The 'Space for Agility' Series
Report providing some general insight and analysis and commentary into what this growing area means for corporate occupiers and their workforces.
The 'Space for
Agility' Series
Where to from here?
The Rise of the Flexible Workplace
The footprint of flexible workplaces continues to expand as more and more global businesses embrace the modern workforce and the ever increasing options for work arrangements.
Co-working or work-share offices afford global businesses the flexibility they need in this dynamic economic and political climate, where we are witnessing technological advancement moving at an unprecedented pace and transforming how and where work is done.
So with this in mind, flexible workspace operators are asking themselves: “where to from here?”
Opposite are 10 observations of what may be some emerging trends and opportunities in this space.
WORKPLACE AS A SERVICE
1. On inspecting a co-work office you quickly identify that co-work users are not making their choice of operator merely based on the need for space: more important are the services being provided that extend beyond basic office facilities. Secure connectivity support, creative areas, exclusive spaces that can accommodate teams, security, catering and wellness facilities and the “look, feel and vibe” of the place are all important.
2. A co-work operation is a “services” and even “hospitality” business that needs appropriate expertise. From an operator’s perspective, ensuring the planning consent conditions permit any ancillary uses to mere office use, employment issues, and even liquor licensing and food safety legal requirements all need to be adequately addressed.
3. The scope and sophistication of the services offering will change over time. One thing to watch: there will be plenty of data in respect of occupier’s use of the co-work space that is capable of being collected and harnessed (e.g. how to work better from the space), subject to data privacy laws and what is agreed between operator and user.
ACQUISITIONS, CONSOLIDATIONS AND FINANCE MODELS
4. Many REITS and property developers have sought to enter this space, but co-working is not a mere property play. The operators that are capable of reading the market for their respective sites, incentivise their staff, maintain a technological competitive edge and tailor their services accordingly will prosper. Expect consolidations, acquisitions and JV arrangements as capital will seek to cosy-up with savvy operators.
5. As the need for co-working space continues to grow exponentially, operators will also need to consider how to finance the opening of new spaces, whether by way of joint ventures, arrangements with property owners or possibly even through other methods such as franchising their system. We anticipate there to be many innovative structures that will arise in the coming months and years.
THERE IS MORE THAN ONE MARKET AND NO SUCH THING AS A STANDARD AGREEMENT
6. Users/occupiers of a co-work site are usually described as “members” in standard “membership contracts”. Despite an attempt by operators to standardise the membership contracts there is clearly more than one market of potential users/ occupiers. The needs of users and occupiers can range from a single self- employed contractor needing a flexible and funky work place to an international organisation that requires a dedicated space with medium to longer term tenure as part of its portfolio across multiple jurisdictions. Expect to see that on longer term arrangements of dedicated spaces, user/ occupiers will seek amendments to the standard membership agreement that reflect a greater control of the space to the user, a more balanced allocation of risk and some “bite” to ensure that specified performance deliverables are met.
THE CONTENTIOUS RIGHT TO SUBLEASE
7. Traditionally the membership arrangement has been a mere licence, but as there is a take up of longer term dedicated space, expect to see the demand for something that has more of a look and feel of a sublease. Co-work operators, if they themselves are tenants, will need to procure a right to sublease preferably without consent of their landlord to make any such sublease arrangements achievable from an operational perspective. In some jurisdictions, a subtenant has the affirmative right to seek relief against forfeiture following termination of the head lease for breach. This will make the sublease right a contentious issue for operators.
MANAGEMENT AGREEMENT AND BRAND STANDARDS
8. Management Agreements with quite sophisticated arrangements such as key money, owner capital contributions, management and performance fees, centralised booking systems, technical services agreements, Brand Standards and bi-furcated structures with PropCOs and OpCOs and trading trust issues are a well-trod path in the Hotel property market. Will we see similar deals and arrangements and consequential issues emerge in the co-work market? In some markets it may make sense that property owners take on more operational risk for higher returns and transact under a management agreement, a hybrid lease or some other arrangement rather beyond a standard commercial lease.
9. More broadly, where does the value in co-work operators reside if not in their intellectual property, brand and operational standards. REITS entering into this space may eventually spin out their co-work division and landowners more generally may be prepared to transact under management agreement structures that follow an “operator selection process” that are already common in the hotel industry.
OTHER ASSET CLASSES: WHAT’S NEXT?
10. Work-share warehousing and logistics facilities? How about a single retail store that rotates its offering of boutique designers or a restaurant that rotates its offering of chefs on world flavours? What about a law firm offering excess meeting space for hourly hire? One thing is for certain: co-working is evolving in several directions, as might be expected in such a developing industry, and targeting different tenant communities as it does.
"As part of a series examining the rise of the flexible workspace, we will seek to provide some general insight and analysis into what this means for corporate occupiers and their workforces that have or are considering utilizing these spaces, in the context of an evolving employment landscape.
We will examine how businesses can protect their confidential information, trade secrets, data privacy, their brand and talent, while operating in these shared environments. We will also explore what key considerations the major operators of these spaces will encounter if growth in this sector is realised at the rates predicted, and what are the broader impacts on the technology underpinning this real estate."
For further information and assistance on ‘Where to from here? The Rise of the Flexible Workplace’ please get in touch with any of the contacts listed below.
Sebastian L. Busa
Partner
Sydney
sebastian.busa@bakermckenzie.com
Kathryn E. Johnstone
Partner
New York
kathryn.johnstone@bakermckenzie.com
Hsian Siong Yong
Partner
Kuala Lumpur
hsiansiong.yong@wongpartners.com
Making Co-working Work
Space for Agility
Co-working spaces are being leveraged by every level of the workforce to keep up with the volatile and ever-changing business landscape. From gig workers and freelancers to project teams, modern workforce needs are being met through the short-term nature, reduced costs, and diverse and agile environments that these innovative workplaces offer. But before employers dive headfirst into co-working arrangements, there are several risk factors to be aware of to make co-working work:
1. KEEPING SECRETS: Shared working spaces encourage interaction and informality, but when separate businesses find themselves working shoulder to shoulder, how can sensitive information and intellectual property be protected and trade secrets kept safe?
Casual conversations over the communal coffee bar, unattended laptops, documents and notebooks, and overheard telephone conversations all create risks for a business’ confidential information. Businesses using co-working spaces need to be aware of the reputational, financial and legal risks posed by these communal environments and ensure their workers are aware of these risks. To help mitigate this exposure,businesses should ensure that:
- Workers have a sound understanding of the types of information that must be kept confidential
- Confidentiality obligations are explicit in employee and contractor/consultant contracts
- Company policies address the use of personal devices, personal email accounts, and other file share programs/folders, with processes put in place to ensure protocols and policies are complied with
Businesses using shared workspaces may also consider the use of sophisticated tools to monitor and analyze a remote workforce’s
activities. Monitoring emails and chats, tracking the creation, deletion and copying of files, tracking location, logging key strokes and even taking webcam photos of freelancers are all potential avenues for managing risks. However, businesses need to be mindful of local privacy laws when engaging such strategies. As legal and regulatory requirements vary across the world, it is tricky, but important, to strike the right balance between advancing business interests while protecting employee/contractor privacy rights.
2. COHESION AND CULTURE: Co-working spaces offer their own culture, with perks to enhance the employee experience, including innovative design, social areas like “in-office” bars and coffee shops and wellness features, such as yoga classes. Companies inhabiting these spaces are buying into a product that encourages creativity and conversation; aiming to get the best out of workers, while accommodating flexibility to adapt to the changing nature of work.
However, as organizations look to adapt to short-term needs and economic uncertainty, they also need to ensure they maintain a sense of cohesion in their workforce if they wish to retain the right talent. According to a survey jointly conducted by Baker McKenzie and Wired Consulting, 51% of senior business leader respondents acknowledged that a frictionless workplace, such as hot-desking or renting flexible workspaces, weakens cohesion and corporate culture.
Businesses using co-working spaces to place physically remote workers need to be mindful of the risk of dilution to their culture and identity - smaller groups of workers, or individuals working alone may feel disengaged and lack the sense of unity a more centralized group of employees may have. This can adversely affect productivity and morale. Companies can protect their cohesion by integrating flexible workers into the culture and values of the firm by:
- Having a sound on-boarding process and maintaining regular communication with workers
- Finding effective ways for teams to collaborate, for example using technology, or implementing new approaches to team working
- Encouraging teams to be inclusive, to allow for diverse perspectives and input to be shared
- Choosing a co-working space that is consistent with the image they want to project
There is a delicate balance to strike in maintaining cohesion and culture, while enjoying the benefits of a flexible and fluid workforce.
3. EMPLOYEE CLASSIFICATION: Businesses also need to be mindful of the risk of contingent workers or freelancers being misclassified as employees. Combining the internal and external workforce on projects that use agile working methods such as Scrum, or allowing them to work under the same arrangements within a co-working space, can make it difficult to distinguish between the different categories of staff engaged by the business. This leads to the risk of misclassification challenges. Ways of managing this include:
- Being conscious of the work being done by freelancers and contingent workers; for example only assigning tasks to freelancers that will not be carried out by employed staff. A clear separation of tasks can help to mitigate misclassification risk and also enhance cohesion and culture amongst internal, employed staff
- Making arrangements for workspaces that set a clear distinction among different categories of staff within the workforce and only a selective collaboration where necessary
4. DIGITAL FATIGUE: While co-working spaces can promote collaboration and flexibility, for the remote workers being deployed to them, there is an ever-present risk of “digital fatigue.” Workers are often bombarded with social media, email, and workplace chat apps to stay connected to the traditional workforce. Constant stimulation and the lack of a formal work environment perpetuates the sense of always being available and the need to immediately respond to every communication, which may lead to a distracted workforce, and ultimately burnout. Legislators around the world are beginning to recognize this problem and are taking steps to address it, with new and emerging regulations around digital disconnection as well as increased compliance obligations to protect the limits on employee working hours. In addition, businesses are implementing their own “right to disconnect” policies and steps to help employees manage techno stress. For example:
- Adopting purposeful and conscious strategies and policies in relation to the use of communication tools, and clear guidance on managing workplace engagement, both online and offline
- Ensuring workers are cognizant of the fact that they have the ability to decide when and how to best engage in communication platforms and face to face conversations, and they have a right to ‘disconnect’ outside of core hours
- Opting to use a co-working space that offers quiet areas, private offices, and yoga and meditation rooms to allow workers to decompress and take a break from the onslaught of technology and social interaction, and the feeling of always being on-call
5. ONE SIZE FITS ALL? An agile and innovative workspace is likely to attract bright and dynamic talent from all ages. It will supply amenities and provide an attractive culture putting an organization ahead of the competition when recruiting different generations. However, businesses should remember that one size does not fit all. Generation Z are true digital natives but may prefer private working spaces. Employees who have spent their entire careers working in private offices may also find the open plan/“hot desking” culture difficult to adjust to, and an environment devoid of personal space may make some less extroverted personalities uncomfortable. Some workers may wear headphones to prevent being approached, or senior people may try and commandeer the ‘pods’ as their own offices.
Businesses need to accommodate the diversity of the entire workforce and ensure shared workspaces are a universally appealing environment. For example:
- Overcome a lack of employee privacy through privacy screens on monitors and provision of easily accessible ‘pods’ for more private or sensitive telephone calls and conversations
- Noise-cancelling headphones may also be an effective solution to those who struggle to work in a busier environment, along with having sound absorbing walls installed to reduce background noise
- Choosing a workspace that has a balance of ‘quiet zones’ and sociable spaces where people can talk in a more informal environment will assist in catering to different working styles
Boundaries will need to be set, and the right balance met, to ensure that the benefits of a shared workspace are enjoyed by everyone.
6. THE COMPANY YOU KEEP: As shared workspaces are occupied by a variety of different businesses, bound by different workplace policies, this presents a challenge for both employers trying to manage expectations and for employees who need to understand their employer’s requirements. Monitoring and addressing issues relating to, and liability arising out of, performance, attendance, workplace aggression, bullying or harassment can become complex with a remote workforce.
To manage these challenges, businesses could consider:
- Ensuring that employees working in a shared workspace receive regular training on key company policies and codes of conduct. The employer could provide this training on an e-learning platform which has mandatory modules covering the range of core requirements to ensure that expectations of staff in the shared workspace are clear
- Implementing additional policies relating to behavior and conduct within the shared workspace, which will be necessary due to the greater security risks associated with a shared workspace
7. LEAKING TALENT: Working alongside energetic start-ups helps to foster a creative and innovative environment and enables employees to build business relationships, but there is always a risk of employees being poached by other companies in the shared workspace. Arguably, the risk of employees being poached is outweighed by the benefits for retention that may be reaped by a shared workspace. Charlie Green, co-chief executive of The Office Group, says:
“many big businesses aim to attract and retain staff with an entrepreneurial mindset by offering them the chance to be part of a wider community”
Fundamentally, people are less likely to be attracted by a competitor if they are made to feel part of an innovative and entrepreneurial community, working in a shared workspace alongside other entrepreneurs and start-ups rather than feeling like a small cog in a huge organization.
To protect the talent pipeline, businesses can implement non-solicitation and non-compete agreements with existing employees where permitted; but these protections can only go so far in preventing leakage. Given the increase in antitrust scrutiny of HR practices across the globe, companies and staff who agree not to poach each other’s employees, or agree to fix wages, put themselves at risk of breaking antitrust laws. Instead, to protect their talent, businesses should consider:
- Identifying potential areas of exposure to risk, seeking information from landlords about other occupiers of the co-working space where possible
- Reviewing non-solicitation clauses in employment contracts and ensuring appropriate protection against losing valuable customers and suppliers is included in agreements with independent contractors
- Reviewing working arrangements to ensure that sensitive tasks are allocated appropriately
- Seeking to ensure employee engagement and cohesion throughout the workforce
Co-working spaces are likely to continue to gain in popularity as the future generation of talent seeks increased flexibility and innovation from employers. To make co-working work, businesses must address the employment and HR risks to their talent, brand, and values before jumping into these arrangements, taking steps to balance the legal risks while enjoying the benefits of these workplaces.
"‘Making Co-working Work’ is the second article in the ‘Space for Agility’ series. Throughout this series, we will seek to provide some general insight and analysis into the rise of the modern workplace, which will examine - from a user’s perspective - how businesses can protect their confidential information, trade secrets, data privacy, their brand and talent, while operating in these shared environments. The series will also explore the different ways in which providers structure their business, as well as the key considerations major operators of these spaces will encounter if growth in this sector is realised at the rates predicted. For further articles in this series, please click here"
For further information and assistance on ‘Space for Agility: Making Co-working Work’ please get in touch with any of the contacts listed below.
Emma Paige Harbison
Partner
Houston
emily.harbinson@bakermckenzie.com
Rowan McKenzie
Partner
Hong Kong
rowan.mckenzie@bakermckenzie.com
Dr. Bernhard Trappehl
Partner
Munich
bernhard.trappehl@bakermckenzie.com
Taking Shape
Evolving Coworking Structures
The business of coworking spaces has come a long way. From its beginning as hackerspaces and community centers, it has now evolved into a business that is changing the future of the real estate industry. An increasing amount of players provide workspace as a service, and as the bigger entities become involved, the structure of the business has become more sophisticated. These are the structures that we have observed:
1. Customized Instead of Cookie Cutter Workspaces. The original set-up for a flexible workspace involved a provider signing a lease (or maybe using its own property), handling the fit-out, hiring employees, and renting out the furnished space with facilities to others. Providers charged a membership fee, which was based on the amount of time and amenities the member may use.
To be more commercially viable, some coworking spaces are vertically integrated; offering food, spa and massage services, gyms, other sports facilities, and even sleeping quarters. For example, Singapore's "Kafnu" has a mini-hotel, virtual fitness studio, media production studio, gin bar, coffee bar, phone booths, and a podcast studio in its Alexandria site.
2. The Future of Flexible Workspace Franchises. Coworking space providers have also expanded by offering franchises to local players. IWG grew rapidly by entering into agreements with six franchisees in the UK, resulting in 50 new locations opening within the next three years. IWG supports its franchisees during the entire process of running a coworking and meeting space, including everything from the layout and design, to the training of employees.
3. Landlords Launch Their Own Coworking Space Brand. Traditional landlords have also seen the flexibility that coworking spaces provide and are now venturing into the business. Real estate owners are creating their own agile spaces and launching their own brand. They also fit-out and manage their own coworking spaces. Tishman Speyer has "Studio", and Boston Properties has "Flex by BXP".
Landlords are allowed to have full control by running their own coworking space. They can easily add units or floors, or choose what arrangement to offer its clients, without having to consult a third party. Building owners may also take advantage of the lifestyle facilities that already exist within their properties, such as gyms, spas, and other fitness facilities in residential or mixed-use developments.
4. Partnership With Space Providers Allows Landlords to Expand. Some traditional landlords and coworking space providers have partnered up. The landlords provide the space and coworking space providers take over fit-outs and management of the space for a share of the profit. The benefits of this partnership include a buffer for landlords during economic downturns. The technology and experience of coworking space providers allow facilities to run more efficiently and cost effectively. Most importantly, this partnership allows for expansion of coworking spaces with lower capital costs.
5. Hotels Provide Hospitality Through Destination Workspaces. Hotels are also becoming interested in providing agile spaces. Some operators, like Marriott International’s Moxy brand, have tech-enabled spaces that may be used as workstations during the day, and then transform into a party spot at night. Tryp by Wyndham Dubai has "Nest", a coworking space that offers unlimited coffee, business center services, and access to the hotel's pool and gym by its members.
Selina, a growing hotel brand from Latin America, is pushing the envelope by offering "stylish live and work spaces", as well as experiences to its clients. The hotel demonstrates their live, work, play concept in the "Playground", a communal space in each Selina that serves as a coworking space, restaurant, event venue, and bar. Hotels have full control over the space in this type of set up structure. The flexible spaces in their lobbies increase food and beverage sales, and introduce their brand to more clients.
Hotels have even started creating their own coworking brands. One of these is "+U" by Australia's Veriu Hotels & Suites. +U converted a six-level property into a destination workplace with coworking spaces for specific industries, including a professional recording studio for the music industry.
Fattal Group (Leonardo Hotels) has "Rooms", a coworking brand that provides "(e)verything you need in an office, everything you love in a hotel". Rooms offers coworking spaces, office equipment and other office services, room service to your desk, laundry services and rooms in a hotel. Rooms originated in Israel but has already expanded to Sweden, Austria and the Netherlands.
Most of these hotels cater to nomadic travelers who share the lifestyle of working remotely from a coworking space.
6. Hotel and Space Providers Partnerships Result in Increased Coworking Space Accessibility. Hotels have also started to partner with coworking space providers. Accor has partnered with Wojo, whose motto is Work. Share. Live (formerly NextDoor), with the goal of having more than 1,200 flexible spaces by 2022. Wojo will have three products: (1) Wojo Spots - coworking-friendly spaces in the bars, restaurants and lobbies of Accor hotels; (2) Wojo Corners - dedicated coworking spaces in Accor hotels, train stations, airports and malls; and (3) Wojo Sites - large standalone coworking spaces that will also offer private offices to enterprises. These sites will be developed in partnership with Bouygues Immobilier.
On a smaller scale, Kerry Hotel Hong Kong has partnered with Singapore's Next Story Group to bring "Kafnu" into the hotel.
7. Investors Capitalize on Property Management Experience.
Property management companies have also jumped on the bandwagon. CBRE’s flexible space brand, "Hana", sees the property manager partnering with property investors, to deliver coworking spaces in investor properties with CBRE managing the space.
Investors have realized the benefit from partnering with a property manager as it connects them to the manager's network, and property managers offer operational experience in asset management.
8. Space Providers as Property Managers. Flexible space providers are also taking over entire buildings in order to control the whole environment around their operations. In Latin America, a coworking space provider collaborated with a property owner allowing an indirect share of projected profits translated to rent, while the owner had to provide full facility operations and maintenance.
Conclusion
There is no predictable set-up used by coworking spaces. Market trends and user need are driving optionality, innovation and collaboration.
In some cases, providers and property managers are partnering with owners, landlords and investors to deliver customized operations or services for an indirect share of projected profits. Providers are also partnering with landlords and hotels to deliver bespoke solutions focused on the theme of live, work and play. Providers are also continuing to expand by starting franchises.
To keep up, landlords and hotels are developing their own spaces by creating new brands and repurposing existing facilities.
While these trends, partnerships and structures are in their infancy, workspace flexibility will continue to drive innovation and offer new opportunities for providers, property managers, owners and investors alike.
For further information and assistance on ‘Taking shape: Evolving Coworking Structures' please get in touch with any of the contacts listed below.
