Germany’s co-working sector gets a shake-up

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Germany’s co-working space getting a shake-up as new – and unexpected - landlords enter the fray.

Starting next year, German rail operator Deutsche Bahn plans to introduce co-working spaces at its stations in Germany as part of its ‘Smart City’ program. ‘Centrally located and highly frequented, railway stations are perfect sites for mobile working,’ a Deutsche Bahn spokesman told REFIRE. ‘The co-working pop-up at Berlin Central Station - available free of charge in July this year- was a great success, encouraging us to further elaborate co-working concepts. We are currently planning to open co-working spaces in 2019,’ he added. Further details have not yet been disclosed.

In July, Deutsche Bahn teamed up with flexible space operator WeWork to offer a pop-up co-working space at Berlin Hbf. The free service comprised 10 desks and additional seating space on the ground floor of the station and was open from 09:00 until 19:00 daily. Bernd Koch, head of DB Station & Service, described the program in the summer as a move to ‘further improve the quality of visits to the station’.

‘It’s important to us to try out new ideas and to meet the needs of our travellers and visitors to the station,’ he said. ‘We are excited to see how our customers respond to our co-working pop-up space.’

Helge Zahrnt,a researcher at JLL Germany, told REFIRE that ‘ it’s a good idea that Deutsche Bahn plans to open co-working spaces at its stations’. ‘Co-working spaces at airports would make a lot of sense, too, tapping into demand for working spaces from business travelers,’ he said.

However, Deutsche Bahn may outsource the management of its new co-working spaces to an existing co-working operator, much like it did to WeWork this summer, according to Stephan Leimbach, head of office leasing at JLL Germany:‘I believe that such “white-label” co-working solutions will increase in future,’ he said. 

Co-working is also likely to evolve in other ways, Zahrnt said: ‘For example, in the future, we could see rental agreements whereby a corporation rents 50% of a building, with a co-working provider taking the rest of the space. There could be a flexible agreement in place allowing both parties to take more or less space over time, as their needs change. This could also make the sector more interesting to investors, who typically prefer an office building not to comprise more than 20% or 30% of flexible office space.’

According to Dr. Jan Linsin, head of research Northern Cluster at C&W in Germany, ‘co-working is the topic at the moment’.

‘A new breed of offices and services is emerging,’ he told REFIRE. ‘That’s what Deutsche Bahn is moving into in. We could also see other companies move into the co-working space, either by engaging a flexible office operator to run some of their space or by managing it themselves. It’s all about the shift in how we work today. The salary and incentives alone are no longer enough. Companies have to be able to offer more in terms of a great office in the best location with excellent amenities in an urban location that is mixed-use, walkable, bikeable and near mass transit. It’s about trying to readdress the work/life balance. By the way, co-working often is pretty misused as a term. To consider and analyze the whole phenomenon, we should rather use the term “flexible workspace” or “serviced office”.’

Co-working take-up on the rise

Interestingly, co-working is a phenomenon that has only emerged in Germany in the last two years, according to Linsin. ‘From virtually nothing in 2016, we have since seen over 360,000 sqm of flexible office take up in Germany’s major office markets. I expect the top four-to-five brands to expand a lot going forward,’ he said.

In the first nine months of 2018, there was around 170,000 sqm of flexible office take-up in the ‘Big 7’, which represents 6% of all office take-up in the period, according to Zahrnt. In the first three quarters of 2018, there was 20,000 sqm of flexible office space take-up in Berlin, compared to 50,000 sqm in Frankfurt and 43,000 sqm in Frankfurt, he added.

‘However, it is very difficult fortenants to find office space in the ‘Big 7’, especially for those looking for between 4,000 sqm and 10,000 sqm of space, Zahrnt said. ‘In Berlin, if there was more available space, take-up would be much higher. The real barrier is the lack of available space, not demand. In 2017, there was 250,000 sqm of flexible office take-up in the Big 7, although I think that we might not quite hit that this year.’

The volume of flexible office space in Europe rocketed by 25% last year, which equates to an increase of more than 500,000 sqm, according to a recent report by JLL Germany: ‘Flexible Office Space – Co-working in the Big 7’. Of this total, around 75,000 sqm of co-working space were leased in Berlin last year, more than a five-fold increase on the 14,000 sqm leased the previous year, according to C&W. The city’s popularity with start-ups - which thrive on low cost, low risk, flexible spaces – is also boosting interest. WeWork is also expected to significantly increase the space it takes in Berlin.

‘Obviously, start-ups need this kind of space as they have no idea where they’ll be in five years time but corporate demand is also increasing,’ Leimbach said. ‘At the moment, 1% of office stock in the ‘Big 7’ is flexible space (compared to between 2% and 4% in markets such as London, Amsterdam, Singapore and San Francisco) but it’s conceivable in the future that companies could want more of their office space to be flexible. Even if they want to have just 5% flexible space we would need five times more space.’

However, the biggest drawback remains the lack of supply. ‘Part of the problem is that landlords don’t always like to lease space to flexible office operators,’ Leimbach said. ‘They would prefer to rent directly to the companies themselves, if possible. Some flexible office operators will consider buying offices but it’s very capital intensive, so it doesn’t really fit with their business model.’

As long as competition remains tight, rents – which typically cost between €200 and €1,000 per desk per month in the ‘Big 7’ – are likely to remain flat, Leimbach said.

UK leads the way in Europe

The UK is king of co-working spaces, accounting for a whopping 32% of global flexible working spaces, beating the US with 27% and EMEA (excluding the UK) with 22%, according to C&W. In London alone, flexible working places accounted for 230,000 sqm of all new office take-up last year, or 21% of the total, therebytripling the previous year’s volumes. Moreover, it’s estimated that there could be around 930,000 sqm of potential co-working space available in London, more than double the 370,000 sqm offered by Amsterdam.

Bumper growth forecast

But that is set to change. According to Elaine Rossall, head of UK offices research and insight at C&W, flexible work spaces are likely to account for at least 10% of the overall office market in Europe within the next ten years. Interestingly, the definition of what can constitute a shared work space is evolving, according to Rossall.

‘While offices have been the traditional source of space, pubs, hotels and libraries are increasingly of interest to flexible space providers, building on the popularity of coffee shops and cafes as flexible workspaces,’ she said. ‘Any brick-and-mortar business that is vacant for a period during the day could be utilised for flexible working. The availability of vacant retail premises could lead to co-working spaces becoming an integral part of high streets in Europe.’

Handful of operators control market

Two operators dominate the co-working space globally: WeWork and Regus. Moreover, in the largest global markets, they account for almost half of the entire flexible office space supply, according to JLL. WeWork and Regus are also the largest operators in Germany, followed by DesignOffices.

However, it has not been plain sailing. WeWork’s growth is accelerating as it adds adds more locations and tenants globally but the company is still spending a lot to achieve that growth. The group generated $422m in the second quarter, representing year-over-year growth of 113%. Still, the company continues to lose money, raking up a net loss of $723m in the first half of this year on around $764m of revenue. That represents a greater loss than the same period a year ago, when it lost $154m on $362m of revenue.

Ultimately, flexible office providers are betting on future growth – and some investors, in turn, are willing to take a bet on them. Japan’s SoftBank Group is believed to be in talks to buy a majority stake in WeWork, potentially doubling down on its earlier bet on the start-up.TheWSJ reported that SoftBank’s investment could be between $15b and $20b, likely coming from SoftBank’s Vision Fund. Both companies declined to comment. (ssk)