Synopsis: How the nature and structure of the commercial office business is changing? Evolution from serviced office to coworking to ecosystems. Changing dynamics of the value chain. How it is impacting property owners and operators? What next after coworking?
A few things have happened since the onset of the 21st century. Developments in internet and mobile technology have created a more connected world. Information can be accessed from anywhere, anytime. The millennial generation has entered the workforce. Unlike the predecessors, they have grown up in the era of multiple connected devices. They aren’t wedded to the corporate way of working of the past. The global financial crisis has exacerbated the disillusionment with corporate careers, accelerating a return to an entrepreneurship driven society. The rise of social media and on-demand services has given rise to the sharing economy. The globalization of Silicon Valley has well and truly happened with startup hubs emerging across towns and cities worldwide. The way business is done, how it is done, who, what, when everything has changed. The change in the construct of the office appears rather muted in comparison. Yet, beyond the mainstream, strong winds of change are sweeping through. Office 4.0 is slowly taking shape.
The un-collared workforce
The office as a construct, as we understand it, is mostly a relic of the state of the civilization in the post-war era. The socio-economic setup in the second half of the 20th century, particularly in developed economies, became characterized by a growing proportion of economic activity being contributed by large corporations. In this service-based economy, with a growing white-collared workforce, the office became the place for carrying out business. Thus, the office emerged as the workplace for the white-collared workforce, which replaced the blue-collared workforce of the industrial era, for whom the workplace was the factory. The present times are characterised by the rise of the “un-collared” workforce of the entrepreneurships era, which is fast taking over from their white-collared predecessors. In terms of socio-economic structure, the change can be summarised as a shift from production based economy to a consumer economy to a sharing economy.
Office 4.0 represents the transition from white-collared corporate workforce to the un-collared entrepreneurial workforce. It is the structure consistent with the current state of civilization, technology and the socio-economic setup in which economic activity is delivered. Office 4.0 is the model for the 21st century. It is the workplace for the entrepreneur and freelancer generation.
PART 1: From Office 1.0 to Office 4.0 – The stages of transition
The graphic below represents the evolution from Office 1.0 to 4.0.
Office 1.0: The Serviced Office
Serviced offices represented the first major revolution in the commercial office industry. Businesses that occupied the office found it a distraction and inefficient to manage their premises. Similarly, property owners and landlords were reluctant to cater to the needs of smaller tenants. The serviced office sector thus emerged to fill this mismatch between supply and demand. The model essentially relied on outsourcing your office management to an Office-as-a-Service provider. Serviced offices can also be considered as the early stages of the sharing economy – it was ok to share office space with other companies and businesses. Yet, privacy was of the essence and that reflected in the design, with little or no interaction between the members. As the industry matured and specialized, these serviced offices effectively became plug-and-play destinations for businesses, companies, and freelance workers.
Office 2.0: Coworking – the Community Model
Over the past decade or so, coworking emerged as the first major disruption to the serviced office industry. In the coworking model, community is of the essence. It turned the serviced office industry on its head – the walls that separated businesses in serviced offices were broken down. Large open plan spaces emerged as the popular model, with a few private offices thrown in. But it wasn’t about the space – it was all about a group of people working together on their respective businesses. The coworking movement, though, for a long time operated on the periphery with non-mainstream locations and buildings, and relied on creatively utilizing previously unoccupied spaces into a cost-effective option for early stage entrepreneurs. Coworking has now evolved to a degree to be an industry in its own right with various sub-concepts emerging that have extended appeal beyond the traditional startups and freelancers.
“Coworking is a stlye of work that involves a common working environment, typically an office, but where activity is independent. It’s much more than a place to do business, it’s a community.”
Office 3.0: Serviced Office + Coworking – the WeWork model
The genius and ingenuity of Office 3.0 is in putting together Office 1.0 and Office 2.0. The success of WeWork, which emerged at the turn of the decade, and other players that have since emerged, has been in extending the appeal of coworking to the mainstream. In many respects it is a hybrid model. The model is revolutionary in many respects – firstly, these places operated at a much larger scale; secondly, they operated mostly out of Grade A commercial locations; thirdly, they brought into their fold a mix of startups, freelancers and corporates. At the same time, it also found a ready market in successful startups that outgrew their coworking space and wanted an environment of a serviced office without compromising on the community. This model recognizes the importance of delivering a quality community as well as a premium serviced office, while offering its different types of members ample choice to customise their experience. This explains the broad-based appeal and success of this model. Also notable is that as this model requires a much greater level of capital investment, the operators of these spaces have generally tended to be more sophisticated experienced players with access to sufficient capital.
Office 4.0: Ecosystems – the NEW model
Office 4.0 goes beyond community. In simple terms, it is about building ecosystems – physical and virtual. Office 4.0 is a recognition of the fact that community is already an intrinsic feature of the workspace for the un-collared workforce, much like the space itself. Yet, access to a community is no longer enough. Office 4.0 is about converting a community into a functioning ecosystem. This has multiple dimensions. Tailoring the community to facilitate meaningful collaboration. Nurturing personal and professional relationships. Unlocking business opportunities within the ecosystem. Providing access to various resources the community needs. The space itself becomes incidental to the ecosystem, but where it exists, its role is to delight and enrich the overall experience through creative design elements. Social interactions today happen online or on mobile – so the ecosystem must therefore seamlessly extend into the virtual world.
“In Office 4.0, the physical office space is seen as part of the entire value proposition including a flexible workspace, community, resources and design elements delivering a whole ecosystem for business, and for life. These spaces are not just business hubs, they’re cultural and social hives of activity. They attract the best architects to work on them, host the hottest parties and in the process continue to blur the lines between work and play”
Yet, important to emphasise, Office 4.0 is to be seen as an evolution of the Office 2.0 (Coworking) model. Scale is not a necessary requirement for a functioning ecosystem. It is perfectly plausible, even desirable, to build small localized communities into functioning ecosystems. As with coworking, scale ecosystem players will emerge in due course and continue the process of office evolution. However, what is clear is that delivering Office 4.0 requires a re-skilling of the coworking operators, greater specialization in skills, and re-orchestrating relationships between landlords and operators.
Hybrid ecosystem example
The ecosystem model has no set-piece formula and different constructs would suit different communities. The graphic above depicts an example of how a hybrid ecosystem for startup communities would look like. In this model, the distinction between incubators, accelerators and coworking spaces gets blurred. The ecosystem, becomes a composite of all combined into one place, with some of the programmes run perhaps in corporate or university partnership. Members have access to investment either by collocating venture funds or by way of an investment fund backing the ecosystem. Clearly, this ecosystem goes beyond just providing its members a shared community experience. It is an integrated ecosphere – the community is crafted to facilitate symbiotic relationships, with plenty of commercial value accruing to members by way of business opportunities, and access to finance and other resources.
PART 2: Office 4.0 – How it is changing the industry dynamic
The growing adoption of coworking (Office 2.0) has had a huge impact on traditional players in the office industry with a lot of value transferring away to the new coworking operators that emerged away from the industry gaze. Office 3.0 is a hybrid, capital-intensive model and has heralded a revival in the fortunes of traditional players who have adapted their business models in recognition of coworking. And now, the ecosystem model of Office 4.0 threatens to disrupt the industry all over again. Like previous iterations, one notable factor is going to be an extension of the value chain beyond the owners of the tangible office asset. With greater specialization and diversity of skills required to deliver Office 4.0 new players will emerge. The owner-operator relationship will change with a deepening of the understanding of the coworking model. The leasing model will evolve and at the same time new partnership models begin to emerge. A new class of landlords and investors will emerge that want to play in the game. The coworking operators who were the disruptors in Office 2.0 now need to stand up and face disruption themselves.
Role of different players in Office 4.0
The graphic below depicts how the commercial office and coworking value chain is evolving for an ecosystem model with greater downstream specialization.
Developers will need to adapt the building design for the evolution of the office into a business and social hive. The new design features large floor plates and natural light along with provisions for open spaces that can be converted into communal, relaxation or recreation spaces as per the requirements of the operator.
Landlords playing the role of the tangible asset owner need to adapt to the reality that they are no longer facing a large corporate tenant, but instead their direct contact is with an ecosystem operator. Also, they are no longer the lynchpin in the office business. Its is the ecosystem operator who plays the role of an asset transformer, converting the brick-and-mortar structure into a viable office space – it is no longer about just fixtures and fittings any more. The landlords have to therefore develop an understanding of the coworking and ecosystem business models. It is not possible to evaluate and curate the tenant mix based on credit quality. Instead, attention needs to be given to understanding the business model and ecosystem model of the operator. As this entails closer involvement and understanding of the business, this would warrant a natural shift towards revenue sharing and partnership arrangements with operators. In many ways, office landlords need to start thinking more like owners of hotel properties.
Operators both from the Office 1.0 (serviced office) and Office 2.0 (coworking) need to fundamentally up their game beyond their core competence of providing office amenities or communities. Most coworking operators had their roots in the community, while serviced office operators have now trained themselves on the community side, at least to some degree. However, crafting a community into a functional ecosystem is a much more complex process, partly because the communities themselves need to become more heterogeneous to facilitate more business relationships. For many coworking communities this will be a paradigm shift as they were built on commonality of purpose. This now evolves into a more diverse community but with symbiotic relationships bolstered by the belonging-ness to the same ecosystem. Once again, coworking operators will have a headstart on the serviced office operators, but many will no longer have the skills themselves to deliver the full monty. They would need to compensate for this by developing relationships with the downstream, and become a packager and manager of services for their ecosystem.
Facilitators can be used to describe a broad set of people who help in the delivery of value-added services to the Office 4.0 community. Some of them would have existed in the pre Office 4.0 world, but their role now increases in importance. Some of these roles may have been played by the better quality operators in the past, but in Office 4.0 this becomes a specialized skill unto itself. The roles vary all the way from designers of spaces through to providers of resources, expertise and specialized services to the community. Many of these players, in turn, become part of the community itself by collocating themselves to complete the ecosystem.
Networkers also refers to the new specialized part of the value chain for Office 4.0. Some of the more well-networked coworking operators may find that they are better suited to reposition themselves as networkers while leaving the operation to someone else. The role of networkers could vary from generating demand (this could also take the form of an online aggregator platform), building the community, organizing events, or bringing business opportunities for the ecosystem members.
The Office 4.0 model with its evolved value chain results in a change in the dynamic between space owners and operators. The operator is no longer seen as a tenant to be reviewed on credit profile and tenant mix. The owners have an imperative to develop a deeper understanding of the business model, the community and the ecosystem they are investing in. The owners thus become more like investors in the ecosystem rather than landlords of the space.
In Office 2.0 and 3.0, coworking operators provided value to the landlord in the following ways:
· Reducing vacancy rates and void periods by pre-leasing the space
· As a space incubator by being an early occupier of a new or vacant building driving footfall
· Broadening the offering of the building by providing a coworking alternative to more traditional office space in the building
The commercial relationship between owner and operator was very much based on the lease. In most markets, the landlord’s preference has been for a fixed lease with the coworking operator playing the role of the lease transformer for its pay-as-you-go clientele. Where the landlord developed a deeper appreciation of the business model, a more balanced risk sharing by way of revenue share and hybrid lease structures has been utilized. In some cases, the landlord also alleviates the financial commitment of the coworking operator by contributing to capex.
In Office 4.0, coworking operators can provide value to landlord in multiple different ways, with the relationship not just limited to the leasing arrangement.
Lease-based relationships can take the form of revenue share and hybrid arrangements where landlord shares part of the operating risk in return for participation in the upside.
Joint venture and partnerships are the next stage of the relationship in which the landlord becomes formally part of the operating business. These type of arrangements are particularly seen for larger sized projects where the operator may not have the necessary financial resources to be able to execute the lease and incur capex.
Operating contracts are the next stage of the evolution where the landlord wants to play in the game but seeks from the operator specialized expertise to manage the coworking ecosystem. In these arrangements, the landlord bears almost the entire financial risk of the project while providing a fixed or incentive-based management fee to the operator of the space.
Brand licensing is reversing the above where the landlord wants to also maintain operational control of the business, but licenses knowhow from an established coworking operator under franchisee or brand license agreement,
Coworking-in-box is a new model that recognizes that a lot of the value in the coworking and ecosystem models is in the intangible part of the office. This can be considered a coworking-as-a-service or ecosystem-as-a-service model where the service provider offers to the landlord a “toolkit” to convert the office space in to a coworking community or ecosystem.
Aggregators and demand generators are replacing traditional brokers or agents providing landlords temporary and permanent sources of occupants/ members for their space.
Response of traditional players
For a long time, the serviced office industry effectively treated coworking as a different industry to be left alone. They were in the mobile phone industry while the others were making computers, until they started making smartphones and made the traditional mobile phone obsolete. Traditional players in the office industry (landlords and serviced operators) have similarly awakened to the challenge from new coworking operators.
Developers and landlords are embracing coworking as a way to monetize the asset portfolio. New project plans need to necessarily consider coworking as part of the overall space offering. In some cases, the developers are making a concerted shift in their business model. This is a pattern seen across the world. For instance, in the UK, MarketTech has developed a 88,000 sq ft coworking campus across 3 locations as part of the London Camden market regeneration with a view to attract a new clienetel and drive more footfall to it’s retail sites. Soho China, which is a large property developer in China, is adding shared office and coworking offerings across all its sites. Keppel Land Singapore has launched a hybrid serviced office and coworking space at its flagship Keppel Towers.
Serviced office operators are also repositioning their product to prevent their clients from leaving for newer coworking sites. In the case of Regus, in addition to adding more open plan spaces across its network, they acquired Spaces to add social coworking to the portfolio. Singapore based The Executive Centre (TEC) has launched is own brand of coworking spaces under the Tribe banner.
In most cases, traditional players are playing catch up and their response can best be described as moving from Office 1.0 to Office 2.0 (coworking) or Office 3.0 (WeWork hybrid model). However, Office 4.0 (building full ecosystems) is much harder to crack. And as traditional operators move into their space, the coworking operators can stay ahead of the game by moving to the Office 4.0 model by leveraging their community and build ecosystems around them. In some cases, one may see new types of partnerships being formed with serviced office and coworking operators collaborating to pool their resources and expertise.
From landlords to investors
In Office 4.0, the role of the landlord changes from asset owner to investor in the ecosystem. A number of traditional landlords may decide this business is not for them and move away. Others will learn the new business model and develop partnerships with operators. At the same time, new types of investors will step in whose risk appetite is more aligned with the requirements of Office 4.0
Strata sold owners: In markets where floor plates are stratified and sold to individual HNW owners, they may step in and form partnerships with coworking operators. They may not have the respurces of larger institutional landlords and may be more inclined to agree to revenue share and capex deals with coworking operators in order to generate recurring cashflow from their investment
Angel investors: As more HNW and professional investors embrace startup investments, familiarity with the ecosystem may attract them to an asset backed investment with rentals from a constituency they understand and believe in. Some of these investors may accept equity based rent further blurring the lines between coworking spaces and accelerators.
Tech companies: Tech and startup companies that scale up too quickly may be left saddled with surplus space. While sub-lease arrangements have traditionally been thorny and difficult to negotiate, with widespread adoption of coworking, the more progressive landlords may see this as a practical solution to handle a tenancy arrangement with a tech company that runs into difficult times.
Large corporates: Large corporates were traditionally happy to leave their surplus space vacant or utilize it for various administrative functions. As companies look for new ways of collaborating and engaging with the startup ecosystem, they may consider opening a coworking area in their surplus space as a viable solution. Where the company does not want to commit its own resources or where they want to be more independent, they may want to bring in a 3rd party operator to manage the space.
Conclusion – Office 4.0: It has arrived
Coworking arrived under the radar in coffee shops and has worked its way into the mainstream. Access to community is now as integral part of the office as the space itself. The next revolution happening now is converting those communities into ecosystems for business, and for life. Office 4.0 is an ecosystem for the uncollared workforce of the millennial generation in the sharing economy of the entrepreneur era. It is a broad category melding together multiple different sub-concepts, large and small.