The CRE market is notorious for moving slowly. PropTech continues to advance in delivering transformational change to traditional CRE models. Today, co-working space or flex office space continues to see an upward trend with forecasts of 30% adoption in real estate portfolios by 2030.
The rapid rise of Space-as-a-Service cannot be ignored. In less than a decade, co-working spaces have advanced far beyond the early-stage entrepreneurial market to producing meaningful impact and relevance to today’s largest corporate enterprises. Far beyond the curiosity stage, co-working business models have established a meaningful presence in the corporate mindshare.
It is easy to dismiss the co-working business model. The underlying shifts embodied by Space-as-a-Service align with broader CRE industry trends happening now. Let’s take a look at three reasons why co-working space business models appear likely to increasingly impact the traditional CRE market.
Space-as-a-Service Represents a Modern Retrofit
Any leasable space can be outfitted as a co-working space. The interior design, atmosphere, and technological features can be crafted to deliver the desired user experience desired by co-working tenants. The entirety of the architectural design represents a packaged retrofit that can be applied relatively uniformly to leasable spaces across diverse locales when targeting the co-working demographic.
This retrofit often implements the latest technology to modernize the space. As such, the co-working retrofit represents a practical example of building modernization undertaken by a Space-as-a-Service operator, instead of the building owner. As part of the co-working space build-out, the modernization plan can focus on workspace features that are particularly attractive to tenants. Indoor air quality (IAQ) represents one of many examples of such tenant-driven features. Real-time IAQ monitoring makes commercial space inherently more attractive because it provides assurance to occupants that indoor air pollution does not exist in the space.
Whether or not the existing building delivers those services, the Space-as-a-Service operator can implement such features using various technologies to retrofit the space. For example, the Internet of Things (IoT) can be used to deliver full visibility to co-working tenants of real-time environmental conditions within the co-working space.
Space-as-a-Service Demonstrates the Shift from Products to Services
The shift toward services has accelerated across industries. Equipment manufacturers, for example, have sought to transition out of hardware-centric models to capture recurring revenue streams. CRE is no different.
Commercial buildings represent hard assets that have long represented the centerpiece of the traditional CRE model. No more. Tech disruptors have changed the game. The co-working space trend just represents one example of the shift towards services. A Wharton research article has noted that:
“The premise of the tech disruptors is simple: Let the CRE companies own the assets and we will own the platforms that enable residents and tenants to access what they need, when they need it, whenever they need it, using today’s real time, Big Data and cloud technologies.”
Co-working space operators own those platforms, and have interposed themselves between the tenants and the traditional landlords, marginalizing the underlying hard asset. Co-working space operators can leverage any new or existing building to launch their platform depending on market conditions. To compete, traditional landlords would need to attempt to match those services. The problem, of course, is that traditional landlords can’t do that at scale.
Space-as-a-Service Marginalizes the Underlying Physical Asset
The corollary to the previous point is that co-working space marginalizes the underlying hard asset by making it relatively fungible. Location will always matter, of course, as reflected in the terms of the lease. Co-working space operators, however, can bring any space on line because their service does not depend on the fundamental characteristics of the space.
In making a technical analogy, think of the underlying hard asset as the Physical Layer. The platform implemented by co-working space operators would implement a Service Layer on top of the Physical Layer. In this analogy, the interface between the Physical Layer and the Service Layer would represent the technology retrofit that enables the co-working space platform to leverage the hard asset.
Significantly, the co-working space operator’s Service Layer would control the co-working tenant’s primary interaction with the CRE space. The co-working tenant would have no interaction with the underlying Physical Layer (i.e., hard asset). The result?
The co-working space operator has now taken control of the tenants away from the traditional landlord. That the popularity of co-working space has reached all types of tenants big and small demonstrates the level of disruption that has already happened. Traditional landlords will continue to experience marginalization as tech disruptors own the platforms that deliver the primary interaction with residents and tenants.
Tech platforms will continue their battle for the next generation of tenants. Asset digitization enabled by Space-as-a-Service business models has provided a near frictionless process for leasing space. Don’t ignore the tech disruption already in motion.