Beyond Wifi And Coffee: Where Coworking Is Headed

Mindspace Shoreditch lounge – Image by Mindspace/Boaz Arad

The first coworking space was a modest affair. Opened in 2005, the San Francisco Coworking Space was situated inside a feminist collective in a converted Victorian style house. Surrounded by bohemian decor, freelancers worked there twice weekly and had access to internet, a kitchen, and a healing center.

The rest is history. Coworking caught on like wildfire: the number of coworking spaces worldwide surged from 14 in 2007 to more than 14,000 a decade later. Freelancers and startups looking to move out of the home and garage jumped on the opportunity to cluster together in shared, flexible work spaces.

Coworking space operators upgraded the level of services and community activities like receptionists for visitors, access to conference rooms, and networking events. Along the way, coworking has changed the work culture by letting members network in new ways, rent the space flexibly and thereby work the hours they choose, and share resources. It also raised employee expectations. Those in traditional offices began to crave the inspiring office design, communal spaces, extra-curricular lectures that are coworking staples. Today, millions of people around the world take advantage of workspaces that are more vibrant and compelling than the grey corporate offices of the past.

Coworking has evolved well beyond its grassroots origins. It’s come into the mainstream as a formidable business phenomenon.

What’s more, large incumbent office space managers like IWG have (belatedly) realized that coworking newcomers have surpassed them in meeting expectations of millennial and techie employees who have high expectations for office look and feel, and — most importantly — services. Welcome to the new era of coworking, or “flexible” serviced workspaces.

A New Phase of Working

As flexible workspaces emerge as a major force in commercial real estate, we see four trends that will drive growth over the coming years:

  1. Consolidation;

  2. Demand for high quality flexible workspaces from multinational companies;

  3. Expansion of flex space services throughout a wider range of office buildings; and,

  4. Profit-sharing ventures between flex space operators and landlords.

Even though coworking is rapidly growing and disrupting the commercial real estate market, the sector is still in its infancy: In 2018, flexible workspaces accounted for only 1.6 percent of the office space inventory in U.S. metropolitan markets. Looking forward, the number of coworking users is projected to grow at an annual pace of 15 percent over the next three years.

1. Economies of Scale Drive Consolidation

With about 20,000 flexible workspaces worldwide, the market is ripe for consolidation. Economies of scale will drive the emergence of a few dominant players in the next few years.

Consolidation is already under way. In recent years, IWG, the owner of Regus, acquired two coworking operators – Spaces and No. 18 – to quickly bring its design up to speed with flexible office providers like WeWork, and Industrious.

Last year, Mindspace acquired Klein Kantoor, a Dutch flexible office serviced offices operator with seven locations in Amsterdam and Utrecht. This year, Knotel, a leading coworking operator with dozens of locations across the U.S., acquired local flexible workspace operators in Berlin and in Paris in order to allow the company to quickly enter these two important European markets.

The business logic is straightforward: For international flexible workspace operators expanding to new markets, especially overseas, acquiring a local operator provides a faster path to expand in an unfamiliar market. At the same time, larger players offer local businesses expertise in operations and services. Local operators become more profitable while partnering with international players.

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As the coworking field became increasingly crowded in recent years, profit margins started to shrink. One shouldn’t be surprised that this consolidation will affect the entire office market by prompting landlords to take leading coworking providers more seriously.