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Yardi On The Future Of Coworking

“The evolution of the flexible office sector has shaken up the real estate industry and has arguably changed it for the better,” according to a recent discussion on the future of coworking.

The Yardi think tank brought together a panel of experts and tackled some interesting topics regarding the commercial real estate and flexible office industries. Here are the highlights.

Flexible Working Is Difficult To Define

“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,”  said Chris Pieroni, Operations Director at Workspace Group.

The definition of flexible working is getting increasingly difficult to pin down as the industry expands. Workspaces now use words such as hybrid, coworking, flexible or service to describe their purpose. Some experts suggest we need to broaden the definition of coworking to match the diversification of the market.

Joff Sharpe, Head of Operations at British Land, said the industry needs to talk about customer responsiveness instead of focusing on flexibility. “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?”

However, some operators use terms such as “coworking” to increase their curb appeal, without truly embracing this concept.

Tony Freeth, Director of Coworking, Yardi, said: “It’s interesting how people use the word coworking because it’s got marketing leverage.” He pointed out that many offices rebrand as a coworking space to get “an instant kick in terms of market attractiveness…[by] just adding a little bit of communal space.”

Community Is Confusing

The impact of community on attracting occupiers is difficult to quantify. Each of the participants had very different views on this topic. “That community thing is something that I don’t think is really well understood in the real estate market,” highlighted Pieroni.

He also suggested a community platform can help customers grow their business and create an ecosystem. As a result, Sharpe warned that operators have to “be a little bit careful about generalizing” if they serve multiple segments.

Mary Finnigan, Head of Transactions, Real Estate at WeWork, disagreed with this point. She said: “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.”

Corporate Coworking Is Driving Growth

“The numbers would suggest that the real growth area in the market is the 50-plus desks…That’s where that kind of mid-size-scale demand is coming from and from big companies too,” according to John Williams, Head of Marketing at Instant Group.

Finnigan pointed out the growing importance of WeWork’s enterprise membership scheme, which is available to companies with 1,000+ members. The scheme now represents 30% of its membership base.

As the customer demographic shifts from individuals and SMEs to large organizations, operators need to take care when building their brand.

Pieroni added: “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.”

Brands Build Value

Branding also plays an important part in an organization’s valuation, according to the think tank. Freeth said: “You’ve got to think about the investment side of it too because the brand creates an intellectual property asset; a non-tangible value.”

Sharpe pointed out the confusion in the marketplace with regards to valuations, referencing the recent WeWork and Softbank investment versus Regus ending takeover talks to reposition its business.

“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,” according to Sharpe.

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

Rents May Start To Reduce

When asked whether rents will have to come down at some point, John Williams, Head of Marketing at Instant Group, said: “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.”

This is an interesting insight. If other markets follow the same pattern as New York and London, which is so often the case in the coworking industry, rents could start to come down across the board.

However, this may be a moot point as the notion of rent is null and void in the coworking industry. Pieroni added: “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 uses the word rent in our day-to-day activity.”

The Future of Coworking Is Safe

If this discussion is anything to go by, the future of coworking will be vibrant and diverse. Branding will play an increasingly important part. It will differentiate operators and their business valuations.

The operators clearly have different interpretations of what defines the flexible working market and what the future of coworking will bring. But an overriding optimism for the future of coworking is evident from this think tank.

You can read the full discussion here.

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