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Workspace Revolution

Flexible workspaces are set to be the way of the future for many businesses, so commercial property owners would do well to think about the opportunities they present, reports Miriam Bell.

By: Miriam Bell

1 December 2019

We all know that the nature of work is changing and so too are the spaces people work in. The rise of both flexible work structures and remote working, enabled by technology, has led to huge growth in flexible (aka shared or co-working) workspaces.

And (despite the current woes of global shared workspace giant WeWork) that growth is set to continue, at an estimated 24% a year.

It’s projected that by 2020 50% of all workers will work remotely most of the time and that by 2022 the global mobile workforce will be 1.87 billion people.

When it comes to accommodating this, real estate giant JLL estimates that up to 30% of corporate real estate could be flexible workspace by 2030.

There are now more than 40 coworking facilities in operation around New Zealand, and Colliers International research suggests that number will increase by 20% this year. It’s a similar story in the country’s biggest office market, Auckland.

According to Bayleys Real Estate’s fourth annual co-working report, the occupier footprint grew by circa 10,000m2 over 2018 to a total footprint of 39,500m2 in 2019.

In the Auckland CBD, co-working represents an estimated 2.0% of the total office market, in line with the Asia- Pacific average of 2.1%. The average is growing with 24,000m2 of stock in the wider Auckland pipeline. Approximately 17,000m2 of this pipeline is due for completion over the year to May 2020.

Additionally, the overall co-working space occupancy rate is now at 81%, which is an increase from 74% in 2018. It is expected that continued growth in membership and occupancy rates will see good uptake of stock currently in the development pipeline.

This highlights the fact that there are real opportunities for commercial property owners willing to make the leap into the brave new world of flexible working space.

Brave New World

In fact, the APAC Flexible Workspace Outlook report 2019 states that, as the shape of occupier demand continues to shift, building owners must react. As part of this, they will have to decide whether to self-perform flexible workspace and amenity spaces, or acquire, invest in or partner with an operator.

Bayleys commercial director Auckland Lloyd Budd says they are seeing a more normalised approach to co-working spaces as a solution these days. More landlords are wanting co-working as part of their overall occupancy mix, while tenants are asking for co-working space access in their market briefs.

The noise in the media about WeWork is a distraction as it is about the private equity/valuation side, he continues. “Within the sector, the model is regarded as a very positive and sustainable one. It’s a very exciting time in the Auckland co-working space market.”

That’s because global coworking IWG (which owns Regus, Spaces and BizDojo) and WeWork are actively scouring the market for expansion opportunities. Spaces has recently opened its first workspace on Karangahape Road and is set to open several other locations in 2020.

While commercial property owners can opt to enter the market directly themselves, Budd says few are looking to at this stage. “Some obvious exceptions are Generator and Smales Farm with B:Hive. But most of the other large landlords are looking to lease to established operators.”

His advice for commercial property owners interested in co-working spaces is to work with an established operator in order to leverage off their networks and community, particularly if the property is a harder one to lease due to its location or floor space.

“There’s opportunities to be had in co-working spaces. It’s another option to offer tenants in a building. Plus it is a better activation of space and a platform for growth. Going forward, the outlook for the sector involves more normalisation and more growth.”

Operator Offerings

IWG New Zealand country manager Pierre Ferrandon agrees. He says the key point about flexible working spaces is that they offer the landlord flexibility of use.

“It gives property owners the ability to take a less traditional approach to their leases. With a traditional lease you can’t flex up or down (with space occupied and tenant numbers). You can with flexible working space – and that’s an opportunity, particularly as returns are higher.”

Having flexible workspace can give a property owner a premium over a competitor building that doesn’t have it on offer, he says. “It also helps to retain tenants because they can scale up or down as their business changes. It’s worth noting that by the end of 2019, 40% of global demand for flexible workspace is expected to come from large and corporate companies.”

IWG, and its various brands, offer different options for property owners. They are actively looking for local partners to partner with on locations for Spaces and Regus workspaces. Earlier this year they launched a franchise programme which enables property owners to enter the flexible workspace industry with IWG’s assistance and support.

‘Make sure it’s the right building in the right place and that it’s done well. A crappy little fitout and chucking a couple of desks in the corner doesn’t cut the mustard’ MICHAEL MACKINVEN

Ferrandon says interest in these options from property owners is strong. “We used to get about 60 enquiries a month, now it’s about 420. About four years ago we had five locations round New Zealand. We didn’t do much for a few years and then, over the last 24 months, our locations have gone up to 11.”

There’s been a big increase in the number of flexible working spaces and companies around, he says. “But most are smaller operators and they struggle to provide the range of facilities and arrangements that businesses want. We have the scale, the corporate contacts, the global network and infrastructure, and a proven business model with different brands to suit different customers.”

Doing It Yourself

Working with an established operator is not the only option for commercial property owners though. It is possible for a landlord to repurpose a property and then run it as a flexible workspace themself. Veteran investor Michael Mackinven is a prime example: he successfully converted one of his underperforming properties into a shared working space.

Back in 2016, he bought a property which seemed a good deal. But, within a year, the long-standing tenant was gone and the property proved hard to re-lease. Mackinven says he was getting offers for the space for as little as $30,000 including OPEX or from businesses that wouldn’t work.

Agents didn’t see potential in the space, but he did – so he spent roughly $200,000 to transform it into a shared working space, called Palmspace.

“We now have 11 office suites and four dedicated desks. The office suites are rented at $150 + GST per week and include OPEX. The dedicated desks rent for $100 + GST per week. The square metre rate is better than what I was getting for the previous tenant. The new rent after conversion is $65,000 plus OPEX plus GST.”

Mackinven says there have been no real challenges. “We do have over 11 individual tenancies to manage. That comes at an administration cost. Also, we are responsible for OPEX including common area cleaning, which can be a pain.

“But we’ve got good systems and processes to manage all that and it takes very little time. I also enjoy working with small businesses. It is exciting to be able to encourage them and provide a beautiful space in which they can flourish.”

His advice to others interested in doing similar is to make sure it’s the right building in the right place and that it’s done well. “A crappy little fitout and chucking a couple of desks in the corner doesn’t cut the mustard.

“Do your homework and get the right advice. It is important to consult with prospective tenants to find out what is important to them before doing the fitout. We were lucky to have lots of parking outside which is a priority. Also, the ground floor, room sizes, breakout rooms, meeting room sizes and HVAC spec are all really important considerations.”

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