201%6-,/,+1%4 61, ,*&+$ +01 )&0%!, & ,+ -1 + )60&0,# …...at a glance coworking –...

Just hype or on the way to becoming an established office concept? Analysis of flexible workspace, for example in Hamburg

Published October 2017

Coworking | October 2017 2

At a GlanceCoworking – definition and concept• Coworking is characterised by:

- Flexibility in terms of lettings - Open workspace and break-out zones - Communication, collaboration and the exchange

of knowledge amongst workspace users - Diversity of workspace user types, from start-ups

to large companies - Trend towards contemporary design - Infrastructure, services and events offered by

the operator• Coworking (focus on open space and collaboration) and

business centres (focus on private offices) may be jointly referred to as flexible workspace. As many operators currently offer a mix of both concepts such as coworking space and private offices, this type of set-up is called hybrid model. This trend is preferred by the large international players.

• Current drivers of the coworking phenomenon are: - Technical advances and changes in the

working environment - Start-up sector - Generation Y - Sharing economy - Large companies (innovation and swing space)

The situation in the Hamburg property market • Upon completion of all projects currently at the planning

stage, there will be around 10,000 workstations in flexible workspaces. Operators of hybrid models are very expansive and will ensure that there is rapid growth in 2017 and 2018.

• The city centre is the most highly sought-after submarket for flexible workspace operators. These typically require a good address/location and good accessibility.

• The asking price for a workspace in a business centre in Hamburg is between €250 to just under €1,000 p.m.

Prices for coworking spaces are between €50 to just under €400 p.m. The average price in a hybrid model is between €290 p.m. for an open-plan workspace and €480 p.m. for a private office.

Coworking space or self-contained office?• A cost comparison between leasing a self-contained

office and a coworking space shows that: - Concluding a self-contained office lease contract incurs

pre-contract transaction costs and expenditure on furniture, tenant fit-out and technical equipment.

- The monthly costs for coworking space are higher than for a self-contained office.

- Both models come to same overall result over a period of three years. Consequently, it is the qualitative factors which must be considered, i.e. flexibility, cost and planning certainty, confidential environment and security, complexity of the process and the presentation of the company within the space.

• A self-contained office becomes more suitable as the number of workspaces and the length of lease required by the company increase.

Special factors of and for coworking operators• Coworking operators have several special features

which owners must examine in detail. This mainly affects tenant fit-outs and contributions to fit-out costs.

• The current market environment with a scarcity of space makes it very difficult for coworking operators to find suitable office premises. There are also further challenges involved in the acquisition and retention of workspace users.

• Coworking properties are becoming an established investment product. Coworking offers owners new potential, for example to develop an individual coworking concept.

• Coworking is becoming an established model in the office property market.


Coworking – a multi-faceted termCoworking is a hot topic in the German real estate market. The combination of the trend towards new models in the world of work and the diversity of players working together under the heading “collaboration” is en-route to becoming even better established. This real estate trend appeared in the English-speaking world a few years before it arrived in Germany. One indicator of this is to google the term “coworking”. The following graph shows the growing interest in this term in several countries over the last few years. The German curve arrives at the rele-vant volume somewhat later than the others.

Google searches for the term “coworking”*

0

20

40

60

80

100

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

World USA United Kingdom Germany

“They come for the space and stay for the community.”

*The values show the searches registered by Google relative to the highest point in the chart for the selected region in the respective period. The value “100” is the highest popularity of the term being searched. The value “50” shows that the term was half as popular compared to the highest point. The chart shows a sliding 12-month average.

Source: Google Trends

Coworking – a new concept in the real estate market?


The history of coworking goes back to 1995 with the programming community C-base in Berlin, a forerunner of coworking. In fact, the term “coworking” was first used in 2006 in Citizen Space in San Francisco, although the first companies to provide space for self-employed people based on coworking criteria had done so some time before that, but without using the term. The sector grew significantly over the following years and the term has become more established in the period since 2008 as the Google Trends analysis shows. The increasing importance of coworking comes at the same time as a sustained upward trend in Germany’s major real estate markets and is characterised by a reduction in available space and rise in rental prices across most of the market. Meanwhile, there is a very low short-term availability of space in city centres. Coworking makes it possible for occupiers to lease flexible space in central locations in the short-term. The key feature of coworking is its proximity to other tenants. This can be achieved at different levels, and ranges from small talk and the exchange of ideas and short-term support to collaboration on projects. The central criteria for coworking are flexibility, mobility, networking, communication and collaboration between workspace users. The latter is not obligatory, but is often a reason and the explicit added value in the leasing of space in a coworking environment. Coworking also offers the necessary infrastructure for short or longer-term work projects, such as a reception area, conference rooms, lounge, post and secretarial services, and an eatery.

The term coworking is understood and used very differently in practice. The above description comprises a narrow understanding of the term which, in part, is also used by classic office communities. Many players like to benefit from the hype and aura of the innovation, and use the term rather more widely. Some workspace users understand coworking to mean staff belonging to one company working in an open-plan office together. This is not the understanding of the term perpetuated here: coworking is not synonymous with the open-plan office.

Definition of coworking in a narrow sense:

• Flexibility in terms of leasing and terminating office workspaces

• Use by self-employed people, freelancers, start-ups and people working for different employers

• Space layout characterised by mainly open-plan workspaces and break-out areas

• Possibility for collaboration and exchange of knowledge between workspace users, and the creation of a network

• Provision of infrastructure and various services by the operator

• Offer of events and further education provided by the operator

In a wider sense, operators of workspaces in offices (e.g. in a business centre) also use the term “coworking” when the space is laid out as both private offices and a special open space or community area for coworking in its narrow sense. At present, many large international operators use this term for a mix of private offices and open space. This is referred to below as a hybrid model.

Like business centres, coworking spaces provide a form of flexibly laid out working concepts. The generic term used to describe these is “flexible workspace (as a service)” in the sense that an office environment is offered as a service and is flexibly lettable. The most significant differences between coworking spaces and business centres are the social interaction and collaboration between workspace users. In other words, coworkers go to the office to network and business centre users go to the office for peace and quiet.


Business centres rent out a fitted-out office space as private offices (typically cellular offices for one or more workstations) for short or longer terms, and provide other optional services and infrastructure. These are available to book flexibly on various terms. The workspace user knows what quality he can expect. Business centres are highly suitable for temporary workspaces or for short-term expansions of large companies. The table below shows the various advantages and disadvantages of business centres and coworking spaces as well as of the hybrid model (see further below).

Business Centre(e.g. Regus, Excellent Business Center)

Hybrid Model*(e.g. WeWork, mindspace)

Coworking Spaces (narrow sense) (e.g. Beehive, usually rather local operators)

• Seriousness

• (Very) good address

• Focus on private sphere and business environment

• High level of services (e.g. secretarial)

• Service includes virtual business addresses

• Flexible leasing and termination of workspace/offices

• Access to other (inter)national locations (depending on membership)

• (Very) good transport connections

• Infrastructure: conference rooms, printer/copier, reception, secretaries, kitchen etc.

• Service palette: reception, post, IT, office cleaning, catering

• Long business hours, access 24/7

• Reduced fixed costs and access to pay-as-you-use services

• Simple lease contract or membership contract, and simplified billing

• Flat rate services often available

• Fully fitted out offices

• Memberships and short-term leases becoming more important in the context of future lease accounting IFRS 16

• Communication and networking amongst members

• Clear potential for collaboration and therefore access to staff and subcontractors

• Communicative and relaxed environment and fit-out make the space an enjoyable place to spend time with trendy and contemporary design

• Currently possesses hip factor

• Eatery as a meeting place

• Mainly standardised fit-out

• Low representative status for client meetings

• Relatively high costs at first glance (overall cost comparison, see below)

• Little visibility for workspace users’ corporate identity

• Data protection is a challenge

• Lack of private sphere and confidentiality

• Leakage of knowledge and competition if competitors are also present

• Danger of poor responsibility amongst users towards furniture and communal space. May result in increased cleaning and repair costs.

* The information provided for the hybrid model applies to both business centres and coworking spaces. In addition, some of the information provided for business centres and coworking spaces applies to the hybrid model.

Advantages

Disadvantage

s


Coworking also includes the temporary letting of office space, but this is focused on a social environment. It enables and promotes collaboration between workspace users. Thus, coworking offers additional advantages over business centres (see table) and is mainly aimed at a different target group: young companies or self-employed people from the creative, innovative and technology-orientated sectors, and particularly start-ups. Workspace users are seen as members and pay a membership fee. There are five core values now established amongst coworking users which reflect their attitude to life and work: openness, amenability, sustainability, collaboration and community.

The advantages of coworking are evident particularly from the disadvantages of alternative layout concepts. In principle, workspace users focusing on coworking are able to work anywhere with internet access and a mobile phone signal. At home, there are distractions but no social interaction. Cafés have a disruptive level of noise and less work-compatible furniture. Coworking spaces fill these gaps and offer an interactive working environment.

There is a widely held view that coworking supports innovation and provides a suitable environment for its development. This is based on the advantages resulting from an agglomeration of companies at one location. Spatial proximity creates better access to staff and specialised service providers, and enables the exchange of knowledge. Staff, project partners and subcontractors can be flexibly engaged in coworking space. In addition, the spatial, institutional and social contact required for the informal exchange of knowledge are very important for innovation and its randomness. Coworking spaces create a positive environment for creative work and the exchange of ideas, and therefore assume an innovative function.

In these times of digitization, the coworking space makes for a new and interesting relationship with the apparent contrast between analogue and digital: digitization and automation are the pre-requisites for location-independent

working in coworking space. On site, the collaboration and exchange of knowledge occurs in analogue, i.e. people conduct business in person. Most coworking operators have so-called community managers who handle the interface between digital and analogue. They must have the skills of a receptionist, host, event manager and carer. In particular, the communal and eating areas play a key role in networking.

In practice, there is a trend for large flexible workspace operators to move to a hybrid model. This combines elements of business centres (i.e. flexible leasing of small private offices) and elements of coworking spaces (i.e. open space, trend towards contemporary design, communal areas and collaboration). These hybrid models tend to include an area of just 10% - 20% of all space for coworking in an open-plan format. Most space is used as private offices in various sizes. This is the key income component for the operator and is also very important for the retention of workspace users who wish to work in private offices whilst the company expands. In an international context, the proportion of private offices in Germany is higher than in the English-speaking world, for example. The hybrid model is therefore Germany’s answer to the coworking trend. Target groups for these hybrid operators include the above coworking groups, as well as large companies which can pay relatively high prices and wish to benefit from the inspiration offered by start-ups.


Selected operators of coworking space in Germany

Name OriginNo. of cities

No. of centres

Design Offices Germany 9+3* 13+6*

WorkRepublic Germany 4+3* 7+4*

rent24 Germany 2+3* 3+6*

WeWork USA 1+2* 2+5*

Mindspace Israel 3 4+2*

Spaces Netherlands 3* 3*

Beehive Germany 2 3+1*

* at the planning stageData as of August 2017

Expansion and specialisation – current coworking trendsThe most recent global coworking survey carried out by Deskmag, an online magazine on the topic of coworking, recognised a tendency towards larger coworking facilities. In general, this sector is highly expansive: two thirds of all operators would like to expand their business. In the relevant study for Germany, the sector views its prospects optimistically and intends to open more centres. In Germany, there is a large number of small coworking space providers compared to a small but growing number of large operators.3

Current trends are as follows: • Many operators offer the hybrid model.• Due to economies of scale for coworking space

providers, large operators are tending to expand (see table).

• Specialisation of coworking spaces in particular sectors.

• Large companies relocate staff and departments into coworking spaces to benefit from advantages such as mobility, flexibility and collaboration in a contemporary working environment, and to motivate staff.


What is driving the trend towards coworking?The coworking phenomenon is being driven by a variety of factors and developments:

Technological advances have had a great impact on the transformation of working and office life. The laptop, smartphone, internet access and cloud storage services mean that it is now possible to work from everywhere and that one is not necessarily dependent upon office infrastructure (motto: technology as an enabler). But this has not resulted in vacant offices or the dominance of the home office, as they offer limited social contact or the opportunity to exchange ideas. At the same time, office structures are transforming from the classic cellu-lar office to open-plan layouts which offer communication and concentration zo-nes. In terms of efficiency (desk-share-ratio) and property-related cost savings, an increasing number of companies are introducing open-plan space. Coworking (in its narrow sense) functions within these structures.

The start-up sector and young companies in technology-orientated and creative segments are the typical target groups for coworking. According to the current KfW Gründungsmonitor (start-up monitor), the absolute number of new compa-ny formations is decreasing year on year due to absorption into dependent em-ployment contracts. Start-ups are just one element of the entire new company formations statistic, but they tend to attract a lot of attention. Digital start-ups in particular who benefit from low marginal cost and high scalability of their bu-siness prefer the above mentioned advantages of Coworking spaces.

Likewise, coworking spaces are well suited to the preferences of Generation Y and digital natives (techno-savvy, mobile communications, working in virtual teams, flat hierarchies, potential for self-expression, work-life balance). In particu-lar, attractive design tends to appeal to the young generation. However, stability and consistent structures are also important to this group, something not sup-ported by the hot desking ethos. For this group, the hybrid model offers the best of both worlds.

The term sharing economy refers to the shared use of resources. In economic terms, this reduces fixed costs and makes better use of resources. However, social aspects such as alternative consumption and production models also play a role. Coworking spaces are therefore one element in the sharing economy. Closely linked with the sharing economy and the increase in individualism, co-working offers a pricing model orientated towards the pay-as-you-use model. In this case, the client pays for actual use of a product instead of owning it. This gives the workspace user a high level of flexibility and reduces fixed costs.

Start-ups are the reason for, and the drivers of, the success of coworking spaces. Meanwhile, these workspaces are also being used to a great extent by large companies. Such corporates use coworking space to drive innovation, to benefit from the working methods and contacts in coworking spaces in order to relocate individual teams to a creative environment, to identify and engage talent, to iron out fluctuations in occupancy due to project work (swing space) and to achieve flexibility. This ranges from the set-up of internal coworking and collaborative structures to the relocation of units into external coworking spaces and the creation of own coworking spaces, which are open for use by other companies.4

Amidst all the hype surrounding coworking, there are also a few critical questions relating to the business model:

• The larger coworking operators are highly expansive. Many new coworking spaces are coming, and will come, onto the market. So where will all the members come from to fill this space? At a time when new company formations are on the decrease, the business model will need to be directed to suit medium-sized and larger companies. But then there is a danger that this would serve to dilute coworking as a concept.

• For medium-sized companies which have leased exclusively coworking space, this can be a double-edged sword in terms of their staffing policy. On the one hand, the modern working environment attracts the young generation but on the other, job applicants may question their company’s long-term commitment to the location.

• How sustainable is coworking in times of economic downturn, when (large) companies are scrutinising their costs and the relocation of staff to coworking space may be the first item on the list to have a line put through it?

• Coworking is currently a relevant trend in the office property market, benefiting from the “hip factor”. In terms of outward image, coworking does have a high level of charm. “Hip” does not necessarily mean functional and tried-and-tested in everyday work. For instance, the occupancy rate in terms of workspaces per sqm is very high in the case of several operators. Also, workstations in the centre of the space can suffer from a lack of natural light, and glass walls offer only a limited level of confidentiality.

Nonetheless, the coworking sector views its space as a lifestyle product with the potential to transform the office environment of the future.

The question in the heading, of whether the concept of coworking is actually something new, can be answered with “yes and no”. The idea of letting flexible workspaces is nothing new. This has existed in business centres for decades. What is new is the design and communal aspects offered by operators. It is also new that large international operators have entered the German market in the last few years, particularly Mindspace and WeWork. The following chapter gives an insight into the current situation regarding flexible workspaces in the Hamburg office property market.


Which operators are defining the market?The falling numbers of new company formations in Germany is also being observed in Hamburg. According to the recent study “Start-up-Unternehmen in Deutschland” (Start-up Companies in Germany) published by PwC, Hamburg is nonetheless seen as a location which will grow in importance in the future, even ahead of Berlin. The city offers a highly attractive environment for new companies and there is significant potential demand for coworking space. In contrast to the current trend in respect of new company formations, office space take-up by start-ups as a core target group in the coworking segment has increa-sed significantly here over the past few years, reaching its high point in 2014 with up to 40,000 sqm.

Office space take-up by start-ups in Hamburg

0

5

10

15

20

25

30

35

40

45

2006 2008 2009 2010 2011 2012 2013 2014 2015 2016

,000 sqm

2007

Definition of start-ups: companies max. 10 years old, showing a high degree of innovation and with strong and dynamic growth potential, and which are often financed by venture capitalists

Flexible workspaces in the Hamburg Property Market

This study researched and classified flexible workspaces and analysed further infor-mation relating to size and pricing models in Hamburg as at the end of August 2017. It was based on internet research and conversations with companies. In the few ca-ses where there was no information relating to the number of workspaces estima-tes are being used. The analysis also includes locations where offices have already



been prelet, but which have not yet opened. It considers the following types of operator: coworking space in its narrow sense (including selected office communities), business centres and hybrid model providers as described above. The latter category has been allocated to the busi-ness centre or coworking segments depending on their positioning. Once all currently planned centres have ope-ned, there will be around 9,800 workstations in flexible workspaces available in Hamburg. These are distributed across 78 locations provided by 56 operators. It is particu-larly noticeable that most providers are small operators. Just 12 of the 56 operators provide more than one centre (existing or at the planning stage) in Hamburg. The num-ber of business centres and coworking spaces is the same, with 39 locations each. It is noted that the high number of workspaces in hybrid centres are allocated to the cowor-king segment (5,400, see the chart below). The majority of these (4,200 workspaces) were not yet open at the end of August 2017.

Mainly workspaces in business centres came onto the market in the period between the 1990s and 2015 (except 2010 with the opening of betahaus). The number of workspaces offered by coworking operators has increased significantly in the period since 2016.

Flexible workspaces in Hamburg

30 2,700

25 800

39 3,600

39 6,200

14 5,400

9 900

Business Center Coworking

Hybrid

number of centres - number of workspaces

CategoryNo. of

operatorsNo. of

locationsNo. of

workspaces

Coworking(narrow sense) 23 25 800

Business Centre 15 30 2,700

Hybrid, either 18 23 6,300

- Coworking 10 14 5,400

- Business Centre 8 9 900

Total 56 78 9,800


With an assumed office space of 12 sqm per workstation (including communal space), the total number of works-paces (including planned locations) offered by flexible workspace operators equates to around 118,000 sqm of office space. This is less than 1% of the total office stock or a quarter of the average annual office space take-up, and the share attributable to pure coworking space is even lo-wer. In the City Centre submarket, it is around 3%. In terms of the overall market, coworking is something of a side is-sue, but one with a high growth rate and which attracts great attention. The self-contained office lease contract remains the first choice for most workspace users.

Regus is the provider operating most business centres in Hamburg. It operates nine branded Regus centres (one of which is at the planning stage) with around 1,300 workspa-ces and two branded Excellent business centres (approx. 150 workspaces). The current principal hybrid operator is Mindspace with around 600 workspaces (of which 450 are private offices) located at Rödingsmarkt. This will change in Autumn 2017, when WeWork opens around 7,800 sqm of office space in the Hanseforum, its first centre in Hamburg. This will provide around 1,650 workspaces, mostly in pri-vate offices. WeWork will open a second location over the

next year in the Europapassage (almost 1,400 workspaces). From the end of October 2017, Beehive (coworking centre operated by Alstria Office REIT) will become the cowor-king/hybrid operator with the most centres in Hamburg (three locations comprising around 130 workspaces).

Year of opening of flexible workspaces in Hamburg

* include some not yet open

Largest coworking space operators in Hamburg

Name OriginNo. of

locationsNo. of

workspaces**

WeWork USA 2* 3,050

mindspace Israel 1 600

Spaces Netherlands 1* 420

betahaus Germany 1 340

Beehive Germany 2+1* 130

WorkRepublic Germany 2* 115

Rent24 Germany 2* n.a.

* at the planning stage** total number of coworking workspaces (in its narrow sense) and private offices

0

500

1,000

1,500

2,000

2,500

3,000

3,500

until2006

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018

Workspaces

Business Centre Coworking


Mindspace (since 2016)Altes Klöpperhaus, City Centre4,500 sqm (600 workspaces)

Which locations do operators prefer?The rental prices paid to property owners by the opera-tors of flexible workspaces are an average of 12% above the average rent in the respective submarket at the time of letting. The most significant divergence from the aver-age rent is in the City Centre submarket, where the rents paid by flexible workspace operators are around 18% above-average. The majority of new lettings in the City Centre are above the €20.00/sqm p.m. mark. The relati-vely high rental price corresponds with the very good locations and high specification fit-out required by operators and their clients. Flexible workspaces have several requirements in terms of location. One is a good address. For business centres, there has always been a necessity to offer space in prime locations. Trendy dis-tricts are particularly suitable for coworking operators focusing on the creative start-up segment. Hybrid model operators also have a clear focus on central locations. Good accessibility by public transport is an important locational factor for all operators. In terms of workspace breakdown by location, the majority (65%) are locatedin the City Centre submarket.

Workstations in flexible workspaces by submarket

Selected coworking locations with opening dates 2016-2018

WeWork (from Autumn 2017)Hanse Forum, City Centre7,800 sqm (1,650 workspaces)

rent24 (from 2018)Alte Brotfabrik, City South3,500 sqm (no information)

Spaces (from 2018)Work Life Center, City Centre3,400 sqm (420 workspaces)

65%

6%

5%

5%

4%

4% 3%

8%

City Centre

St. Pauli

Harbour Edge

Barmbek-Bramfeld

HafenCity

City Süd (outer area)

Altona-Ottensen-Bahrenfeld

other submarkets

Picture credits: Art invest, On3, Corpus Sireo, DWI-Gruppe Hamburg, rent24 GmbH


The following map shows the spatial distribution of flexib-le workspaces in Hamburg. There is a noticeable concent-ration in the City Centre, which offers the best accessibility and proximity to clients and suppliers. This is also the location of the preferred addresses. Business centres and hybrid models are dominating. The City Centre is also do-minant in terms of size categories.

Spatial distribution of flexible workspaces

Coworking spaces in the narrow sense tend to be located towards the west (St. Pauli and Altona). As central and trendy districts, they fulfil the above locational advantages for coworking operators. There are also a few centres loca-ted in city districts such as Winterhude, Uhlenhorst and Rotherbaum, and in the City-South submarket.

HamburgNorth-East

Süder Elbe

Elbe

Norder Elbe

betahaus

Friendsfactory

mindspace

rent24

rent24

spaces

WeWork

WeWork

collabor8

Altona-Ottensen-Bahrenfeld

Barmbek /Bramfeld

Billbrook /Billwerder/ Billstedt

City Nord

City Süd(Outer Zone)

City Süd(CoreArea)

Eimsbüttel

Eppendorf /Harvestehude/ Rotherbaum

Airport/ GroßBorstel

HafenCity

Harbourfringe

Hamburg-West

Harburg -south of the

river Elbe

City Centre

East of Alster/ St. GeorgSt. Pauli

Wandsbek

Winterhude/ Uhlenhorst

ABC Business Center

Regus

Regus

Regus

mindspace

rent24

spaces

WeWorkWeWork

Category

Business Center

Hybrid

Coworking

not yet opend (as of Aug. 2017)

Workstations

< 50

50 - 149

≥ 150(narrow sense)


What is the rental price for flexible workspaces?Amongst the different providers there is a great variation in prices for workstations in the flexible workspaces analy-sed because of the diverse business models influenced by the following factors:

• The location of the building and the fit-out specification affect the rental price paid to the operator

• Target group (e.g. sector and company size)• Staffing involved (e.g. community manager

or reception)• Infrastructure, services, events, eateries and

drinks included in the price

Asking prices in business centres range from €250 to just under €1,000/space p.m. In the coworking segment, as-king prices range from €50/space p.m. to just under €400/space p.m. The average (median) price in a hybrid centre is

between €290/space p.m. for a coworking space in open-plan premises and €480/space p.m. for a private office. The-re are individual discounts for longer-term coworking mem-berships and in business centres. The wide range of prices is because the service is aimed at different target groups. Operators providing coworking space in its narrow sense often have lower costs and attract almost exclusively small companies. Operators of hybrid centres and business cent-res are aimed also at large companies.

The wide price range shows that the business centre and coworking products are generally very heterogeneous in nature. A workspace user must ascertain what is important to him in terms of location, fit-out, design, infrastructure etc. Perhaps the first question to be asked is whether a workstation in a coworking space is suitable at all, or whether a self-contained office would be more appropriate. This question will be investigated in the following chapter.


Cost comparisonNot every company needs to decide whether to take a membership of a coworking space or a lease for a self-contained office. Large companies do not generally have to consider locating their entire staff in a coworking space. If smaller units are to be relocated, there are often other reasons for this (see above). Young or newly formed companies often do not have the ability to lease their own small office. The short period the business has been in existence affects the corresponding credit rating and company history, and this does not make them suitable tenants for many landlords who require long-term lease obligations and high credit tenants. Furthermore, new companies are typically in a growth phase, in which the company may often require further space or space in which to expand in the short-term. A landlord may not necessarily be able to offer that level of flexibility. Also, many new companies do not want to invest in office equipment and fit-out early on.

For companies facing the decision on whether to take a coworking space or a self-contained office, the following relevant decision factors from a cost and qualitative perspective should be analysed. To guarantee a certain level of comparability between the workspace models, this will be based on workspaces in private offices located in a coworking space. There are several assumptions which must be reflected in the calculation. This is a hypothetical enquiry for an office location with 10 workspaces in the Hamburg City Centre submarket for a term of three years. The company may be newly formed or opening its first office in Hamburg. It does not have an office in Hamburg to date and has no furniture or office equipment of its own. No rental guarantees are taken into account.

What is beneficial? Coworking or self-contained office

Costs to lease a self-contained office space

• The leasing of office space in Hamburg is generally free of leasing commission for the office tenant. Leasing costs are budgeted by the landlord.

• Legal costs in the order of €5,000• Space requirement: 15 sqm per workspace (including

communal space)• Move into a new-build office property. Turnkey handover;

the landlord pays for and carries out the tenant fit-out.• Costs for own furniture in the workspace and communal

areas including joinery: €2,500/workspace. Furniture leasing is not considered here as it is generally only feasible in the case of short-term use.

• Fit-out costs for IT cabling including server components, which are borne in part by the tenant: €70.00/sqm

• IT and telecommunications equipment (computers, monitors, printers, landlines and mobiles): €1,500/workspace

• The rental price is based on the current average rent for offices with top class fit-out in the City Centre submarket: €20.00/sqm p.m. (rounded), service charges: €3.50/sqm p.m.; incentives: 3%

• Refurbishment costs (regular and at termination): €50.00/sqm

Costs for a membership of a coworking space

• IT and telecommunications equipment (laptops and mobiles): €1,200/workspace

• Installation fee: €200/workspace• Membership fee for a private office: €480/workspace p.m.

This equates to the median price for hybrid centre providers in Hamburg (see above)

• No further services or infrastructure required


Results of the model comparisonThe model comparison is in no way intended to be exhaustive or to be suitable in every case. It is intended to show the relevant decision-making factors and the approximate amounts involved in each option. The cost analysis shows:• The conclusion of a self-contained office lease contract

generally means there are costs in setting up the contract in terms of legal advice, which are not required in the case of a membership of coworking space.

• In the case of a self-contained office, there are initial costs for equipment, tenant fit-out and more comprehensive office technology. This sum must be paid up-front or financed and is in some cases lost, as is the case with tenant fit-out at lease termination. Financing costs are not taken into account here. There are also the refurbishment works. Furniture remains the

property of the tenant upon lease expiry and is a more important consideration in the case of long-term letting decisions.

• The total pre-contract costs for a self-contained office are significantly higher than for coworking space (around €60,000 compared to €14,000). But the monthly cost for the membership of the coworking space is around €1,300 higher. This is hardly surprising, as this is an inclusive fee and the coworking centre operator’s costs must be remunerated through the monthly income.

• Looking at costs over a term of three years, both working models come to an almost identical cost of around €187,000. Over a period of just one year, the cost for a self-contained office is €102,000 and for a coworking space it is €72,000. Over a five-year period, the costs for a coworking space (€302,000) exceed the self-contained office (€271,000) by 11%.

Self-contained office

Membership of a coworking space

Pre-contract costs

Legal advice 5,000 € -

Tenant fit-out (furniture) 25,000 € -

Additional tenant fit-out for IT cabling 10,500 € -

IT and telecommunications equipment 15,000 € 12,000 €

Incentives -3,240 € -

Refurbishment (regular and at termination) 7,500 € -

Set-up fee - 2,000 €

Subtotal 59,760 € 14,000 €

Monthly costs

Net Rent 3,000 € -

Service charges 525 € -

Membership fee of coworking space - 4,800 €

Subtotal 3,525 € 4,800 €

Total for 3 years 186,700 € 186,800 €

Model comparison: self-contained office vs. membership of a coworking space


As the pure cost analysis for this three-year model does not really show which is the more reasonably priced al-ternative, it is necessary to include other criteria. In the first instance, we will look at qualitative factors; se-condly, we will examine contract terms; and thirdly, the number of workspaces.

In addition to the pure costs, there are also several qua-litative factors which are important when making deci-sions. As every company has specific requirements and wishes, this list cannot be exhaustive. Some factors can determine the precise working model for a company at the outset. The advantages of a coworking space mem-bership are the high degree of flexibility and a simplified process prior to occupation. The self-contained office offers a confidential environment, security aspects and a higher degree of planning and cost certainty. These security factors are less evident in the case of a cowor-king space, as there is a greater dependency on the operator (e.g. price alterations). In the end, the short-term contracts make it difficult to plan for the future.

In terms of time factor, the fixed and variable costs are converted to linear format. Due to the higher fixed costs of a self-contained office, this cost curve starts higher than the one for a coworking space. As the variable monthly costs in a coworking space are higher than those for a self-contained office, the lines eventually cross. In this model, the crossover point is at 36 months. According to this model, if the contract term is shorter than 36 months, it is better to become a member of a coworking space and if the contract term is longer, then a self-contained office may be the better option.

Cost functions over time

Crossover point at 36 months

0

50,000

100,000

150,000

200,000

250,000

6 12 18 24 30 36 42 48

Total costs (€)

Months

Self-contained office Coworking

Qualitative decision-making factors

Self-contained office

Membership of coworking space

Flexibility of contract terms and space

Planning and cost certainty

Confidential environment and security

Complexity of the process prior to occupation

Company image in own space

= (more) positive assessment; = (more) negative assessment


The same analysis can be carried out in terms of the size of space occupied, i.e. which model is better based on the number of workspaces, using the two curves. These show the relationship between the average cost per workspace and the number of workspaces. As they do not show any simplified linear relationship they are presented in ideali-sed format. The fixed prices per workstation in coworking spaces are subject to a group discount with a greater num-ber of spaces. Consequently, the average costs fall in steps. The cost curve for a self-contained office falls incremental-ly, the greater the number of workspaces (fixed costs are distributed across an increasing number of workspaces). It is interesting to see the critical crossover point between the two curves, i.e. the X number of workspaces above which there are lower average costs for a self-contained office; however, the precise calculation of the X number of workspaces does not form part of this study.

This model assumes that the company requires 10 works-paces. So, what happens to costs when the company re-quires the 11th workspace? In one’s own office desks can be pushed closer together to an average of less than 15 sqm per workspace. Or a larger area with a reserve in the antici-pation of future expansion may have already leased. Both variants would result in low additional costs for one further workspace (furniture and equipment). If it is not possible to push the desks closer together or there is no such ex-pansion reserve, then the only solution is to relocate to a larger office. This results in various costs for the company: relocation costs, further pre-contract costs and a higher overall rent. It is always an advantage to build in an expan-sion reserve. In the case of coworking space, there is flexibi-lity to simply hire an additional workspace. If the private offices are fully occupied, it is possible to rearrange the private offices and possibly move into alternative accom-modation in the same building. Both scenarios are gene-rally easily achievable as long as the coworking space is not fully occupied.

The analysis model shows that there are many factors to take into account when deciding which working model is suitable for a company. The qualitative decision factors may favour one particular model at the outset. As shown, the contract term and company size also influence the decision. Coworking spaces are particularly suited to start-ups due to the efficient processes, lack of up-front invest-ment costs and level of flexibility. But flexibility costs money. If the occupier wants to make use of the advanta-ges of collaboration and networking, coworking is the right choice. The smaller the number of workspaces required by the company and the shorter the contract term, the more suitable coworking becomes. Self-contained offices have the advantage of a confidential environment and lend the company consistency and professional status in the mar-ket. They are the standard product in the office property market and are likely to remain so despite the contrasting opinions of some coworking operators. The more workspa-ces and the longer the lease term, the more attractive a self-contained office becomes.

Idealised curves showing costs per workspace

Number of workspaces

Costs per workspace

x Coworking Self-contained office


Coworking and the office property The large international coworking space providers (hybrid models) are the new players in the German office property market. Many of them prefer to take offices in shell and core condition and manage their own tenant fit-out. In Germany, office space is typically handed over in turnkey condition, subsequent to the completion of tenant fit-out. As operators also design the space and have particular re-quirements and very definite standards in terms of tenant fit-out (implementation of defined design guidelines and fit-out quality), they prefer to manage these works them-selves. They look after their own timetable and cost cont-rol. This often results in highly individual and mostly high specification office space. The start-up phase in coworking spaces is often supported by the owner in the form of rent-free periods and contributions towards fit-out costs. This means that the operator must deliver a high level of up-front services and accept a certain level of risk. In return, the lease contracts are generally long-term and rents relatively high.

The current market environment with a low and reducing volume of available office space in good locations makes the search for space difficult for operators. They are often in competition with other companies looking for space. At a time of high demand, incentives decrease, which is a relevant factor for operators. Coworking operators may be a less attractive proposition for owners because of their short credit history and the new and less well-known, and only recently established, business models. It is possible that the insolvency of several Regus business centres in 2003 is still resonating with some owners.

To date, operators have entered the Hamburg market pre-dominantly by leasing existing properties. The reasons for this may be the lack of credit history and poor confidence in the sector amongst project developers, and the long lead-in times of market entry from the operator’s perspec-

Coworking and the office property What are the challenges facing the players?

tive. In the case of existing properties, there is the challenge that space layouts must be suited to the operator’s concept. In particular, the depth of space and amount of natural light play important roles. They look for properties with a USP fea-ture (e.g. industrial charm). This type of property in a good location with favourable transport connections is extremely rare in Hamburg.

What effect does a coworking space have on the property and the neighbourhood? It is assumed that there is a higher footfall and activity in common areas such as corridors and staircases, even outside regular office hours. If there are other occupiers in the property, the security and locking systems are important factors. Other workspace users may possibly feel disrupted, but there are ways for them to benefit from the coworking space, e.g. they are able to make interim use of workspaces and conference rooms.

From an investment perspective, there are some features to watch out for if a property is let to a coworking operator. In-vestors examine tenant credit ratings and look particularly at the third-party usability of fitted-out space and possible rein-statement obligations. If this is viewed negatively, it may have an adverse effect on the sale price. Investors’ opinions regar-ding the suitability of the presence of coworking space in a potential investment property are conflicting, but the use type itself is generally acceptable. In the current market en-vironment with extremely scarce supply and very high de-mand from investors, purchasers must make compromises, otherwise they go away empty-handed. One interesting ex-ample is the New York-based private equity company Rhone Group, which has launched a new fund to purchase property let to WeWork. This is a show of trust in this business model. Alstria Office REIT has also taken a step towards coworking as both investor and portfolio owner. Its Beehive concept will be rolled out across its own properties in strategic locations in relevant major cities in the medium-term.


What are the challenges to be overcome?Coworking presents a number of challenges for the various players. For expansive operators of coworking spaces, it is currently difficult to find suitable properties in the Ham-burg market. If a property has been secured, it is then necessary to acquire and retain members. The significant increase in the supply of coworking spaces has greatly in-creased competitive pressure. On the one hand, existing coworking spaces benefit if a new major operator comes onto the market, because they increase the profile of the coworking concept and provide advertising for the entire sector. On the other, there is the danger that workspace users will relocate to newer coworking spaces. There is no formal commitment as the contract terms are short. The social commitment is higher if the workspace user is bene-fiting from collaboration with other companies and has al-ready become acquainted with other members. Initiatives to tie in a new member in the first few months are import-ant. After the company has been a member for one year, the likelihood of retention tends to increase. Operators use different ways to increase the chances of long-term stays, including regular and attractive events with current the-mes for the various target groups. The importance of large companies has been mentioned several times. These re-present an important client group for operators as they tend to lease a large number of workspaces over the medi-um and longer-terms. The operator is therefore able to sta-bilise his rental income. Large companies are also good advertisements for other workspace users. WeWork shows a number of high profile company clients on its website.

For potential new members of coworking spaces, the search for a suitable property is relatively straightforward, as these are shown on the internet and can be easily compared. An in-spection of the space can typically be arranged at short notice. A more relevant aspect is the collaboration with other workspace users, which is more difficult to achieve. This brings us to the key question: how does one find out from other companies which complementary services one needs? In addition to the pro-active approach to other people, this is achieved via the events offered by the operator.

For landlords, coworking operators were and are often higher risk tenants with a lower level of creditworthiness (see above). The boom in coworking space is currently changing this perception. For finance authorities, the coworking sector in its narrow sense presents a number of challenges. It is not entirely obvious to them if an address in a coworking space is a legally valid business address. Important criteria such as access, company signage, letterbox and recognisable works-pace must be available. If the company’s registered office is not recognised and no VAT ID number is issued, the company cannot be commercially active as it cannot issue invoices.

The collaborative environment continues to develop. Coworking is targeted at the working environment. Future developments will be in the residential sector with concepts such as coliving. For example, the company rent24 is opening a combined coworking and coliving project in Eiffestrasse in 2018. WeWork has already rolled out the WeLive concept in the USA and is active in the leisure segment with WeWork Wellness. Operators will attempt to offer a greater range of services to their mem-bers, to boost their attractiveness and competitive edge. The combination of these different worlds results in a complete ecosystem of collaborating environments – people live and work flexibly together and spend their leisure time together. This matches the individualism and flexibility of society, but is less suitable for people and companies for whom a certain level of consistency, predictability and a private sphere are important.

The boom in coworking is likely to continue. The mix of work style, a high degree of flexibility and the shortage of office space sustains the coworking segment. However, it is critical to assess how many new lettable workspaces can be created in the short-term. Sooner or later it is expected that there will be consolidations and takeovers if there is cut-throat competition between operators. However, coworking has now achieved a high profile and relevance in the market, in a similar way to business cen-tres many years ago. This workspace concept is on its way to becoming an establis-hed part of the office property market.

A look into the future

Sources

1 http://www.deskmag.com/de/die-geschichte- von-coworking-spaces-in-zahlen-zeitleiste-868, August 2017

2 http://www.deskmag.com/de/coworking- prognose-statistik-mehr-als-1-million- menschen-arbeiten-2017-in-coworking-spaces, August 2017

3 http://www.deskmag.com/de/coworking- spaces-in-deutschland-2017-studie-erhebung- statistik-zahlen-umfrage, August 2017

4 JLL (2016): A new era of coworking, http://www. jll.eu/emea/en-gb/Documents/co-working/doc/ JLL-A-New-Era-Of-Coworking-2016.pdf


Barbara Banschbach MRICSTenant RepresentationHamburg+49 (0) 40 350011 [email protected]

Helge ScheunemannHead of Research GermanyHamburg+49 (0) 40 350011 [email protected]

Author

Helge Zahrnt MRICSAssociate DirectorResearch Germany+49 (0) 40 350011 [email protected]

Copyright © Jones Lang LaSalle SE, 2017. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.

Contacts

Tobias ScharfTeam Leader Office AgencyHamburg+49 (0) 40 350011 [email protected]

Stephan LeimbachHead of Office Leasing GermanyFrankfurt+49 (0) 69 2003 [email protected]

http://jll.de

http://jll.de/research