Coworking: Novelty or Innovation?

From a modest start in a small space for five, two days per week in San Francisco, today people on six continents are coworking, with about 66,000-square-feet of dedicated space added globally every day and 5.1 million active members predicted by 2022. Jacobs National Director of Workplace Strategies Amy Manley and Matt Gammel, Jacobs interiors practice lead discuss the evolution of coworking and its path – and future – along the novelty – innovation spectrum.

Twenty years ago, coworking was a term used by behavioral scientists to define a niche of their studies related to emerging technologies that foster collaboration (think computers).

Within a few short years, the idea has attracted significant venture capital, creating interest across numerous media outlets associated with real estate, business, design, workplace strategy, facility management and human resources. As a team of designers, planners and strategists, the meteoric rise of these work flow environments caught our attention several years ago. We wanted to understand the “how” and the “why” behind the changes we were seeing in our industry; more importantly how these changes might impact our clients.

Would the effects be transitory, and leave us with only incremental improvements in office space markets when the fad was over? Or would coworking fundamentally change the way we occupy, analyze, design and populate the workplace? In short: is it a novelty, or innovation?

Novelty - Innovation Spectrum

A discussion involving innovation starts with understanding disruption. On the supply side, a disruptive product or service happens because existing businesses failed to meet the needs of their customers or overlooked their needs (the demand side). Disruption helps frame our understanding of innovation because all innovation starts with disruption (but, as we’ll discuss, not every disruption leads to innovation). In 1913, Henry Ford began to disrupt the horse-drawn carriage industry with the introduction of the Model T™. The new assembly line manufacturing techniques to produce it made it affordable, becoming a necessary part of middle-class American life. To control costs, the Model T came only in black; nonetheless, by 1933, over half of American households owned one. Up to that point gasoline-powered motor cars were simply an expensive and customized plaything for the rich. If Ford’s Model T was not mass produced at an affordable price, his disruptor would have lacked the scale to become an innovation.

Innovation creates new markets and business ecosystems. Consider all the industries started or grown with the proliferation of the Internet. The effects of innovation are powerful. It’s hard to imagine any business without a web presence. Businesses owners who resisted the Internet in its early days were superseded by those who embraced the technology.

Contrast this to a novelty. Novelties tend to offer only incremental improvements to an existing product or service. The addition of radios and air conditioning to cars was a novelty. People don’t buy more cars because they come equipped with these items. The addition of fluoride in toothpaste was certainly a good idea – yet only an improvement to an existing product. Our twice-daily brushing habits were not affected. As you might surmise, there are many more examples of novelties than true innovations.

Coworking sits somewhere on the novelty – innovation spectrum.

Evolution of Coworking

The first coworking space was established in San Francisco in August of 2005. It was a rented space in a commune for five people, two days a week.(The founder, Brad Neuberg is credited with coining the term “coworking” to refer to a workplace.) The amenities included a garden, full kitchen, healing space, life coaches – some of the hallmarks we still see in today’s coworking spaces. From this modest start grew an industry that operates on six continents, adding about 66,000 sf of coworking space every day globally, with 5.1 million members predicted by 2022. How did this happen in 15 short years? The rapid growth of coworking comes from a convergence of many factors: the growing sharing economy, technological advances, changing business priorities, continued infusions of venture capital just to name a few. Coworking has evolved as business processes have evolved. As businesses seek competitive advantage in the Age of the Customer, we see higher levels of engagement with clientele and enormous thought to designing the user experience. On the supply side, coworking evolved to fill gaps that a new generation of tenants was demanding.

Coworking’s effects on the office space markets of 18 major U.S. cities suggest the higher the market percentage of coworking space, the lower the overall vacancy rate. Buildings with lower vacancy rates (ergo higher occupancy rates) enjoy higher property values and garner higher rental rates. When a real estate investment is at play, this could mean higher cap rates. How are landlords, tenants and Corporate Real Estate (CRE) teams responding?

• Landlords - even without a coworking tenant(s) in their buildings, proprietors are investing in the concept of shared tenant spaces: conference centers, communal gathering and hospitality style public spaces, curated events and health/wellness programs. These types of amenities allow landlords to put hard-to-lease square footage back to work, giving new purpose to older buildings and adding cache to traditional office buildings. We are seeing an 11% increase of coworking spaces becoming joint ventures with lessors, which indicates a trend that building owners and coworking operators are sharing risk (and rewards).  The advent of IoT helps landlords facilitate many coworking operators’ programs and helps create an enhanced user experience.
• Tenants - from freelancing entrepreneurs to enterprise level organizations, many are finding better connectivity and technology options for remote employees. Established companies can test out new workplace ideas without a traditional lease commitment, and potentially even revitalize company culture and employee experience.
• CRE teams in larger organizations are strategically leveraging co working space to add flexibility and resiliency to their portfolio, providing occupancy alternatives for remote hub locations, special project teams and swing space during in-place renovations.

Data-Driven Design and Operations

To date, only 42% of coworking spaces are profitable. Part of coworking’s growth comes from cash injections of venture capitalists, with hopes their investment will eventually be profitable. Pressure to increase financial performance has led coworking operators to data driven design for continual measurement of space and consistent application of metrics in space design. Just like the real estate and design industry, the coworking industry has championed data collection to better inform tenant space use and efficiencies.

A recent study by CBInsights shows that leading coworking operators have developed algorithms that can better predict how a discrete space (ex. conference room), or group of similar spaces (ex. private offices), will be occupied 40% more accurately than projections based on human experience and not data collection. Financial performance of coworking spaces is based on the use of fully-booked, high-profit spaces such as private offices and conference rooms. Too many unused conference rooms or private offices drives down profits and keeps many coworking operators in the red. Conversely, if the coworking space has too few, tenants will look to other providers for space. Leveraging data for effective and efficient space use has become an integral marker across the CRE industry.

The Impending and Pervasive Future of Coworking

So, is coworking a novelty or innovation? Based on the ubiquitous and increasing market demand for coworking space, it is here to stay.

We know that U.S. coworking anticipates:

• A rise in freelancer demand, as well as large block enterprise demand
• 60% of operators expanding in central business districts, expanding into suburbs, and covering more international markets
• Mergers and acquisitions adding scale and global reach
• Continued expansion of the industry year-over-year by over 20% in major cities globally
• 25% or more of new leases signed will continue to be coworking spaces

As an innovation, CRE teams in more mature organizations are looking to coworking spaces for inspiration for the design of their own space and provide flexibility across their portfolio. On the up side, coworking spaces can provide short term flexibility for special project teams, swing space for renovation projects and business resiliency in times of natural disaster. On the down side, coworking space offers a prepackaged culture and standardized workplace design, making it difficult for larger organizations to express their own brand or culture.

The financial model of a coworking space requires space efficiency above all else. Most coworking spaces provide a range of space types in which to work and anticipate user mobility between the leased space and shared public space. But some companies feel the need to drive density requiring a very small, one-sized, universal approach to individual workstations and office design, leading to what some call, ‘’cubeville,’’ creating a dense workplace that increases stress and a sense of crowding. Jacobs’ research on “Livable Density” finds that dense coworking spaces are not conducive to focused work and cannot provide enough of the right kinds of space, nor the unique range of floor plans needed to support work today. Working with BOMA International, their research also shows that increased density in buildings stresses building systems, including restroom and elevator waits that can adversely affect an already stressful workplace.

Coworking’s early success rests partly on the GIG economy jobs of a new generation of workers seeking alternatives, landlords looking for ways to fill recession-caused vacancies and continued interest by capital in search of the next unicorn. Currently, coworking only occupies between 2-5% of the office space inventory in the U.S., a rather small space to be drawing such attention, even with its projected growth. Yet, the sheer scale of its largest players makes for a rich laboratory of insights for the design and real estate industries. Coworking is worth watching, and learning from, especially as it continues to evolve along the novelty – innovation spectrum.

As Jacobs National Director of Workplace Strategies, Amy Manley leads our workplace team of experts developing new ways of working for global clients to align mission, vision and business drivers. Amy brings over 30 years of experience in all aspects for corporate office design with specific expertise in workplace strategies, change management, benchmarking, senior leader and employee engagement to this role as well as her role as Jacobs Global Interiors Solutions & Technology Leader. Her enthusiasm for workplace has facilitated the development of strategies for numerous Fortune 500 companies including Campbell’s, DuPont and Eastman Chemical.

Matt Gammel, AIA, is a leader in Jacobs built environment market, specializing in interior design. His experience in both design and management spans multiple project types, including commercial office, headquarters, government, institutional, retail and multifamily. His significant interaction with end users, real estate brokers, landlords and developers provides unique insight into the needs of both ownership portfolios and tenants in Southern California markets.