The pros and cons of the ever growing coworking sector

This article was written and published in Spanish and has been translated into English via Google Translate. Click here to read the original article.

The great promise of the office segment is more exposed than other models because of the imbalance between the five-year terms with which the operator rents the space and the ones of just hours it gives to its tenants.

Millennials, flexibility, start ups— All sociodemographic trends inevitably lead to a common place: coworking. Flexible work spaces have become the great promise of real estate but its largest operator, IWG, only has 15% of its space with the coworking model, and WeWork multiplies losses year after year. What risks does the model have? Can it withstand a recession without the guarantee of the traditional five years of mandatory compliance? What if Amazon or Facebook end up being their main competition?

It was only in 2017 that the total volume of flexible space in the twenty largest markets in the world grew by 30%, the equivalent of one million square meters. Since 2014, the sector has doubled, and in cities such as London it represents 20% of space hiring, according to a JLL report. In Barcelona, ​​the quota now stands at 12%.

The consultancy estimates that the European park will grow between 25% and 30% annually on average in the next five years and will reach 30% of some corporate real estate portfolios by 2030. But these predictions also hide great challenges that threaten to put in check the great promise of the sector.

One of the main challenges of the model is that the operator is tied to the property for at least five years, as in a traditional office, but its tenants have contracts of months or even hours. When a new crisis arrives, what guarantees does the owner have that he will be able to continue facing the rent?

"On paper, this does present a risk, but the truth is that the phenomenon of coworking came during the crisis," explain from Savills Aguirre Newman. "When there is a recession, all sectors suffer, but the traditional offices will be harmed because those who can not afford the costs can face those of a shared work space."

Another risk factor is that coworkings have capitalized on the lack of available offices in the center of cities and, also, the scarcity of appropriate spaces for new ways of working within traditional companies.

"Who is energizing the sector are the multinationals that look for adequate spaces for innovation teams or that work for projects," says Manel de Bes, director of the office department of Forcadell.

But what will happen when the offices of these big companies adapt to this new scenario? "At this time, most companies are in the experimental phase; if they consider that these tests do not respond to their needs, they could resort to more conventional models," explains the JLL report.

"On the other hand, new operators are emerging, including those developed by owners, which will provide a wider range of options for companies," continues the consultant. In fact, although coworking is one of the most common manifestations of flexible spaces, they are not synonymous: coworking implies a shared work area, while flexible space is based on the possibility of renting spaces for short periods of time, and this is the formula that is being imposed in the sector.

"The coworking model is born because today companies face a different market reality, and professionals have another way of understanding work: they look for greater flexibility, immediacy, ease and space management," says Mónica Sentieri, CEO of Elworking, a web portal for office rental, coworking and meeting rooms.

"Having resolved many aspects in the workspace saves time and effort for any company or professional, and therefore frees up resources that can be dedicated to issues more related to the company's own activity, but all these aspects and services that logically They make life easier, they also have a price," he explains.

From the 'rockstar' to the conservative Within the coworking phenomenon, the rockstar is WeWork. The New York company, which last year became the largest tenant of offices in the city, is valued at 20,000 million dollars but recorded a loss of 723 million dollars in the first half of last year.

"Its model is based on getting the best buildings, in the most prime areas, and then compete with other operators for price: it is an unsustainable model," argues another operator in the sector. "Sooner or later, they will have to raise prices," they say.

A more conservative model is IWG, which has an umbrella of five brands and thirty years of experience. "We have gone through three or four cycles and we cover our backs: first, diversifying the type of tenants to minimize the risk, we ask the owner to invest and we do not take the best building in Barcelona, ​​or at any price," says Philippe Jiménez, responsible of the group in the Spanish market.

"Many people have thought it is a very easy business, you have to have volume, capillarity and know how," says the executive. "Without those factors, the model does not support the income you have to offer to attract the tenants," he argues.

However, although IWG is the largest operator in this segment in the world, only 15% of its space is coworking. In recent years, the group has diversified with up to five brands to gain flexibility and deal with changes in the cycle.

"I think that in the medium term four or five operators will remain: those who rent 200 meters or 400 square meters in secondary areas will be left out," explains De Bes. In fact, the market is already in concentration: since 2015, the five most important operators have represented 50% of all new flexible space in Europe.

What if WeWork's competition is Amazon?

In an interview with EjePrime, José Miguel Setién, responsible for JLL offices, compared the phenomenon of coworking with the predictions made a decade ago about cinema or the use of mobile phones.

"We consume more movies than ever, but there is no Blockbuster; mobiles are central in our lives, but Nokia is not the one who has taken the cat to the water," recalled the consultant. "The same happens with flexible spaces: they are the future, but we do not know in what way they are going to materialize," he explains.

In this sense, the specialized operators of coworking have begun to join new actors: socimis like Colonial, which has launched its firm dedicated to this segment, Utopicus; promoters who build mixed buildings with traditional and flexible offices, and even companies that are beginning to offer part of their space to use for this purpose. "Neither one is going to eat the whole market or another is going to disappear," explains de Bes.

Experts agree that flexibility will be imposed, but not so much in terms of spaces but rather on rental contracts and, above all, on their duration. "The boom in flexible space will surely accelerate the decrease in average duration of rentals, especially in markets that traditionally operate with long-term leases, such as the United Kingdom, and in the area of ​​less than 500 square meters," agrees the JLL report.

"However, this situation must be evaluated in light of other trends in the office sector, which point to an increase in investment in the brand, user experience and technology at headquarters, which will require long-term commitment terms," says the consultant.

This could also have an impact on the valuation of office assets, for which it is currently positively valued that the tenant has three years of mandatory compliance. "It is not sustainable to continue maintaining a model that no longer responds to demand," they say from Savills.

This article was written and published in Spanish and has been translated into English via Google Translate. Click here to read the original article.

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