Coworking entered the real estate industry only a short time ago and has clearly made a lasting impact, said a recent report by AEW. AEW, one of the world’s largest and most established real estate investment managers, referred to JustCo @ Marina Square (among other key global real estate in major cities), to arrive at their conclusion on coworking space.
The research paper outlines what coworking is and how its demand for real estate in the Asia Pacific region has evolved. It then reviewed the business model shift operators have taken to target corporate users and the industry’s response to the continued growth of the coworking industry; outlines key factors to consider when adding coworking to your portfolio; and lastly, explores future trends.
AEW noted that coworking entered the Asia Pacific real estate market and rapidly changed the landscape.
In explaining what is coworking, AEW said:
“While there is no one-size-fits-all, the common coworking experience is the provision of a ‘cool’ working environment with a strong ‘hospitality feel’. Operators differentiate themselves from traditional serviced offices by emphasizing community, lifestyle, social interaction and wellness. They prioritize the provision of amenities including front-desk services, free food and beverage, wellness and fitness services, back-end support such as IT or human resources, as well as access to insurance, legal and travel services.
“A key difference with traditional office occupying arrangements is that coworking operators sell memberships, in an extremely flexible manner. Commitments by occupiers can be short or long-term, for a single seat or at the enterprise level.”
The AEW research paper suggested that coworking in several Asia Pacific cities is behind other global gateway cities.
It said that in markets with low vacancy and limited new construction, operators have found their expansion plans constrained. The low penetration rates and announced plans by operators suggest over the next few years these rates could rise.
The research explained that demographics are part of the explanation of why coworking has grown as strongly as it has, and that in Asia Pacific, millennials (those born between 1980 and 2000 and now making up the largest part of the workforce), are one big reason for its fast growth.
In referring to a CBRE 2016 research titled ‘Asia Pacific Millennials: Shaping the Future of Real Estate’, AEW said “the importance that millennials place on their office environment, with 71% saying they would be willing to give up benefits like location and travel time for better office design.”
Mr Glyn Nelson, AEW’s Head of Research for Asia Pacific said: “They also value flexibility, with more than 60% saying this was a strong preference. Also, millennials report a strong desire for amenities and wellness, features that coworking operators prioritize.”
He added: “After some initial apprehension, there has been an increase in the acceptance of coworking operators as a tenant. Many investors with vacancy have targeted coworking operators as the industry represents a source of new expansion demand and usually involves large space requirements.”
In constructing a real estate portfolio, AEW believes exposure to coworking should, like all tenants, be diversified. By making certain a portfolio’s coworking component is spread across multiple cities and by working with only the most creditworthy operators, a portfolio’s exposure to the industry’s uncertainties can be minimized.
It added that at the same time, investors are able to tap an industry with expansion demand. Other positives of doing a coworking deal include their long leases adding to the portfolio weighted average lease expiry (WALE) and the high-density utilization of coworking space leading to associated retail opportunities.
Mr Nelson said, “Serviced office is nothing new, but coworking operators significantly updated and refreshed the offering. They brought a new approach to a traditional model and built on the Active Based Workplace movement already underway.”
AEW said investors focused on total return should consider coworking operators as tenants in their buildings, but with the full evaluation of the income, costs and security of the agreement. AEW believes that landlords with long-hold portfolios are expected to continue to follow the market and provide house-branded services.
In conclusion, AEW said that there is little doubt coworking as a concept is here to stay. The product and service provided is highly attractive to an array of users. AEW believes more and more corporates will opt to include flexible space in their real estate portfolio. It believes that some coworking sites will prove highly successful, others less so.
AEW anticipates the real estate industry as a whole will continue to react to the rapid growth of the coworking industry. It added, “coworking operators are both partners and competitors to the traditional real estate industry and they are here to stay.”
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