_The transition of real estate towards a soft, flexible and customised service

Data. Big data. Curation. Customisation. Customer experience. Customer journey.

The digital age is bringing a new language, and new practices, to business. It places greater emphasis on understanding and engaging with customers through the analysis and application of data.

It recognises that the needs of the customer are both varied and changeable, and responds accordingly. Business success in the digital age is about creating customer-centric services and flexible solutions, not the simple provision of fixed and standard products.

Evidence of this shift is all around us and is represented in disruptive companies such as Spotify, Netflix, Zipcar and Uber.

Commercial real estate is not immune to this digital transformation. The emergence of the spaceas- a-service model is rapidly becoming the new reality, as best exemplified by the recent explosion in co-working spaces.

Although, serviced and flexible office space has featured in global office markets since the early 1990s, 2017 was the year in which space-as-a-service really started to capture both headlines and attention within global property.

Recent estimates suggest that there are now almost 18,000 co-working spaces around the world, accommodating almost 1.7 million workers – representing growth of 3,500% and 8,000%, respectively, since the start of this decade.

Indeed, the growth has been so startling that lettings to co-working operators have become the mainstay of many global leasing markets. As if to underline the point, perhaps the most widely known co-working operator, WeWork, has become, within just eight years of its formation, the largest private occupier of office space in both the London and Manhattan.

Yet despite this astonishing growth, co-working space still represents less than 10% of office stock in all major global markets. This raises a fair degree of scepticism within property circles together with some fundamental questions: Why is co-working attracting so much attention? How does the space-as-a-service model evolve and why?

The allure of Space-as-a-Service

Space-as-a-service models have at their very core, a key point of distinction from the traditional supply of commercial real estate – a clear and actioned understanding of the requirements of the customer A.K.A the occupier.

There are six specific elements of this customer-centric model that appeal to the occupier:

1. Flexibility: 55% of the global corporate real estate leaders we surveyed regard the flexibility of co-working as its primary appeal. As digital disruption challenges and shortens business planning horizons; creates short-lived market opportunities that demand rapid, agile business responses; and fundamentally restructures business processes and hence the structure and headcount of organisations, there is a need for real estate that is flexible in both quantum and lease terms.

Although lease lengths for conventional office product in London have shortened to an average of seven years, this still requires a business to commit to a term that is at least two business-planning cycles. That presents great risk to an occupier. The fixity of the lease is also problematic as businesses grow and decline rapidly in highly changeable and disruptive business conditions.

Space-as-a-service, which gives the tenant greater control over the duration of their occupation, hits the spot for the modern occupier.

2. Aligning space to need: Space-asa- service models also enable the occupier to align the amount of space they take from the operator with their precise business needs down to a workstation level. This negates the need to hold expensive, underutilised space to support future expansion, and enables efficiency through the ability to scale-up and scaledown space rapidly.

This is in marked contrast to conventional space procurement where the give back of space incurs significant financial penalties.

3. Community & collaboration: Co-working models, by their very nature, bring people working for different organisations into closer proximity. The design of the spaces supports collaboration and a sense of community.

Although co-working models now extend beyond the servicing of numerous SMEs within a single floor, emerging spaces managed by operators for single occupiers continue to use design and fit-out to promote the cross-company collaboration that is so central to corporate creativity and innovation.

4. Customer service & engagement: Customer-centricity is at the heart of co-working appeal but this extends beyond a simple recognition of who the customer is. Co-working operators flourish or flounder on the quality of the service and engagement they offer to their occupiers.

At the heart of this engagement is a mission to provide experiential spaces that stimulate workplace satisfaction, happiness and hence productivity. Taking learnings from the hotels and hospitality sector, there is a strong focus on retaining customers by providing seamless, high quality service.

5. Well-being & amenity: Linked to the provision of high-quality customer experiences has been a strong focus by operators on the provision of amenities and support of worker well-being.

This can range from concierge services, the provision of on-site food and beverage, educational events programmes to gym facilities. These amenities underpin the sense of community generated within the workspace and bolster the experience in support of productivity.

6. Data-driven optimisation: Data is the life-blood of digital business. Space-as-a-service operators utilise data from their buildings to enhance the day-to-day experiences of their customers, whether it is by activating areas of the building that have low utilisation rates or increasing resources associated with in-demand services or amenities. Tellingly, the operators also use the weight of this data to inform future site selection and building configurations.

The growing appeal of space-as-a-service models is supported by findings from our survey of global corporate real estate leaders, which found that the proportion of those occupiers who have between a fifth and half of their occupied portfolio in co-working, serviced or flexible space is set to increase from 27% today to 44% within the next three years. Space-as-a-service meets occupier needs

The evolution of Space-as-a-Service

One of the often-heard critiques of the space as-a-service model is that it has yet to be exposed to recessionary market conditions.

Cynics point to the troubled experiences of the serviced-office sector in the late 1990s and the buy-long, sell-short characteristics associated with early co-working activity. There are three key points in response to such concerns.

First, given the rapid proliferation of co-working operators over recent years, it is inevitable that some will fly too close to the sun and fail, particularly in more challenging economic circumstances. Yet operational failures do not equate to the failings of those principles that underpin space-as-a-service.

Second, drawing direct comparison between traditional serviced-office models and co-working points to an ignorance of the clear distinctions between the two. As noted, space-as-a-service is far broader than the provision of workstations on a flexible basis.

Finally, the critique typically paints space-as-a-service as a static phenomenon when, in fact, it is evolving rapidly and in ways that may well serve to offer some protection in the event of a market downturn. Some of the most notable features of this evolutionary path are:

1. Operators shifting to ownership: Well capitalised operators are increasingly competing with conventional investors for prime assets within key cities in order to build global platforms.

2. Market consolidation through acquisition: The proliferation of space-as-a-service operators, combined with strong capitalisation and desire for scale will bring consolidation within the market, as exemplified by WeWork’s recent acquisition of NakedHub.

3. Scale-up and repositioning of traditional brands: Some traditional brands that have strong market presence will undergo a brand and service refresh. One example is IWG, owner of Regus, who are rolling out their Spaces brand and have recently acquired The Engine Room in Battersea Power Station for their new concept, No18.

4. Differentiation through specialisation: As the space-as-a-service market matures, it is inevitable that operators will seek to specialise and appeal to niche markets defined by industry sector or business function, or differentiate through a particular service offering or member experience.

5. Enterprise and managed solutions evolve: Operators are targeting larger corporate occupiers either to house special project teams within coworking environments or by offering fully-serviced, managed solutions to corporates on a floor or building level.

The former approach seeks to position flexible space alongside core corporate real estate, providing the occupier with a mix of longer-term and flexible accommodation that better suits changing business circumstances. The latter approach provides an end to-end solution to occupiers and creates more secure but innovative environments.

6. The rise of alternative spaces: Space-as-aservice is not narrowly restricted to office space. There are growing examples of retailers, leisure operators and hoteliers all utilising their spaces to create touchdown spaces for transient workers.

Space-as-a-service models are very much in their infancy and there is a long process of evolution ahead. While there may be false-starts and dead-ends for some operators, the principles of the model will hold firm and will become an essential component of the supply side of global real estate markets.

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