Coworking: Owning a Share in the Future
Does the new office format deserve a premium from investors? The short answer is “yes!”.
A new segment has emerged in recent years in commercial real estate to become one of its fastest growing areas. Many refer to it as “coworking”, although it encompasses far more than its name implies. This is the shared economy — the possibility of renting not just a space for working or living in, but also accessing a whole range of additional services. The cost of these extra features is shared among the co-participants, making them affordable, although before such amenities would have been ‘over budget’ for a non-executive level office employee.
GCUC (the Global Coworking Unconference Conference) estimates that by 2022 there will be more than 30,000 coworking spaces (from 14,411 in 2017) and that the number of those working in these new office spaces will rise from 1.7 million in 2017 to 5.1 million. In major cities, such as London, by 2017 coworking spaces already accounted for more than 20% (Central London) of all office space in the city (Source: Cushman & Wakefield, Coworking 2018). Growth is being driven by start-up companies and SMEs, as demand for flexible workplaces is rapidly changing the traditional office leasing market.
Changing preferences are an additional economic driver: New tenants often mistakenly believe that coworking spaces are cheaper to rent than traditional offices. This is because they can rent smaller spaces and avoid paying for additional employees. In reality, however, tenants often pay significantly more per square foot for coworking spaces.
So what does all of this tell us? We have seen explosive growth in shared space offices and in their popularity around the world. From the point of view of a commercial real estate operator, there is an arbitrage opportunity for those willing to bridge the gap between traditional real estate owners and those who are prepared to pay a premium rent for coworking premises. This is also a step into the service economy and involves managing a community. Coworking operators must offer a range of perks which appeals to prospective tenants. Companies pay for a product (a shared office) but also for communal benefits which they find attractive. Companies also tend not to pay attention to how paying for these services impacts the ultimate cost of the product — the actual rent which they pay on a per square foot basis for a coworking office. By selling services instead of just square footage, operators can increase their margins.
Blockchain technology perfectly complements the shared economy. First, it makes it possible to quickly, and at a minimal cost, issue your own payment instrument. This could be, for example, a building’s tokens to be sold to tenants who can use the tokens to buy anything from working spaces to coffee. On the other hand, we expect a wave of tokenized real estate. With the help of blockchain technology, it will be possible to issue a token which will give its owner the right to receive income generated by tangible real estate assets. This will fundamentally change the liquidity of assets, and will open the market to new buyers. Investors will be able to build their own portfolios incorporating their own appetite for risk.
But what does this all mean in practice? The “tokenization” of real estate might lead to a situation where many buildings will have multiple owners. The role of manager, e.g. the operator of a coworking space, will become even more critical. It will be a question of one’s reputation and experience. Blockchain transactions are irreversible and cannot be rewritten. Therefore, it will be very easy to look at an exact history of previous transactions to verify if an operator really does have a good reputation before you decide to sign a new coworking contract with him.
Real estate investments will change with blockchain technology in a fundamental way. 200 years ago, it was impossible to become a co-owner of a company (particularly of a large one) without being a direct investor in the company’s capital. Today, with only $1000 you can buy a tiny piece of Facebook or Apple. This same phenomenon will happen in the real estate sector. At the moment, it’s a rich man’s game, but in a few years, the market will truly be open to everyone.
New buyers in the market and inflation in national currencies might drive real estate prices to new heights. The creation of new real estate formats (coworking, coliving, shared warehousing, 24/7 offices built around shifts) will generate even greater profits for those who are ready to bring these formats to the market. Of course, these same investors can raise additional funding through the tokenization of their assets.
The next decade will be an interesting time for the real estate market: new formats will appear and new relationships will form between developers, owners and operators. New means of raising financing will become commonplace as will new ways of accessing liquidity, such as the sale of a stake or the resale of leasing rights via tokens. Thaler.One offers solutions which answer some of these challenges for the future and will help access these new opportunities.