The Office Group, Deliveroo And Starwood: 6 Ways The Shared Economy Will Revolutionise Real Estate
The shared economy has revolutionised the way we live, and has created three of the biggest private companies in the world in tech unicorns Uber, Airbnb and WeWork.
Real estate is squarely at the centre of that revolution as people share space they occupy as well as their cars and their lives on social media. That offers the opportunity to use real estate more efficiently and interestingly. But it also fundamentally challenges the traditional model of renting space to one user for as long a period as possible.
From using data to pick the best location from which to deliver pizzas, the best financial model for office owners and coworking companies, and why a private equity firm might want to buy Regus owner IWG, a panel of experts at Bisnow's London State of the Market event this month discussed the way the shared economy is transforming real estate.
Here are the key insights.
The best financial model — partnering and revenue sharing?
Food delivery platform Deliveroo creates “dark kitchens” where restaurants can take space and fulfil orders from somewhere other than their own restaurant kitchen — or avoid the need to have a restaurant altogether, cutting out the huge capital expenditure needed to set up a physical location. For Deliveroo the financial model is clear, U.K. and Ireland property acquisitions manager Patrick Weiss said: It bears the upfront cost of setting up the kitchen, and then takes a cut of every order fulfilled from the space. It will even pay some marketing costs for restaurants, to ensure their sales are as high as possible.
In the office world, this kind of revenue share agreement is rare, but Charlie Green, co-founder of flexible office operator The Office Group, believes it will become more common, with flexible office operators partnering with landlords.
“We take a lease at market rent and then generate a margin above that, which is an impressive thing to do, but it is very hard to expand and grow if you stick to that model,” he said. “You are competing with other operators and that drives rents up.”
The partner or management agreement model means operators have fewer long-term liabilities, and building owners don’t have to go through the difficult process of capturing those higher revenues by setting up their own flexible office business, he said.
Lenders need to get on board
Green said a major issue holding back this model is the attitude of lenders. They are still less keen to lend against buildings substantially occupied by flexible office companies because the income is short term and the smaller tenants who take the space are less credit-worthy than larger firms. He gave the counter argument that companies like The Office Group have occupancy of about 96% and a long track record of managing buildings and keeping them full. For asset owners, this increased upside should mitigate the downside risk of not having a long-term lease on an asset.
Cody Bradshaw, managing director and head of international hotels at private equity firm Starwood Capital, said that as an asset owner, received wisdom was that you wanted to have about a third of a building maximum leased to a flexible office operator; above this level, the value at which you could sell it is impacted.
Why Tuesdays? The incredible things data can tell you about the best way to use real estate
A major factor enabling advances of the shared economy in real estate is technology. The insights being provided give owners and operators of real estate the possibility of being far more efficient than in the past. Weiss explained how Deliveroo could utilise data on where orders were coming from to find the optimum point to locate his dark kitchens so as to reduce delivery times as much as possible. The challenge was securing the sites that fit the data.
More fundamentally, that ability for restaurants to take space in a new market without the capital expenditure of setting up a restaurant allows brands to experiment with new cities and new offerings.
Green said it is early days of data analysis for him, but The Office Group is now measuring when common areas and meeting rooms are most in use, and looking at ways to find different uses for areas not being used on particular days. Apparently, Tuesday is the most common day for people to be in the office. Best get in early and bag your desk.
Bradshaw mused on how apps like Deliveroo could allow owners to make better use of the facilities in hotels, an area where Starwood is a major investor and operator.
“There must be hundreds of hotels across London where, after they've finished making their full English, the kitchen is not being used. An app like Deliveroo could allow those to be better utilised.”
Why private equity might want to take over Regus owner IWG
Bradshaw gave insight into one of the big takeovers that didn’t happen in the shared economy space. Starwood was one of the bidders for Regus parent company IWG, alongside other private equity firms like Brookfield. He didn’t name names, but he did talk about the appeal of such platforms to firms like Starwood.
“If you take our large mall portfolio in the U.S., sleepy 1970s malls, if you have a business that has real scale and a real network, that can be a huge advantage and can take decades to build up, and that gives you a huge advantage, especially with big corporate accounts,” Bradshaw said.
“Then if you layer on some of the interesting aspects we use every day in the hospitality space in terms of design, branding, revenue management, food and beverage, then it's really interesting when you see the evolving consumer demand of your customer. We’re doing it now with our mall portfolio, everything is under the knife, and it is no different in other sectors.”
There is too much flexible office space in London being run by the wrong people
On the question of whether the flexible office and coworking sector would face a reckoning soon because it had expanded too fast, Green was unequivocal.
“There are some entrants to the market in London that are so desperate to have a presence here that they don’t understand the real estate: the submarkets, the buildings, the rental values, their audience,” he said. You have to understand the fundamentals, and if you don’t you’ll get caught. People are coming in to this market with no understanding of real estate and paying too much, for the wrong buildings with the wrong floorplates, and it’s my opinion that you will see some really difficult conversations happening when tougher times come, which may be sooner than we all want.”
Big shared economy companies will become big asset owners
It is well known that WeWork is a buyer of offices, and Airbnb is buying multifamily developments. But Bradshaw pointed out that online companies of all stripes will take more of a direct role in assets from here on. Take booking.com, the online travel website. It has now rolled out a service whereby it will provide capital expenditure for hotel owners to improve assets, in exchange for them listing rooms exclusively on its site. Investment in the sector will take many forms.