Coworking is not a new concept, but it is rapidly expanding as a workspace alternative for start-ups, high-growth businesses and, increasingly, large-scale corporations. Its primary appeals are risk mitigation and flexibility, allowing organizations to lease a fully furnished, creatively designed, tech-enabled workspace on a short-term or mid-term basis - and they can do it without necessarily engaging a real estate broker. WeWork is the most prominent coworking space provider. The company leases floors in multiple buildings or perhaps even entire buildings in desirable markets, designs and furnishes the space, and subleases it to clients. A tech startup seeking flexible space in a fast-growing and high-cost market, like San Francisco or Seattle, can work directly with WeWork to secure the ready-to-occupy workspace it needs at virtually no risk; it can easily add or shed space as the business expands or shrinks.
There are downsides to coworking, of course. For instance, once a company reaches a headcount of 40-50 the coworking model becomes cost-prohibitive on a cost/RSF basis. Another drawback is that coworking environments don’t nurture unique corporate culture, particularly as companies scale to larger head counts.
How does brokerage respond?
Companies like WeWork aren’t competing directly with the brokerage business (yet), but they are challenging the current brokerage business model. Of course, the market will not completely shift to the coworking model – there will always be a need for a stable workforce that requires permanent space. However, the traditional brokerage model has been put on notice.
One way brokers are evolving: They are beginning to treat co-working space as just another workspace option, another landlord. Recently, a Newmark broker in San Francisco represented a client to WeWork. Prior to that transaction, however, Newmark performed strategic location analysis to determine the optimal city for that client’s expansion and was subsequently hired to broker the lease agreement, collecting a commission from WeWork.
Coworking companies are not yet offering strategic services, but they are quietly positioning themselves to do so. It is quite probable that they may begin offering services beyond site selection, like real estate technology services or space management services to provide customized workspace.
In the long run it is likely that the coworking industry will have more internal competition and may evolve into something more like traditional space, because the incentive will always be to find clients willing to sign long-term leases. WeWork or Regus or any upcoming coworking space provider will need strategies to keep the model fresh, to graduate from being a fad to becoming indispensable. Also, we have not yet seen how coworking would perform during an economic downturn.
Brokers should be asking, ‘Why would companies hire us in this changing market? Real Estate Brokerage Firms must transform themselves into knowledge-based business solutions providers offering industry research and business insights to the c-suite, not just to real estate managers. Brokerage service could then follow as downstream transactions. As the brokerage landscape changes, the brokerage business must provide greater value to remain relevant, adapting to an environment where the transaction is secondary to strategic insights.
Senior Managing Director, GCS