Yotam Alroy - What does the office tenant really want?

What will tomorrow’s office space look like, and what trends are driving the revolution that everyone active in commercial real estate is navigating? To find out, I sat down with Yotam Alroy, Co-founder of Mindspace, the global boutique coworking provider.
 

What will the next 12 months hold for the office space market? Just a continuation of current trends or something much more disruptive?

We believe that current trends, which have so radically altered the office space market in recent years, will continue and likely accelerate in the next 12 months. Continuing urbanisation along with low unemployment rates will continue to drive demand for office space. But the nature of this demand will continue to evolve, too. We will continue to see occupiers becoming increasingly sophisticated in their demands and occupancy needs – notably for flex space. This, in turn, will drive more and more landlords to innovate and embrace emerging business models.
  

Who is the future occupier? How have tenant and end user needs changed over time, and how do you think they'll change in the future?

I’m not sure that tenant needs have changed so dramatically as their expectations and demands have changed. In the past, no one expected the building experience to play such a key role in the day to day employee life. Now we understand that the building experience is the customer experience. Today, a younger workforce is a more demanding workforce. Employers realise that one of the ways to attract talent is not only to have an office in a prime location but also to offer a unique building and an amazing office environment. Because of this, employers see office space as a means to an end – a way to create a productive, happy workforce. Our customers are global enterprises – hosting hundreds of their employees. And we hear more and more frequently how important it is for these companies to offer the right environment in order to attract and retain talent, and ultimately to be more competitive in their market.
 

What do you believe to be the next thing for office?

From the landlord’s perspective, the next step in the transition of office space to a more flex-centric paradigm will be the application of the hospitality model in the flexible office space. The hotel industry’s OpCo-PropCo split extracted significant value, and capital markets understand and support this model. As flex spaces become predominant, the office segment will transition to a similar model. It is a process that requires some market education, of course, but we are already seeing increased interest in it, and in fact, recently signed several deals under this model. 
 

How will the approach to employee wellness in coworking spaces evolve in 2020 and beyond?

Employee wellness is definitely an important piece of the puzzle – and not just in the flex space industry, but in office buildings in general. In the recent past, landlords and occupiers sought to have a LEED certificate for the building - focusing on the building's impact on the environment. Already today – and certainly into the future - we see more and more companies seeking a WELL certificate, meaning that the building advances health and well-being through design and in-office wellness activities like yoga, nutrition education, and more.
 

How will the concept of company culture evolve as more and more companies move to coworking?

We believe that company culture still eats strategy for breakfast – and a high quality, well-run coworking location actually contributes to a cohesive, distinct company culture. Our client companies can enjoy their own private DNA while getting inspiration and ideas, and developing relationships, as they use the services and activities of the coworking space. 

Still, coworking means different things to different companies. In the flex space offices we operate, for example, some companies take large private suites, full floors, or even combine several offices into one. These companies want to enjoy their own private space and often have their own unique design demands. 
 

Mindspace has stated that 30% of the entire office market will be flex space by 2030. What are the key drivers of this trend, and how will they change in 2020?

Correct, and we’re not the only ones saying it. Research by large global broker firms says the same. The drivers are fairly simple – a massive par between supply and demand. An increasingly large portion of the workforce is comprised of small businesses and freelancers – who are looking to flex space to feel more connected to the business community. And now, many large enterprises want to adopt coworking for their own needs. So, we estimate that close to 50% of the workforce is better served in a high-quality flexible office space, as opposed to a traditional space in the same building. Yet at the moment, less than 5% of the office supply in large cities is flexible. As long as supply is so significantly behind demand, we’re going to see growth.
 

You’ve spoken about flex spaces disrupting the traditional lease model. Where is this more prevalent, in Europe or in the US?

In general, the US is slightly ahead in this regard, but we have seen an uptick in signed contracts in EMEA and Europe, as well as a growing appetite for flex from landlords that understand its value - both in terms of tenant experience and as regards the economics. For example, we recently signed two new spaces – one in Europe and one in the US – both under our newly-launched Mindspace for Landlords partnership program. These deals are an excellent weathervane - and indeed, we’ve seen a serious uptick in interest on both sides of the Atlantic. And in my view, there is no doubt that this model will become standard globally.  
 

Lastly, let’s discuss the elephant in the room: WeWork. Where do you see them heading this year?

It’s difficult to estimate as changes take time. But it’s clear that WeWork will need to transform massively, and will do whatever they can to reach profitability as quickly as possible. And there will likely be some painful steps in order to achieve that. I can say that many landlords understand that the flex space product alleviates real pain and answers the needs of many tenants. So, the fact that WeWork had corporate governance issues they needed to solve before going public really does not reflect on the market viability of flex space.


Leading investors, developers, lenders and operators active in UK real estate will gather for discussion and high-level networking at British & Irish GRI, taking place on the 20-21 May. 
 
Article by Matt Harris