Co-working is a style of working that involves a shared office space where workers, who are typically not members of the same company, gather to work. This represents a movement away from traditional office spaces to a more open and collaborative environment. It has also become a global movement towards creating innovative, cost-effective and community-based workplace environments for independent, flexible or remote workers.

According to available statistics from online database and statistics provider Statista, worldwide real estate co-working spaces increased from almost zero in 2005 to 7,800 in 2015, with forecasted numbers reaching 37,000 in 2018. In the period between 2010 and 2015, the number of people working in co-working spaces increased from 21,000 to 510,000. In line with the number of co-working spaces being established around the world, it is expected that the number of companies and workers making use of a co-working workplace will only increase in the years to come.

Prepare for the future

It is important to note that co-working solutions are not limited to small companies, startups, freelance workers or entrepreneur-focused working environments only. The trend is also impacting how large companies look at their workplace solutions and general real estate management. In several jurisdictions, notable companies such as IBM, Microsoft, KPMG, General Motors, Samsung and HSBC are already incorporating co-working as part of their business strategy.

The exponential growth of co-working spaces and companies offering co-working services around the world should not be ignored in considering the future of the real estate office market. New demands from tenants and office users force landlords to adapt accordingly if they want to compete in the market. Thus, landlords who do not take co-working into consideration run the risk of being left behind in the stiff competition for future prime tenants.

Legal challenges

"It is crucial to engage management and personnel with the required knowledge of how to create an attractive co-working environment."

From a legal perspective, co-working is typically arranged through a co-working management entity that in turn licenses or subleases parts of the leased premises to the end user. The co-working management entity will often be the tenant, but can also be the landlord or a third party company managing a co-working space separately. In theory, the end user can be anything from a single freelancer who only comes in to use a desk occasionally, to a complete location office with several hundred workers from a multinational Fortune 500 company.

In recent years, the co-working community has seen a rise of multi-site and even multinational co-working management entities. Companies such as WeWork, Impact Hub and Regus now offer seamless co-working solutions in several countries around the globe. For premises managed by one of these multi-site chains, the end user will typically enter into a membership agreement, almost like a gym membership, where the user will pay a corresponding membership fee. The end user may then, depending on the company and membership fee, etc, use the premises for work, networking activities, classes, special events, day passes, access to other premises within the multi-site network and so on.

This means that a wide range of potential contract parties, occupancy alternatives and agreement structures may be applicable, depending on the circumstances and jurisdiction. This opens up both challenges and opportunities for the market players involved. Discussed below are just a few examples of issues that must be handled appropriately from a legal standpoint.

A landlord will normally want to establish a consent requirement in relation to the arrangements that a tenant might contemplate in regards to the co-working premises. If a tenant is considering subleasing or licensing deals as the primary commercial use of the premises, the landlord and tenant should address all relevant details in the lease agreement. These include, but are not limited to, landlord consent, approval of terms between the tenant and the end user, adequate indemnities and warranties, insurance, limits on use, minimum space requirements per user, services, maintenance, termination rights.

Where space is not clearly divided between each end user, concerns as to compliance with law, confidentiality and security should also be addressed. Other issues that the landlord and tenant must deal with include compatibility between the different end users within the building, relationships among other tenants and end users, compliance with state and local regulations, and clarity as to the use of and access to common areas in the building.

"Perhaps the most important step is to create a place and network that the users want to be a part of."

It is equally important that the use of space by the tenant and the end user is clearly regulated and defined in the agreement. This includes space that may be used exclusively by the end user, as well as space that will be shared between several end users. How and when the shared space may be used, and how the costs of the shared space is allocated among users, should also be clearly regulated in the agreement. Issues concerning the treatment of confidentiality and intellectual property may also be important topics for end users.

To avoid disputes over property damage liability, the agreements should also define the ultimate responsibility for the space, including any movables or equipment. To ensure certainty for all parties, it is recommended that the co-working management entity obtains all necessary consents required by the landlord, lenders or other third parties prior to entering into end user agreements for the premises. Without such confirmation, the continuing validity of the end user agreement could be at risk should the landlord, lenders or other third parties object to the agreement.

Action points

In order for companies to use the co-working market to their advantage, certain elements must be present. The first, perhaps most important, step is to create a place and network that the users want to be a part of. Compared to traditional office leases this means an increased focus on social aspects, the mix of people in the building, flexibility, modern solutions and the general well-being of the user.

Second, it is important to note that a large part of the income from co-working arrangements comes from additional services offered to the users outside of the occupancy itself. These include services such as events, food and drinks, classes, speeches, insurance cover, business mentoring, among others.

Most real estate investors are not currently set up to compete with the large and already established multi-site and multinational co-working entities on these type of arrangements. To compete efficiently in the co-working market, and to create an environment where co-working becomes financially viable for the landlord, it is crucial to engage management and personnel with the required knowledge of how to create an attractive co-working environment. This is key if the premises are to attract the necessary number of users. This knowledge is not usually immediately available to a passive financial real estate investor with no, or only a small, management team. One strategy that is often used to compensate for this is that the landlord remains a passive owner and enters into an agreement with an already established co-working company. This gives the landlord the opportunity to participate in a rapidly growing market, whilst providing security and less risk.

The big question

The all-important question is: where will the potential for return and growth in the real estate office market gravitate in the future? It could be that the greatest potential lies with ownership of the infrastructure, that is, in the real estate itself, but it could also be that ownership of the end user will become equally key. It is submitted that it is wise for both current and future real estate investors to reflect on this question and to adapt their business strategy accordingly.