As London continues to lead the way in the flexible workspace industry, a growing number of people are becoming space owners and operators. From solo operators opening their first space to the influx of landlords and commercial real estate companies moving into coworking, the sector is booming.
As it does, it’s increasingly important for new space operators to differentiate their space and brand.
“The most important thing we’re going to need to do as a sector is the next phase of differentiation,” says Chris Davies, Director at Uncommon, a serviced office brand with four locations in London. “As a business, we’ve spent a lot of time thinking about what we want to do and what segment of the market we can serve.”
The larger workspace industry competes on either price or what Davies describes as “something else,” such as service, design of the space, or amenities.
He compares the serviced office sector to hotels which, at a fundamental level, all do the same thing: give you a place to stay for the night, whether you pay £50 or £1,000. For a £1,000 hotel, you’re paying for amenities and services but, if you’re only there for one night, how many amenities do you actually use? When you stay at a five-star hotel, you’re paying for the brand guarantee.
“You pay more at Four Seasons because you know you’re guaranteed to have a certain experience and level of service,” Davies says, “whether you’ve been to the hotel or not.”
Alternatively, if a decision is price-driven, people will pay for the best deal they can get.
Unlike hotels, which are B2C, workspaces are B2B businesses. Workspace operators are trying to convince a management team of 10 people to do a deal. As Davies points out, “Someone might be happy to pay for a five-star hotel for their honeymoon, but they won’t pay for a five-star hotel because they need to spend a Tuesday night somewhere.”
Those fluctuations don’t happen in an office space. People take an office space on far more rational grounds than you would just to go on a honeymoon.
“We have slightly different problems in differentiation than a hotel group does,” he says, “but we will end up more like hotels.”
Davies stresses that new operators need to work out what they want to be and who they want to serve, because the market is very broad and the coworking industry is increasingly diverse.
For instance, Uncommon offers many amenities and services at a level and cost that operators in a 5,000 or 10,000 square foot space can’t offer.
“You’ve got to understand where you are in the market and how big your space is,” he says. ‘In a 5,000 square foot space, you’re not going to offer a full coffee lounge because that would take up half your space. And you’re not going to offer eight meeting rooms because you don’t need that many meeting rooms.”
Understanding your space and market is important to the sector, as a whole. Workspaces should appeal to different people and offer different amenities and services. This strengthens the industry and the spaces in it.
“We will appeal to some companies, and other spaces will appeal to different companies,” says Davies. “This is where the sector needs to go. We need to be able to have opinions, and not all look the same, and not be bland. I think WeWork gets in trouble because they all look the same, whether they’re in Tel Aviv or in America.”
For Uncommon, a key differentiator is the human side of serviced offices. The company has a strong focus on making sure their staff and clients are happy and comfortable, beyond nice space design.
“Design can get you so far,” says Davies. “But if you put the wrong humans in—the wrong team—you’ll still lose. This is a people business, it’s a service business.”
Trying to be everything to all people is a recipe for failure. What’s right for some people will be wrong for others, and that’s okay. A perfect sensory experience for one client will be distracting, or too quiet for another. One Uncommon location has more plants than people. There are 1,000 plants and the space holds 800 people.
“You’ve got to stand for something,” Davies says. “I’d rather be polarizing. Not everyone likes our plants.”
Davies treats workspace clients like partners, understanding that human resource costs make up the vast majority of businesses costs. Uncommon is able to help companies recruit people, keep them and make them happier and more productive. This, he says, is one of the most powerful things we have as the serviced office sector, when compared to traditional office leasing.
“The office, in general, is our benchmark competition, not each other,” he says. “By us doing serviced office or coworking well, we can make it easier for companies to recruit and keep staff. We add value to their business, which is what we should be aiming to do. If I can be a partner to these companies, then I’ve won. If I’m someone’s partner, they will stay with me longer.”
“They stay until you haven’t got any space left, or something catastrophic has happened to their business, or, after three or four years they just want to make a change. Those are the only reasons you should be losing people.
Davies calls it the “Google effect” and points out that, in London, everyone wants to work for Google because they offer lots of onsite amenities, including a gym and restaurant. The tech giant is, therefore, able to recruit the best staff.
Davies sees that the way for smaller tech companies to compete with this is by putting their people in workspace that offer services and amenities.
“That’s our role in the serviced office sector—to enable them to be able to compete with Google by providing them with that level of amenity,” he says. “It adds value to their business, which is one of the key things we must do. That’s definitely what I’m trying to push in our business—to be more along that line of thinking.”
As the serviced office sector grows, Davies cautions against growth for growth’s sake. For space operators thinking of expanding, he offers the following: “You’ve got to want to push yourself, and you’ve got to be ready for it. Just doing it for the sake of growth, however, is always a dangerous thing.”
He also cautions against taking the wrong space, simply for the sake of expanding.
“Ninety percent of office buildings in the UK, certainly in London, are not appropriate for serviced office or flexible office,” he says. “The building just does not work.”
Davies has seen companies take buildings that, strictly from a mechanical and engineering point of view can’t deal with the density of people a serviced office creates. For example, buildings that don’t have enough lifts.
“Things like that, you can’t get around when you’ve just taken a lease,” he says. “You can’t change any of that.”
As consolidation becomes an area of focus for the global workspace industry, Davies predicts we’ll end up with four or so global players that can serve multi-nationals. He points out an interesting aside of consolidation: if every space is different, it makes consolidation more challenging because what he calls the DNA of each company is different.
When accounting or law firms consolidate, there’s a human element that needs to consolidate; in the serviced office sector, there’s a physical element, as well—down to the carpets. To get around this challenge, operators need to spend a lot on capital expenses to bring the companies inline with each other and they run the risk of disrupting existing clients while doing so.
“There are going to be mergers because people need scale,” he says, “but it’s going to come at a cost.”
Uncommon owns all its properties. Davies and his team took the view that this was “a very stable thing to do.”
“It’s a slower strategy,” he says, “but, ultimately, you can attract different types of investors by adopting that strategy.”
When it comes to financing, Davies advises new operators get one space up and running.
“Get an income by any way, shape and form,” he says. “We spent hardly anything on our first building and just got it open. We just got on with it.”
That first space was a minimum viable product. Davies then spent a year going around, meeting people, convincing them the market was going to happen.
Now, everyone wants to be in the sector so space operators have more competition for financing. It’s not as difficult, however, to convince people of the market. The key, according to Davies, is to show up to the financing house with a product—an idea won’t get you anywhere.
“Just get on and get something open,” he says. “That’s always better than having nothing. Funding people will always invest in people and in track records. They will then invest in proveability. Then they’ve got to buy into the business model and see that the numbers make sense.”
Space operators need to have a clear picture of costs and capital structure, and understand the tradeoffs.
“You need to make sure you’re happy with your capital structure, in whatever form you take,” Davies says. “You have to understand what it truly costs and what that truly means. You can go get a business funded, but you might be fundamentally giving away the whole of your business and the whole of everything you do.”
He adds, however, that if this strategy “gets you from point one to point four,” and then you get to take a different financing package, then so be it.
“It’s all about understanding that equation of what you’re giving away to receive,” he says. “You’re far better off having a small share in something that is alive and real, than to have everything in something that never happens.”
Learn more about coworking and the flexible workspace industry in London at GCUC UK 23-24 September. Reserve your tickets now to join the conversation.
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