COMMENT The dramatic rise of WeWork over the past five years, and more recently much of the commentary around the company’s intended IPO, could lead one to believe that the space-as-a-service model is built on sand and destined to fail.
But I believe that much of the debate around this sector is rooted in a degree of schadenfreude as the “traditional” real estate sector runs to catch up with the inevitable democratisation of the office market.
WeWork and its peers are fulfilling a need which arguably has not been paid enough attention in the office market in the past. The need for flexibility and customer care – both of which have been further down the priority list for some landlords in the past – is now top of the agenda for all.
I am old enough to remember the regular use of terms such as the “institutional lease”, which points to the focus of many developers having been more on who they might sell the building to, rather than the satisfaction of their tenants.
The rise of the sharing economy, instant customer feedback and higher levels of service in other industries have all supported an increase in businesses wanting better service from their workplace. Whatever one’s stance on WeWork’s financials, it is hard to imagine this need changing in the future.
There are obviously issues that need to be addressed for this model to become more acceptable to landlords, investors and lenders. Most notably these include better industry data on performance, and a more income-focused valuation model.
It is absolutely natural to be sceptical and cautious about new ways of doing things, but a Canute-like resistance to change is seldom a wise strategy
However, we are moving in the right direction on both fronts, with better data on occupancy and pricing from companies such as WorkThere, and the Royal Institution of Chartered Surveyors looking closely at valuation techniques. As these initiatives move forward, I expect to see a more sanguine attitude to space as a service evolve.
The rapid growth of any new model has its challenges, and there are undoubtedly areas of oversupply in both the UK and US at the moment. Operators that do not have a clear point of differentiation – other than price – will undoubtedly fail, but the large, well-funded players who understand branding and customer care will survive and evolve.
We have to be realistic about the challenges this sector poses and faces, and rethink some of our old metrics, such as vacancy rates, to take account of change.
For example, in central London we estimate that our standard vacancy rate measures that we quote every month could be as much as 100 basis points out if we assume that typical occupancy in the space-as-a-service sector is running at around 90%, and that sector occupies around 20m sq ft across central London.
It is absolutely natural to be sceptical and cautious about new ways of doing things, but a Canute-like resistance to change is seldom a wise strategy.
Mat Oakley is head of European commercial research at Savills
