investing in co-working

Investing in Co-Working

The rise of millennials in the worksforce have changed the dynamics for offfice space demand. In this article we discuss investing in co-working.

The Millennial Influence

By 2025 Millennials will represent 42% of the Australian workforce and by 2020 this generational cohort will begin to turn 40. The Deloitte Millennial survey (2017) estimates 24% of Millennials are currently in senior positions.

As such, Millennials are having an impact on key decisions around commercial real estate, the future workplace and the very nature of work itself, it is important to understand the distinct behaviour patterns associated with this generation.

Co-working in earnest began in 2005, when professionals including technologists, programmers and creative professionals wanted to work outside the office environment, but also avoid the isolation of home offices, according to an October 2014 article, “Workspaces That Move People,” in the Harvard Business Review.

Technology is a key driver here, with over half of freelancers stating that technology is making freelancing easier. The connected era is removing barriers and liberating our workforce.

The co-working revolution has emerged from a confluence of factors: the rise of freelancers and starts-ups, technological change, a shift toward self-employment and the greater numbers of Gen Y workers.

Growth in the U.S.

The United States in particular has seen a rapid rise in the so-called freelance economy, with freelancer numbers projected to outpace full-time workers by 2020, according to business services firm MBO Partners. The McKinsey Global Institute has also suggested that 160 million jobs – approximately 11% of the world’s 1.46 billion service jobs could be carried out remotely. WeWork’s rapid expansion has highlighted this growth.

Co-working in Australia

Roughly 30% (3.7 million Australians) are now freelancing, according to a survey by Elance-oDesk which highlights five freelancer segments: Independent Contractors (35% of the independent workforce); Moonlighters (19%); Diversified Workers (23%); Temporary Workers (20%); and, Freelance Business Owners (3%).

Currently in Australia, there are more than 120 co-working sites, with the bulk of these found in New South Wales (around 30%) and Victoria (around 2.5%). Close to half of these sites can be found in inner suburban areas (less than 10km from CBD), predominantly in city fringe locations within 2-3km of a CBD.

The growth in the sector has been extraordinary. The amount of space occupied by co-working hubs in Melbourne, for example, has increased a staggering 750% in the past three years.

With the co-working sector firmly established and demand expected to rise further, mainstream landlords are grappling with a potential threat.

Major landlords are already responding, not only by absorbing WeWork as a tenant, but by offering their own flexible spaces, for investing in co-working. For example GPT has set up Space&Co, to offer short-term and flexible workspace, and DEXUS has a flexible hub for its tenants, DEXUS Place.

Business Model Opportunities

Arguably the co-working model best known to the market is the one used by WeWork, where the operator leases office space from a traditional office landlord on a long term lease and sub-leases that space as co-working. Under this strategy the co-working operator will make a margin by charging premium style office rents to the co-worker while paying B-grade style office rents to the landlord. The drawbacks with this strategy are the lack of a real balance sheet and the risk of the landlord not renewing the lease.

An alternative strategy for investing in co-working is to acquire vacant or near vacant buildings and convert them into workspace style buildings. In Australia Blackwall have had limited success with this strategy, while the best example is Workspace Group PLC in the UK. While this strategy provides greater flexibility and a balance sheet, it often takes time for the asset to reach a suitable occupancy level.

Find out more

For more information on commercial property in general, read our article  Investing in Commercial Property – The Ultimate Guide.

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