I speak to many real estate companies looking into the abyss of what life during and post COVID-19 may look like. Many dismiss Flexible Office Space (FOS) or coworking providers as a small percentage of their footprint. While investing more into FOS may not be the best route given what history has taught us (more on that later), I think there is one lesson we can learn from flex space providers that will be fundamental to the future success of commercial real estate: get to know your customers.
In 2010, WeWork arrived on the real estate scene as a coworking provider. It wasn’t the first into the space with IWG plc (formerly Regus) and New Work City already existing, but WeWork drove awareness and adoption, proving enormous (and growing) demand for flexible space.
Meanwhile, the real estate industry may have been guilty of focusing on its own needs rather than the needs of its customers. Real estate conferences focused on IRR, cost of capital, and replacement rates rather than features and benefits of the customer. WeWork changed that to offer flexible terms, a mixture of spaces (private office, lounges, cafe, etc.), and a hip environment. But WeWork, like commercial real estate in general, still has no moat. As demand increases so can supply and as Convene, Industrious, or IWG’s Spaces are proving, it isn’t and won’t be a winner take all market.
Commercial Real Estate (CRE) companies have responded by partnering with the aforementioned companies, happy to hand over the reins to what is less than 2% of their portfolio.
But I fear that is a grave mistake.
Commercial Real Estate innovation comes with a warning message from the past.
In 2000, Toys R Us entered a 10-year partnership with Amazon. This followed a disastrous 1999 where Toys R Us was fined by the FTC ($350M) for failing to get thousands of Christmas gifts shipped to customers in time for Christmas. The Amazon partnership helped Amazon grow and develop the skills and infrastructure to be a great online retailer. It also allowed Amazon to slowly squeeze the margin out of toy sales. By the time Toys R Us went bust, online sales still represented far less than 20% of all sales. Today (July 2020), Amazon still only represents 6% of all US retail, but look at the state of traditional retail.
The problem for Toys R Us is that they allowed Amazon to get in between them and their customer and this is fatal. For example, Amazon can ship packages using FedEx or UPS or indeed themselves. This could be seen as a great partnership for FedEx. But FedEx only knows to ship a 4lb box from point A to point B. Amazon knows what’s in the box, who put it there, who purchased it, and what else they have purchased, along with a ton more data. And DATA is KING.
And so my thesis is that real estate firms will partner with coworking providers to their detriment. The real estate firms provide the office, and the coworking providers sit with the customer and all the data. The coworking providers will quickly know who wants what, where, when, and how, and they can either go raise the capital themselves to provide it or have a real estate firm provide it for them. But make no mistake, there will be very little margin left for the real estate firm as you have now become a utility with no monopoly and no moat.
COVID-19 is the perfect event to remind CRE firms that they are in the people business and coworking is one of the best ways to regularly engage with customers.
Flex may only represent a small percentage of your portfolio today, but building the infrastructure now to know where your customers commute from, go to, eat, work, and more could be vital for the future.
Duncan Logan is the founder of Coworking pioneer, RocketSpace, and heads up real estate innovation at Nex Cubed.