that point. London is at saturation point; New York is the same – the two oldest markets for this type of space. In other markets I think it’s all go.

CP: The traditional way of looking at real estate is the rental agreement and I think people are not going to be doing that anymore. It’s a desk rate, a membership fee, cost per month.

None of us use the word rent in our day-to-day activity.

Partner comment from Yardi: Increasing demand for flexibility in our working lives has seen the coworking asset class go from strength to strength, but how are the operators responding to accommodate a demand that sees a wide range of membership needs? In our first coworking think tank, it is clear operators have differing interpretations of what defines the coworking market, although interestingly, we notice similarities that are driving responsiveness. Led by member demand, operators are helping to create flexibility in the workspace but how are they adding competitiveness through brand, amenity and service?