Crunch time is fast approaching for co-working providers as traditional landlords adjust their models to compete with emerging disruptors, commercial real estate analysts observe.

While co-working providers cleverly capitalised on the rise of freelancing and the workforce’s growing desire for adaptable, stimulating environments filled with services galore, the number of existing landlords now going down similar paths is shifting the goalposts yet again.

Eventually, flexibility will be the top priority of prospective tenants choosing their next commercial space according to recent analysis by leading commercial firm Knight Frank.

In the meantime, co-working operators will not so much disappear as morph into a hybrid model, meeting on a ‘middle ground’ with offerings from traditional offer providers, says leading industry observer Lee Elliott, Knight Frank's global head of occupier research.

This ‘middle ground’ will see tenants choosing their new landlords depending on how they judge the customer flexibility, workplace experience and services on offer.

"I'd go as far as to say that in two years I don't think we will be meaningfully using the word co-working anymore," Mr Elliott said. "I think it's here to stay but not in its present form."

Flexibility is key

His point is borne out in Knight Frank’s recent Your Space report which states 60% of global corporates plan to increase utilisation of co-working and flexible workspace over the next three years.

These global corporates are increasingly looking for landlords to provide this type of space in addition to their core occupancy footprint, says Knight Frank partner and Australian head of occupier services Dermot Lowry.

 “The response from owners has been varied and has seen some lease space to third party operators such as WeWork, but others (especially the institutional owners) incorporating flexible offerings into their own business model,” he says.   

“The value of flexible offerings is strong for both existing and prospective tenants. Whether it be an added benefit that will lessen the likelihood of a tenant vacating or a sales hook to attract a tenant in the first place, flexibility is key to building and maintaining strong occupancy levels.”

One following this shift is fast moving Singapore-based co-working provider JustCo which recently opened the first of six locations planned in Australia, a 4200-square-metre space at Sydney's 175 Pitt Street. Observing that many of co-working’s pioneers are not surviving, JustCo founder Wan Sing Kong says the big opportunity now is in expanding by selling space to “established companies with 100 staff or more” as well as to smaller businesses.

"Some of them, they want to have a little bit of co-working, but not be totally immersed in co-working," Mr Kong told media. "They still want privacy, a private entrance."

JustCo will follow its inaugural site in Sydney with two in Melbourne: an 8300 square metre space located across four floors of the 15 William Street tower, as well as a four-level, 4000-square-metre location at 276 Flinders Street. Both are scheduled to open June 29, on the same day as a second Sydney address which will take up 2800 square metres across two levels of Mirvac's 60 Margaret Street.

Finding the right fit

Another factor heralding change is that co-working operators themselves are now increasingly judged, according to Mr Lowry. “For owners not looking to operate their own model, there is a trend emerging where lease negotiations with external co-working operators will also include consideration of the suitability of the operator for the key tenants in that particular building,”.

The 2018 CBRE Pacific Corporate Coworking Survey likewise found that only 32% of corporates would prefer a building with a classic coworking operator in it, stating “there are some concerns for occupiers about being in a building with a coworking provider”.

And while the CBRE survey also stressed the importance of flexibility, a key consideration for the commercial sector going forward would be the vastly different requirements of different industries.

“For instance, law firms want silver service client meeting/event/function space and concierge services whilst for the banks it is about portfolio flexibility,” says Felice Spark, Associate Director, CBRE Research. “Government occupiers are seeking to use it for collaboration and IT firms for agile business methodology and bringing project teams together. In time, we might see the industry start to respond to these specific sector-based requirements.”

While co-working may represent less than 2 per cent of assets in Sydney and Melbourne (the largest is New York with around 7 per cent), momentum is gathering. Knight Frank’s Mr Lowry says most of Australia’s institutional owners are either already offering or are preparing to offer more flexible and attractive space.

Prominent examples include:

  • Space & Co, by The GPT Group. It now has multiple sites in Melbourne and recently opened a site in Sydney offering a full co-working style environment, with a generous occupancy ratio targeted at corporate occupiers.
  • Dexus Place, by Dexus offers flexible event and meeting space at a number of locations promoting high quality and high-tech environments for existing tenants and external customers.

Mr Lowry advises the key sales pitch for an owner-operated model should be the broader access to their entire portfolio – how they can allow co-working occupiers to grow within their space and then access longer term traditional leased space through the same landlord relationship.

“The bigger picture however for owners, whichever model they choose, is the ability to improve tenant retention in the medium-long term and reduce vacancy which will impact on the asset’s valuation,” he says.

Differentiate Co-working for Particular Target Markets

National Director, CBRE Client Solutions, Suzette Lamont neatly summarises the current changing Coworking situation, “Whilst we are still not at crunch time in terms of absorption rates, we are certainly seeing crunch time in terms of amenity and services. 

It’s also time for co- working operators to step up and differentiate themselves for their particular target market ... no longer will coworking and agile flex be able to deliver the broad blanket approach to all , but rather pinpoint who they want to service; and curate a service specifically for them. Clever landlords such as ISPT and Dexus do this through creating their own spaces such as Flex and Dexus Place; as well as exploring better ways to connect through configurable tech platforms that connect the built form with the human experience that are tailored to each individual user such as the Charli app by Charter Hall.”