Commercial Real Estate Tenant Advisory Services CANADIAN COWORKING & SHARED OFFICE STUDY

Transcription

1 Commercial Real Estate Tenant Advisory Services CANADIAN COWORKING & SHARED OFFICE STUDY Welcome to the Future OCTOBER 2017

2 EXECUTIVE SUMMARY The shared workplace and coworking trend seen for some time in other countries has now officially arrived in Canada, and is poised to shake up the Canadian office space market like nothing before. Perhaps a slight exaggeration, but the shift in perception towards shared office space has been rapid and quite startling. Of course packaged offices have been around for many years, and coworking space has been offered by a variety of operators for some time now, but the arrival of WeWork, the 900 pound gorilla of shared workplaces, has sparked a revolution in how users of office space view their real estate and the role physical premises play in the operating of businesses. This study is the first of its kind in Canada and hopes to address the scope and limitations of the flexible workplace movement. Cresa operates in both the traditional leasing arena, representing tenants as they look for traditional space, as well as tenants who are interested in exploring shared office space opportunities that provide flexible and often cool space at a reasonable price. For our inaugural report, we have focused on Toronto and Vancouver, but in time we will add Montreal, Ottawa, and Calgary. The goal of this report is to understand both the demand drivers, the current (and future) supply of shared office space, and how we see this niche market evolving within the context of the more traditional office leasing market. The move towards shared workplaces could be a game changer both for occupiers and landlords. Our own view is that shared office space could be as much as 20% of the overall office market within the next decade. For vested parties, this represents both an opportunity and a threat. There are three critical drivers that we believe are influencing this shift in workplace preferences. 1. The growth of startups. Canadians of all stripes have become entrepreneurial, almost overnight. This is seen everywhere, and in almost every industry. 2. Today s workforce is far more mobile than previous generations (and will only become more so). They want to work anywhere, any anytime. 3. Millennials recently became the largest segment of the Canadian labour force, and they don t want the status quo. Move over traditional office. While these three drivers only begin to explain the demand side of the equation, what may be more profound is the supply side. To say packaged offices had an image problem, would be an understatement. What WeWork, and increasingly operators such as Regus have done, is redefine what shared office space should look like, and more importantly feel like. They have tapped into a number of key macroeconomic (and social) changes that have been underway for some time, and will no doubt continue. To date, the biggest challenge for shared office space has been mental, but it appears that the mind shift is now underway. For readers of this report, we hope you find our observations (and data points) relevant and informative, we look forward to working with many of you, either for good old fashioned leased space, or to the flexible workplace movement! 2

3 TABLE OF CONTENTS EXECUTIVE SUMMARY 2 CANADA OUTLOOK 4 REGIONAL SUMMARY 6 REGIONAL ANALYSIS 7 TORONTO HIGHLIGHTS 8 VANCOUVER HIGHLIGHTS 9 REGUS HIGHLIGHTS 10 WEWORK HIGHLIGHTS 11 THE LANDLORD S PERSPECTIVE 12 CLOSING THOUGHTS 14 END NOTES 15 Disclaimer: Information contained herein has been obtained from sources deemed reliable. While every effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. 3

4 CANADA OUTLOOK WHAT IS COWORKING AND DOES IT MATTER? One of the fastest-growing workplace shifts visible in the last decade is coworking. This enables people from diverse backgrounds and teams to work together in common space. Coworking is not a new concept, and is often an essential ingredient to attracting and retaining talent in today s competitive marketplace. Alongside growth in major Canadian cities, companies are opting for the flexibility of shared work spaces. The rapid growth of coworking has now moved beyond its origins as an alternative to traditional office space, originally favored by technology, start-up, and freelancing communities. Today, businesses across the spectrum recognize the value of flexibility, community, and shared resources. 21% Goods Producing Sector Employment Concentration Source: Statistics Canada Service Producing Sector 79% IS ENTREPRENEURSHIP THE CATALYST? The Centre for Innovation Studies in Alberta stated that Canada is second only to the United States when comparing global levels of entrepreneurial activity. A large portion of this activity is centered around the major metropolitan areas of: Ottawa, Toronto, Vancouver, Montreal, Calgary, and Waterloo. For the purpose of this report we focus our attention on two main areas: Toronto and Vancouver. As risk aversion towards entrepreneurship decreases, the actions put in place by both the Canadian government 6% FIRE * and private investors have garnered success in major 10% 4% TAMI ** cities such as: Vancouver, Toronto, Montreal, and Calgary. The investment intentions outlook from the *Finance, Insurance & Real Estate **Technology, Advertising, Media & Information Business Development Bank of Canada (2017) stated that small and mid-sized businesses will invest $96.9 billion this year. Not surprisingly, the technology industry is the leader of both innovation and investment. For example, Ontario has over 400,000 small businesses (with less than 99 employees), while British Columbia has roughly 175,000 and increasing. The FIRE industry (an acronym used to delineate the finance, real estate and insurance industry), makes up 6% of total employment, while the culture and information sector totals 4%. The two aforementioned categories have a combined concentration of 10% and have become two key users of shared office and coworking spaces in Canada. SMALL BUSINESSES (LESS THAN 99 EMPLOYEES) ONTARIO BRITISH COLUMBIA 400, ,000 Source: Statistics Canada 4

5 CANADA OUTLOOK WHY COLLABORATION? Whether by design or accident, more and more businesses are adopting a staged or phased approach to their business strategy. Therefore, as teams may work autonomously, they are often a part of a larger process that can include numerous teams and stages. WHY COWORKING? The shared-space model is a break from the traditional office paradigm. WeWork and similar operators lease space from building owners, then effectively re-lease that space to what they call members. A member can be understood as someone committing to specific space for a period of time, or looking for an occasional desk or bench at various international locations. Wayne Berger, the Executive Vice President at Regus, offered his insight on this matter in a recent interview with Cresa. He highlighted the idea that over the past couple of years, shared office space and coworking have gained momentum throughout Europe and North America. This growth can be attributed to the increased popularity of coworking space, or the integration of both shared office and coworking. Modern office building standards have risen to accommodate environmental, health, and wellness concerns, in addition to the ability to become mobile. This offers small and large enterprises the ability to operate out of premier space at a reasonable cost. A Gensler design forecast summarized the demand for this space as follows, The Millennial generation and its creative employers are looking for the play of imagination in the buildings they inhabit. Both expect spaces that can be reshaped on the fly to suit their changing needs. Both want amenities that cater to their social nature. Both like things urban, but there are many ways to provide it. All of this points to a rising tide of buildings that will be repositioned, rethought, and upgraded. Literally every building type is in play now, including towers in the downtown core. Tapping new technologies and systems makes remaking costeffective and ROI-attractive. 5

6 REGIONAL SUMMARY Although the coworking trend is not new, we have collected and analyzed data specific to the largest growth markets in Canada, specifically Toronto and Vancouver. With a cumulative total of almost 1.8 million square feet, coworking space has grown from a trend to a disruptor in the commercial Coworking space has grown real estate industry. As global from a trend to a disruptor in the workplace trends evolve, organizations are seeking commercial real estate industry. to use technology in order to increase ease of access and reduce costs. Coworking space is also no longer limited to classic tenants such as technology and design firms. It is now available to a much wider variety of businesses. The idea of larger international firms taking advantage of this agile and cost effective strategy is illustrated by IBM leasing 77,000 square feet of WeWork s Manhattan Midtown South location at 88 University Place, NY. TRADITIONAL LEASE VS. COWORKING COSTS Property Costs Operational Costs Acquisition Costs Capital Costs SERVICES INCLUDED IN SERVICED OFFICES INCLUDED IN CONVENTIONAL Rent Property Taxes Service Charge Tenant Improvement s Utilities Facilities Management Building Management Repairs & Maintenance Equipment Maintenance Premise Insurance Security Support Team Reception Meet & Greet Telephone & Switchboard Project Management Tea/Coffee/Drinks Legal Fees Agent Fee Photocopier, Printer & Scanner Cabling Telephone Systems IT Infrastructure Post Management Services Furniture Source: Cresa 2017 COWORKING DEFINITIONS The two main programs found within a flexible workplace environment are shared office and coworking. A shared office is a format that allots a specific group of people a small office within the confines of a larger premise. Coworking offers either a hot desk or dedicated desk within an open and collaborative environment. SHARED OFFICE & COWORKING INVENTORY VANCOUVER 790,000 SF 1,790,000 SF TORONTO 1,000,000 SF Source: Cresa Q

7 REGIONAL ANALYSIS FINDINGS The Toronto shared office and coworking market has almost doubled to one million square feet during the past two years, based on recent data. Vancouver s growth is similarly explosive with close to 790,000 square feet. There are 85 coworking locations in the Greater Toronto Area, with 59 of them (69%) concentrated within the downtown core. Comparatively, Vancouver has 58 locations, with 32 of them (56%) concentrated within the downtown core. The average minimum price for a private office in Toronto is $740, while the average maximum price is $1,800. Outliers are WeWork and Source: Cresa Q Workhaus which offer much larger office spaces. The minimum for a private office in Vancouver is $650, while the maximum is $1,500 with an average of $1,119. The average price for a dedicated desk versus a hot desk in Toronto is $483 and $288 respectively. The average price for a dedicated desk versus a hot desk in Vancouver is $414 and $281 respectively. Source: Cresa Q TORONTO - VANCOUVER PRICE COMPARISON (price per month, CAD) The three concepts of collaboration, innovation, and simplicity, outlined by a white paper on coworking by the Harvard Business Review, ring true (Source in End Notes). Below is a list of the pros and cons used to weigh the CoWorking format. COWORKING PROS, CONS AND FEATURES PROS Speed of contract Length of contact/flexibility New business from within coworking community No insurance needed Deposit +- 50% less than traditional leasing Ease of relocating No upfront capital costs Modern, contemporary space Fewer covenant issues CONS Difficult to brand individual space Inability to lock in occupancy costs Lack of control over immediate environment Limited number of locations Network security Bandwidth issues Lack of privacy Risk of relocation Private Office $740-$1,800 Dedicated Desk $483 Hot Desk $288 Private Office $650-$1,500 Dedicated Desk $414 Hot Desk $271 Source: Cresa Q FEATURES Great for start-ups Suitable for short term projects and training Ideal option for swing space Great option for satellite office space Possible disaster recovery space 7

8 TORONTO HIGHLIGHTS Toronto is Canada s largest city with a metro population above 5.3 million. The downtown financial core and neighbouring areas create a combined cultural and financial hub that coworking operators have been able to leverage. As rent and the cost of construction continually rise in today s tight market, tenants are forced to amortize their improvements over longer terms, while coworking spaces offer quite the opposite. A combined cultural and financial hub that A global comparison shows that London has roughly 300 million square feet of office space, with over 500 coworking locations. Toronto has half the inventory of space, coworking operators have 150 million square feet, with been able to leverage. only 85 coworking locations. Comparisons between these cities conclude that the population and large concentration of technology and design companies (roughly 137,000), located in London far outweigh Toronto. Roughly 87% (based on square footage) of the coworking companies offering their services in the Greater Toronto area are made up of nine operators: iq Office Suites, Workplace One, Regus, We- Work, Workhaus, Office Exec, Brightlane, Centre for Social Innovation, and the Fueling Stations. Half of these are focused on TAMI based companies while the other half focus on FIRE. With the exception of Regus large portfolio, the majority of companies have one site, with outliers having between two to five. In the area indicated by the above image, there are four large universities focusing on either design or STEM (Science, Technology, Engineering, and Mathematics). In addition, the colleges and private colleges, such as Red Academy and Hacker U offer programming courses and degrees. It is clear that this area is brimming with creative and analytical talent. The coworking concept acts as a unique extension of the academic environment that young professionals are used to. Instead of a rigid corporate environment, coworking space offers a more fluid and horizontal platform that enables a connection between people of complementary skill sets. Shared Office Locations GTA Q Shared Office Locations Toronto (Urban) Q Shared Office Locations Shared Office Locations Source: Cresa Q

9 VANCOUVER HIGHLIGHTS Shared workspace and coworking fits nicely into the fabric of Vancouver with its high concentration of entrepreneurs, freelancers, startups, and small businesses. The population exceeds 2.5 million, and it is dominated by small tenants. Shared workspace and coworking operators would struggle to find a more logical market to establish a presence. With a disproportionate number of creative class businesses (including: animation, architecture, software, virtual reality, digital media, film, and television post production, special effects, clean technology, video game production, fintech and app developers), Vancouver is a mecca for coworking communities that are heavily biased towards a shared work environment with an emphasis on collaboration. Shared Office Locations GVA Q Shared Office Locations The Canadian entrepreneurial spirit, supported by world class universities and colleges, has created an ecosystem that rivals the top international tech clusters. Notable academic institutions including: the University of British Columbia, Simon Fraser University, British Columbia Institute of Technology, Emily Carr University of Art + Design, and the Vancouver Film School, have helped to position Vancouver as a centre for excellence in technology, design, and other creative industries. In addition, the city s natural beauty, as well as the focus on health and wellbeing, makes Vancouver an attractive destination for both travelers and professionals. Vancouver s shared workspace and coworking inventory now exceeds 790,000 square feet in 58 locations, with more growth to come. Shared Office Locations Vancouver (Urban) Q Shared Office Locations Source: Cresa Q Regus leads the pack at 354,000 square feet and 20 locations, including Spaces, their upcoming 42,000 square foot coworking venture in Gastown. WeWork is a distant second with 77,000 square feet in Bentall Centre III, and another 53,000 square feet in Bentall Centre II. The remaining 36 locations are operated by a variety of groups, most with just one location. The split between shared workspace and coworking space is 430,000 square feet and 360,000 square feet respectively, although this distinction is quickly disappearing. Additionally, more than two-thirds (68%) of coworking/shared workspace is located in urban locations, mostly the downtown core, Yaletown, Gastown, Railtown, and the Broadway corridor including Mount Pleasant. 9

10 REGUS HIGHLIGHTS Regus currently has 3,000 locations in more than 900 cities. It has 104 locations across Canada and has doubled its number of locations in the last three years. In 2015, Regus acquired the WeWork equivalent, Spaces, and will be opening a 50,000 SF location on November 13th in Toronto, with locations of 35,000 SF and 42,000 SF respectively, to be opened in Montreal and Vancouver in Q The acquisition is a move by Regus to take a more aggressive position in the coworking universe. TORONTO 100 KING STREET WEST Regus has 41 locations in Toronto at just under 600,000 SF of office space, accounting for 54% of the Toronto shared office market. Their class offerings span from Brick and Beam, downtown core, to office spaces along the Yonge Street corridor northbound into Richmond Hill. Modern fixturings allow clients to enjoy first class locations throughout the city. The highlighted property is a 31,545 SF facility located on the 56th floor of the iconic 72 storey, First Canadian Place. Located in the core of Toronto s financial district, this location places Regus clients in Canada s top office node. VANCOUVER 2025 WILLINGDON AVE (SOLO), BURNABY Solo is Regus newest location in Vancouver, located in the bustling municipality of Burnaby, immediately adjacent to the Brentwood SkyTrain station, and just minutes from downtown Vancouver. This location has a downtown feel, but is located in the suburbs. Situated on the 9th floor and occupying 20,508 SF, this space has commanding 360-degree views of downtown, the Northshore mountains, and south and east up the Fraser Valley. Solo district is a high quality mixed-use development featuring residential condominiums and a wide variety of retail, including: Whole Foods, Shoppers Drug Mart, and Starbucks. Regus users will have these amenities and others at their finger tips, as well as a two-minute commute to Highway 1, lending to points east and west. 10

11 WEWORK HIGHLIGHTS WeWork is quickly emerging as the dominant global provider of coworking space, and now has a sizable presence in Canada. While originally focused on freelancers, entrepreneurs, start-ups and design/technology firms, WeWork is quickly entering the enterprise market with a growing focus on medium and large businesses. WeWork is not expected to deviate from their mission to meet the needs of creators of all kinds, but the shift towards corporate users is perhaps a logical next step. This shift is reflected in their newly opened Toronto location where enterprise level companies like RBC, occupy the entire second floor. WeWork currently has 160 locations worldwide, as of September 1st TORONTO 240 RICHMOND WeWork currently has two locations with a total of 72,000 SF. Their 66,000 SF flagship location, 240 Richmond Street is on the corner of Richmond Street and Duncan Street, steps away from Queen Street and Toronto s entertainment district. It is bordered by the financial core to the east and the beginning of the King West Brick and Beam sub-market to the west. With modern design and furniture, the six floors of space mimic an architectural magazine. Users of the space are afforded free roaming access to various areas throughout, and a dedicated desk if desired. Amenities include a large kitchen, high speed internet, and professional and social events tailored to developing a strong social culture. VANCOUVER 595 BURRARD (BENTALL III) At 76,906 SF, WeWork s Vancouver Burrard Station location will be its largest in Canada and is spread across five floors in Bentall III. Members will have access to all the Bentall Centre amenities, as well as the perks that WeWork offers in all its locations. The details are still to be released, but promotional literature indicates that micro-roasted coffee, infused water, conference rooms, phone booths, business-class printers, and wellness rooms, will all be offered to members. Situated on the northwest corner of Burrard and Dunsmuir Streets, with easy underground access to the Burrard SkyTrain station, along with a multitude of bus routes, makes this one of the most transit friendly locations in the city. WeWork members will also be able to access multiple restaurants, coffee shops, banks, and many other convenience retailers making lunch hour highly productive! Expected opening is late fall

12 THE LANDLORD S PERSPECTIVE So how does the landlord community view the rise of coworking? For many the response is most likely a shrug of the shoulders. No big deal. Whether people lease space from a building owner, or via a third-party operator makes little difference. Throw in the argument that operators typically offer a better covenant than most startups or small businesses thereby transferring the risk of failure or bankruptcy from the landlord to the shared office operator, and it would appear to be a win all around. Now for the less appealing aspects. Landlords are motivated by four factors; occupancy, rent, covenant and control. Occupancy would seem to be a straightforward win. Fill the building up with shared office operators and the building s occupancy goes up. Three issues, however, come to mind. What happens when the next downturn hits and startups and small businesses start to fail. How long can the operator survive before they themselves collapse? The second issue concerns small tenants who would otherwise sign a direct lease with a landlord, but instead sign a contract with an operator. Small tenants sometimes become big tenants, and as a landlord you want them to expand in your building(s). This is less likely to happen if a business is a client of an operator as opposed to an existing tenant. The flip side to this argument, no more small leases, which can often be more time consuming than large tenancies. Lastly, higher occupancy, but at what cost? Still to be determined, but shared office users tend to be hard on a building. Density ratios are often higher putting pressure on a host of systems, and while almost impossible to quantify, tenants constantly moving in and out of a building create wear and tear. Anecdotal evidence suggests operators pay market rents, although large requirements can lead to below market lease rates, but not always. The issue is the significant tenant inducements that are often part of the deal. Coworking space is expensive to build out. Lounges, kitchens, cafes, meeting rooms, nooks, phone booths, server rooms, receptions are all expensive items that must be paid by someone. 12

13 THE LANDLORD S PERSPECTIVE OCCUPANCY, RENT, COVENANT & CONTROL Operators will often apply significant pressure on the landlord to invest in the space. So, while rents may be the initial question, tenant improvements are the real story. Covenant has already been touched on, but landlords (and their lenders) care very much about the quality and strength of covenant. On a related topic, the mix of tenants and type of tenants is also of importance. For many landlords, the risk of taking on an operator who is not a well-funded group such as WeWork, or a large publicly traded entity such as Regus, is not worthwhile. Lastly, control. Speak to any landlord and they will have a strong bias towards having complete control over their building. Coworking and shared office space removes an element of that control. To an extent, by signing a lease with an operator, the landlord relinquishes a degree of control to a third party (not to mention profits). Landlords try to have a relationship with all tenants, for reasons as varied as customer service, retention and, as noted above, expansion. With this mind, look for landlords to offer their own shared space. Why leave money on the table? The only risk is creating a mindset where tenants opt for flexibility (for a price), and don t make the usual long-term commitments, which landlords prefer. For now, landlords appear to be treading carefully, not sure whether to fully embrace this new leasing paradigm or stay clear. Canadian landlords have the option of looking to markets such as London or Manhattan to get some input, but every landlord will be sure to have a different take, and to act accordingly. Stay tuned. Regus/Spaces Canada Top Locations WeWork Canada Locations Toronto (Spaces)* 50,000 SF Vancouver - Bentall III* 76,906 SF Toronto Bay Street 45,636 SF Montreal Place Ville Marie 72,820 SF Vancouver (Spaces)* 42,000 SF Toronto Richmond Street 66,000 SF Montreal (Spaces)* 35,000 SF Montreal Des Canadiens-de-Montreal 61,341 SF Vancouver Burrard Street 34,332 SF Vancouver - Bentall II* 50,000 SF Toronto King Street West 31,545 SF Toronto - 33 Bloor Street* 36,343 SF 13

14 CLOSING THOUGHTS Shared office space will not be the solution for every office user, but early evidence suggests it could be the answer for many. This concept provides an alternative or hybrid solution that is now being utilized by numerous multinational corporations in the United States, Europe and Asia. What began as an easy and affordable option for startups and small businesses is quickly becoming the answer for top corporate users. Through this analysis, we have highlighted advantages and disadvantages of shared office space. We have also illustrated the nuances that exist between the various operators and the segmentation that has increased dramatically. Our intent was to put together a guide that would help readers understand whether shared workplaces or coworking are the way forward for your business. Utilizing a tenant advisor such as Cresa will be an asset in building the foundation of understanding of available options, as well as ensuring a successful outcome. We combine the experience we have gained and market knowledge accumulated over many years to provide advice on numerous issues as varied as IT packages, stepped pricing agreements, capped rates, support services, office redecoration, reconfiguration, additional furniture, catering, company branding, virtual packages and multiple site access. In addition, and of primary importance, we negotiate the best possible price. Our goal is to provide the ideal all inclusive office package that matches your unique requirements and business needs. Lastly, Cresa s advisors will review and alert you to any contractual concerns. In summary, if you want the flexibility to expand or downsize at short notice, to focus on running your business, and you need to move into fully functional plug and play space quickly, shared office space is almost certainly something worth considering. The increased cost over traditional leased space is difficult to quantify, and is quickly coming down, but the benefits of flexibility and minimum up front capital costs will be highly attractive to many users. 14

15 NOTES END Cresa is the original and market leading commercial real estate advisor across the globe that works exclusively for commercial occupiers. We do not act for landlords in any way or at any time. We are the Canadian offices of Cresa Global, the largest firm of tenant-only real estate advisors in the world. As a result, we offer conflict free advice in more than 200 locations in over 40 countries. Services offered by Cresa include Capital Markets, Consulting, Facilities Management, Global Portfolio Solutions, Lease Administration, Mission Critical Solutions, Project Management, Relocation Management, Site Selection, Strategic Services and Transaction Management. CONTRIBUTING AUTHORS Ross Moore Senior Vice President e: rmoore@cresa.com t: ext. 106 Sheldon Dobsi Research Analyst e: sdobsi@cresa.com t: ext. 403 REFERENCES

16 We encourage all readers to contact us below Cresa Toronto 170 University Avenue, Suite 1100 Toronto, ON M5H 3B Cresa Vancouver 1040 West Georgia Street, Suite 1020 Vancouver, BC V6E 4H Cresa Calgary 606-4th Street SW, Suite 1400 Calgary, AB T2P 1T Cresa Montreal 2000 McGill College Avenue, 6th Floor Montreal, QC H3A 3H Cresa Ottawa 130 Slater Street, Suite 1000 Ottawa, ON K1P 6E Cresa Global 1800 M Street, Suite 350 S Washington, DC