Coworking and the way to Office 4.0
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Vishal Gupta, from Kabeela.life, explains what kind of deal can be discussed between landlord and Real Estate owners.
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Coworking and the way to Office 4.0
- 1. Office 4.0: Real Estate Masterclass What to do to arrange shared revenue deal with landlord, manage lease cost and risks? VISHAL GUPTA Co-‐founder and CEO Brussels, 28th Nov 2016
- 2. PUTTING THINGS INTO PERSPECTIVE IntroducLon 1
- 3. My professional journey EvoluLon of my career 2 Vishal Gupta Entrepreneur | Investor | Ex-‐ Investment Banker | Startups, Technology & Coworking MISSION: To develop the ecosystem for entrepreneurship and invesDng in entrepreneurship by breaking barriers to informaLon, access and investment Investment Banker Corporate Business leader Investment Manager, Advisor, Freelancer 2002 2012 2015 Full-‐Dme entrepreneur, investor and connector Hong Kong London Property Renewables Tech India
- 4. The journey of Coworking EvoluLon of the office market • >1 million coworkers by 2017 • 34% of coworking spaces globally are less than a year old –> fast growth market • 100 million new businesses are launched annually -‐> shi from large corporates to entrepreneur-‐driven economy • 40% of workforce will be freelancers, independent contractors or solopreneurs by 2020 • >10,000 coworking spaces worldwide -‐> not a trend, but a new way of working • $16bln valuaLon of WeWork has mainstreamed coworking – > larger companies locaLng alongside startups 3 Source: GEM, Deskmag Survey, CoworkingLondon
- 5. Today: The coworking boom How WeWork has changed the game for everyone 4 5 mn sq Y $1.4 bn raised $16 bn value Source: Crunchbase, WSJ reports
- 6. Back then: When things went bust How Regus went bankrupt 5 • Economic downturn • Over-‐supply of office space • Fixed long leases in US • Rentals agreed at peak of market • Sharp downturn in passing rents • Reliance on dotcom and startups – demand fell away Dot-‐com bubble burst 1989 – 1st Regus opens in Brussels 1990s – Rapid growth fuelled by startups mushrooming 2000 – Regus IPO 2001 – Expansion across Europe, Americas, Asia 2003 – InternaLonal business operaLng in 52countries 2003 – Regus files for Chapter 11 bankruptcy for its US operaDons, sells stake in UK business What went wrong? How they changed? • Corporate restructuring • Property JVs, profit sharing partnerships with landlords • Shi to 30-‐40-‐30 mix (large corp-‐SME-‐ startup) During downturns, the leasing model can make all the difference between survival and failure
- 7. Financing a coworking space 6 Average size of coworking spaces has doubled in 2 years Need to find new avenues for capital, (also revenues)! Source: Deskmag Global coworking survey 2016
- 8. WHAT IS OFFICE 4.0? The new model for commercial office and coworking industry 7
- 9. Office 4.0: It has arrived Commercial office business is increasingly complex 8 Office 1.0 Office 2.0 Office 3.0 Office 4.0 Serviced Offices Coworking Serviced Office + Coworking Ecosystem Office only Workspace Community Workspace Community Delivering the above with choice and at scale WeWork Model Regus Model *NEW* Model Workspace Lifespace Community Design Resources Online plamorm Peripheral locaLons Prime locaLons – Grade A commercial
- 10. Office 4.0: What it means Office is commodiLsed, new skills required to moneLse 9 For landlords For everyone else Office 4.0 is an entirely different business than owning and managing buildings The physical office space is seen as part of the entire value proposition including a flexible workspace, community, resources and design elements delivering a whole ecosystem for business, and for life
- 11. What hybrid ecosystems could look like 10 Incubators GestaLon focus 5-‐15% equity Discounted services Equity-‐based rent Accelerators Investment focus 3-‐10% equity Structured programme Equity-‐based rent Coworking Community focus No equity Events + networking Cash-‐based rent Hybrid Ecosystems Industry incubator host In-‐house accelerator Investment fund Coworking space Corporate offices
- 12. Office 4.0: Key characterisLcs How it is going to change the industry dynamic • Emergence of co-‐working value chain – beyond owner and operator • SpecializaLon of skills – roles of different players to deliver Office 4.0 • Coworking operators need to transiLon from “community builders” to “ecosystem managers” • How is owner-‐operator relaLonship evolving • Lease-‐and-‐sublease model may not work -‐> new partnership models begin to emerge • Response of tradiLonal players • A new class of landlords 11
- 13. Roles of different players in Office 4.0 How the coworking value chain is gesng specialised 12 TradiDonal players (Office 2.0 & 3.0) NEW (Office 4.0) Developers Build spaces (Large floor plates, natural light) Landlords Own spaces (Flexible leases, engage with operator) Operators Build ecosystem (Package and manage services) Investors Growth capital, replace or co-‐ invest as landlord Facilitator Design spaces Provide resources and experLse Networker Generate demand, build community, business opportuniLes
- 14. Owner-‐operator relaLonship How coworking operators provide value to the landlord 13 Office 2.0 & 3.0 Office 4.0 • Pre-‐lease • Reduce vacancy rate • Space Incubator • Broaden offering • OperaLng contract • MoneLse vacant space • Revenue sharing • Joint Venture and partnerships • Brand value All of the above provide direct and indirect value accreLon to the landlors, and should be considered in the lease negoLaLon
- 15. Owner-‐Operator RelaLonship Summary of leasing (and revenue) models 14 Office 2.0 & 3.0 Office 4.0 ConvenDonal lease Fixed rental/ cost Revenue share Variable rental/ cost Hybrid lease Floor with upside parLcipaLon Joint Venture Business partner, Equity for capex OperaDng contract Management fee Coworking in a Box Aggregator, demand generator Brand licensing
- 16. Response of tradiLonal players Office 3.0 is within reach, BUT Office 4.0 is harder to crack • TradiLonal players have now awakened to the challenge from new coworking operators • Developers & Landlords: Embracing coworking to moneLse asset pormolio • MarketTech UK: Coworking campus (Office 3.0) as part of Camden market regeneraLon, driving foomall to retail sites • Soho China: Property developer, rolling out a shared office offering across all its sites (Office 2.0 + 3.0) • Keppel Land Singapore: Launched hybrid serviced office and coworking (Office 3.0) space at prime asset • Operators: Serviced office (Office 1.0) operators are reposiLoning their product • Regus: acquired Spaces to add social coworking (Office 2.0) to its pormolio 15 TradiLonal operators moving in to Office 2.0, owners moving in to 3.0, but will find it hard to crack Office 4.0 themselves
- 17. Thinking beyond Office 4.0 will also see a new class of landlord emerging • Awareness and interest in coworking business will also avract a new class of landlord with a completely different playbook • Strata sold owners: Smaller individual landlords owning smaller places may be more inclined to agree to revenue shares and upfront capex • Angel Investors: HNIs may view this as an asset backed investment with rentals supported by a consLtuency they understand and believe in • Tech companies: Tech companies that scale up too quickly may be le saddled with surplus space – with landlord consent, a sub-‐ lease to coworking operator will provide vital cashflow • Large corporates: Opening up to the idea of moneLsing their surplus space or outsource enLre operaLons 16 Proper market diligence and relaLonship building is needed to orchestrate such opportuniLes and tailor a mutually beneficial structure
- 18. LEASING CASE STUDY Developing a working model 17
- 19. Case study Analysing trade-‐offs of different lease structures • ObjecDve: Develop a simple working model to evaluate financial impact of different lease structures to landlord and operator • Scenarios: Analyse financial impact in base case and downside scenario with a 5 year horizon • Inputs required: 1. Size of coworking space 2. Market rent landlord can achieve 3. Through-‐cycle vacancy rates in area 4. Membership capacity as coworking space 5. Average monthly fee per member 6. AnLcipated through-‐cycle occupancy in base case and downside 7. Annual operaLng cost of running coworking centre • Analysis: Flex revenue share terms to idenLfy “opLmal” arrangement for landlord and operator 18
- 20. ConvenLonal lease v/s Revenue share [30% model] Landlord perspecLve 19
- 21. ConvenLonal lease v/s Revenue share [30% model] Operator perspecLve 20
- 22. ConvenLonal lease v/s Hybrid lease [50%+10% model] Landlord perspecLve 21
- 23. ConvenLonal lease v/s Hybrid lease [50%+10% model] Operator perspecLve 22
- 24. Case study Summary points and takeaways • In markets/ buildings with high vacancy rates, economics of revenue share should appeal to the landlord • Revenue share deal requires buy-‐in to the business model/ easier with track record • Without revenue share, business model cannot withstand downturn => in the landlord’s interest to avoid contract not being honoured and resulLng void period • Revenue share introduces variability but could provide much higher return to landlord • Hybrid leases structures contain the variability, while sLll providing vital operaLng flexibility to operators • Revenue share/ hybrid lease structures are more aligned with cahsflows generated from end-‐occupiers => win-‐win for landlords and operators 23
- 25. DISCUSSION CHALLENGE This or That 24
- 26. Discussion Challenge 25 v/s THIS THAT
- 27. Discussion Challenge 26 v/s THIS THAT Large Integrated campus MulLple smaller centres
- 28. Discussion Challenge 27 v/s THIS THAT Commercial building Industrial building
- 29. Discussion Challenge 28 v/s THIS THAT Private offices Open Plan
- 30. Discussion Challenge 29 v/s THIS THAT Fixed Lease Revenue share
- 31. Discussion Challenge 30 v/s THIS THAT Management fee Brand licensing
- 32. Discussion Challenge 31 v/s THIS THAT Parent level financing LocaLon based financing
- 33. Discussion Challenge 32 v/s THIS THAT Equity based rent Cash based rent
- 34. Discussion Challenge 33 v/s THIS THAT Office 2.0 Office 4.0
- 35. WHAT IT TAKES TO SUCCEED Brainstorming 34
- 36. What it takes to succeed? Defining your Golden Circle 35 WHY HOW WHAT 1
- 37. What it takes to succeed? Defining your Golden Circle 36 MY BUSINESS WHY?? • XX • X HOW?? • XX • X WHAT?? • XX • X 1
- 38. What it takes to succeed? Standing out from the crowd: Purple Cow 37 2
- 39. What it takes to succeed? Standing out from the crowd: Purple Cow 38 2 MY BUSINESS NOW – What am I doing differently? • XX • X FUTURE – What can I do differently?? • XX • X
- 40. What it takes to succeed? Where can I turn to for finance: 39 3 White Knight Friends & Family Angels VC Venture equity Venture debt PE Banks Pension Fund LOC Warrants Structured credit Property JV Corporate partnership Overseas capital M&A HNI
- 41. What it takes to succeed? Where can I turn to for finance: 40 3 MY BUSINESS Sources of finance I have considered? • XX • X Sources of finance I could consider? • XX • X White Knight
- 42. Contact details 41 Vishal Gupta Co-founder, CEO Founder Tech Startups SocialMedia London, United Kingdom www.kabeela.life vishal@kabeela.life +44 (0) 7788 491 774 Investment Fundraising Community @vishthink Coworking