It’s seems like the perfect time for Pitbull to do a coworking remix of his famous 2009 Hotel Room Service lyrics “we at the hotel, motel, Holiday Inn,” as Knotel, the flexible office space startup, just raised $70M in financing lead by Newmark Knight Frank. This follows up Industrious’s $80M financing in February of this year, and the well covered $4.4B funding WeWork took from Softbank in August of 2017.
There is a lot of speculation around whether or not the coworking market is being over capitalized at this point as many in the industry remember temporary office offerings such as Regus gaining notoriety in the past only to fall hard in down economies (Regus did file for Chapter 11 in 2003).
So what is different this time? Why are a number of smart groups with deep pockets moving so aggressively into flexible work models when we know what’s happened in the past?
Well, there are two key factors that make the opportunity different this time around and I highlighted them in our recent newsletter, the PropTake.
Internet Penetration and Adoption
The internet has forever changed how, and subsequently where and when, people work. In 2003, when Regus filed for Chapter 11, the Bureau of Labor Statistics reported that 77M Americans used a computer at work (~55% of the workforce), and only 30M Americans used the internet or email. By 2008, the number of Americans using the internet jumped to ~50M. And, though admittedly I stopped Googling for the exact stats for 2017-18, it is safe to say the almost all working Americans use internet in some form for their work now.
This internet penetration and adoption has made work doable from anywhere. Combine this with advances in travel and you come to the fact that working people are and will be working from all over. Flexible space is no longer just for traveling salesmen and executives. Flexible space also won’t be just for the “creative economy” of freelancers and artists. Flexible space in the next 5-10 years will just be regular space. The genie will not be put back in the bottle regarding companies wanting flexible space and leasing. And this is apparent as the three companies above push aggressively upstream to provide solutions for bigger companies. (Sidenote: the debate around the validity of the model of lease arbitrage, however, is a topic for another day).
Bundling Services and Technology
Flexible work providers are actually increasing the market size by grabbing a larger portion of a companies expense budget by bundling additional services into their space and charging higher rental prices. This idea isn’t new – I’ve spoken to about 10-12 real estate professionals who have given me the “we had this idea in 2000!” speech (sidenote: sure the Palm Pilot maker was saying the same thing in ’07 when the iPhone dropped…) – I know that. But with efficiency improvements coming from technology enabled services, the timing for delivering on these additional services is now doable.
Regarding Knotel’s and Industrious’s fundraising, it is incredibly valuable from a strategic standpoint for these companies to be cozying up with large brokerage groups (Industrious is backed by Fifth Wall which has CBRE as an LP). Ultimately, anyone physically managing space is going to collide with the big 5 broker/managers.