Peer-to-Peer Networks

Using Vacant Space

There is likely no industry with more potential idling capacity than commercial real estate. In the industry, we are used to this idling capacity (we call it “vacancy”) and, no matter how healthy our markets or portfolios, we always have some of it. While we first look to vacancy as a trailing indicator of the health of a marketplace, we, as industry professionals, rarely focus on truly new and innovative ways to go about actively reducing it. We constantly blame the state of things on “the market” ' one that is beginning to move more slowly than the frequency and number of trades within it.

Fortunately, however, others are innovating around us. The tech sector, despite multi-million dollar valuations, IPOs, and seemingly endless venture capital, is today the most highly conscious of the high costs of office occupancy, and most sensitive to the need for flexibility and choice in their real estate needs. These occupiers have quickly adapted to inherent market inefficiencies in commercial real estate. The result has been a trend in occupying, designing, and ultimately paying for space in new and innovative ways. The same individuals who share rides to the office and use Airbnb when traveling for business are sharing office spaces ' or more particularly, renting or subscribing to just the spaces they need for their people, and sharing the resources they cannot otherwise afford. They are co-working, or time-sharing a traditional office environment.

This occupier trend cannot be ignored. In the last four years alone the number of co-working spaces worldwide has doubled year over year. In 2013, an average of three co-working spaces opened daily in 81 countries. See, Deskmags Co-Working Timeline. Co-working, incubation and special-use spaces are quickly growing to become local office occupiers that are garnering the attention of the commercial real estate business. Take 1776dc.com, an incubator and co-working space that was opened in early 2013 in Washington's central business district by two locally successful entrepreneurs, Evan Burfield and Donna Harris. Within the first six months of operation, 1776 doubled in size to 30,000 square feet ' adding more seats, special-use areas, private offices and even classroom space (which were then sub-sublet to General Assembly, a coding school). Meanwhile, uncertainty in the economy and business climate has caused a significant reduction in the lease terms and occupancy footprints of the typical occupier in major markets, Washington, DC, included, where lease terms have shrunk 25% in just five short years. See, JLL Research.

An Evolutionary Concept

Despite its popularity and innovative companies within the spaces, however, co-working is still evolutionary, not revolutionary like some of the aforementioned models tapping unforeseen economies of scale. Co-working operators are simply master-leasing space for substantial lengths of term and relying on the network effect to sublet their space for a profit, often very efficiently and with little to no risk or downtime (WeWork.com, which has quickly grown to 16-plus locations in 24 months, is an excellent example). Some might argue there is no appreciable difference between the co-working and the “executive suite” model (including third-party solutions like Regus, Servcorp, Metro Offices and HQ, as well as space that is built, serviced and operated by landlords themselves in their own buildings such as Carr Workplaces and PowerSPACE), but for the design of the spaces within them, and the recent meteoric growth in size and scale of the former. Either way, the real winners end up being the co-working and shared space operators, who are essentially savvy sublandlords ' aggregating, commoditizing and up-charging large market rate swaths of space to those seeking more flexibility and less space.

Digging deeper, however, one might conclude that the recent rise of co-working signifies a much larger trend in how occupiers are thinking about space, and a potential enormous backlog of spaces that could, and should, be made more readily available to these new, nimbler tenants ' beyond even just tech and creative tenants. This would certainly include occupiers from any industry sector that are simply looking for cheaper, more flexible space, whether a smaller company with little structure or capital, an established company looking to test a new location in a new market, a contractor requiring a specific type of space in short order only in a particular location for only a particular period of time (let alone spaces that could easily be utilized for disaster recovery or risk mitigation).

It is no surprise that the rise of co-working closely coincides with the most recent financial crisis, and the rise of the “knowledge worker” in an increasingly disaggregated global economy. Could there be a model that effectively offers most or all of the benefits of these “big box” flexible space retailers ' well-located, upgraded space, typical office amenities, property insurance, and even community, but on a hyper-local, on demand, almost ad-hoc basis? More specifically, could you devise a peer-to-peer marketplace to facilitate the connections, interactions, and transactions required to deliver the same type of space that is being “manufactured” by coworking, executive, or even “spec” suite operators virtually anywhere there is idling capacity, anywhere there is under-utilized office space? Could we get more of the “right” space on the market, or market it in such a way as to achieve better product-market fit with today's occupiers?

The answer is yes, and there will be a platform and exchange developed to encourage individual bartering of office spaces, and/or specific components within them ' from seats to suites ' between landlords and tenants, but in a manner that will create needle-moving value to space owners, both landlords and sublandlords alike. We just need to take the evolution that has occurred one step further.

The Right Space

We can already see the rising success of desk-licensing, or co-working management software like sharedesk.com or desktime.com, whose goal is to help freelancers find the best co-working space or desk-licensing option; or liquidspace.com, which aims to fundamentally change the way we work by facilitating the right physical connections with the right people virtually anywhere within a company's portfolio or the world around it. However, while these platforms deliver a tremendous amount of value, these solutions still require a “host,” such as a co-working operator, a corporate occupier, or someone with extra room in their leased space to deliver value. They are merely speeding up the evolution that is already occurring.

The new paradigm will support new occupier strategies that are trending in today's marketplace, and translates them into a more traditional format ' from the dollar values sought, to the documentation, even down to the insurance that allows one to occupy virtually any commercial space. This new technology platform will leverage the requirements that are under-served in the marketplace, and the connections between them, to unlock real value; value to the landlord, or sublandlord (the acceptable rent dollars), and the opportunity to create even more value (for the occupier). This is the same type of value that allowed Henry the homeowner to pay off his house with his treehouse. In this way one will not manufacture the space, or the experience of a flexible work arrangement. The new commercial leasing paradigm will move either individuals, or groups of already-connected individuals, toward collective action to rent the space that makes the most sense for them individually, but delivers the most value in a more traditional sense.

Similar to the efficiencies of other peer-to-peer networks, space owners can compartmentalize their unused space ' whether a floor, a suite, or a grouping of seats (or other resources) ' by location, time, unit price, and total rent desired and offer it directly to the market nearly immediately. Now, owners of space that had been unavailable but for an “all or nothing” situation, where only a perfect or near-perfect fit yielded a transaction, can access formerly untapped networks of individuals and small companies to manufacture the perfect fit. The fit is not necessarily just about the space itself; it can encompass complementary requirements previously unknown to the potential tenants.

For example, a digital marketing agency and a more traditional PR company can share space and add value to both companies. Or, going by usage, a company that needs mostly open space but a few offices can share a larger space that is 80% open and 20% perimeter offices with a more traditional firm. Another example would be a VC, angel or group of private investors and several companies they have invested in or advise. Or, perhaps, in the case of attorneys, it might be a group of sole practitioners who have different but complementary focuses and are open to some collaboration. The idea is that these aggregates could occur on Day One in a fully vacant space with full control of the occupants, rather than a master leased space with less control.

Moreover, this new commercial real estate technology will operate on emerging online peer-to-peer principles:

• Discovery (spaces are broken up, categorized, and marketed appropriately);
• Trust (documentation and review/approval is handled through the technology platform);
• Payment (deposits and rent are collected through the technology platform); and
• Transparency (landlord and prospective tenant information is openly visible to those that need to know).

If it catches on like the executive suites concept and co-working spaces, it could signal a new paradigm for the commercial real estate industry, and a potentially lucrative avenue for e-commerce. Stay tuned.

Alex Lassar is a Senior Vice President at Jones Lang LaSalle. Elizabeth Kluger Cooper, a member of the Board of Editors of our sister newsletter, Commercial Leasing Law & Strategy, is an International Director at the firm.

A widely repeated story concerns a man (let's call him Henry) who, on the recommendation of a friend, decided to list on an obscure apartment-sharing website called “Airbed and Breakfast” a very elaborate treehouse he originally built for his then off-to-college son. Today, Henry's treehouse is one of the more popular destinations on a marketplace that boasts over 250,000 properties in 192 countries (there is often a seven-week waiting list for the treehouse). In fact, Henry has since paid off the mortgage on his real house through the proceeds garnered through the Airbed and Breakfast site at www.Airbnb.com.

Airbnb is today a $10B company riding the wave of collaborative consumption, a closet industry that is the modern manifestation of traditional barter marketplaces. By tapping into the inherent efficiency of today's increasingly connected world, peer-to-peer collaborative consumption threatens to shake the pillars of traditional and institutional marketplaces and exchanges such as financial markets (peer-to-peer lending), automotive dealers (peer-to-peer car-sharing), and transportation (peer-to-peer ride-sharing such as lyft.com or uber.com).

Peer-to-peer e-commerce platforms seem to be popping up almost daily, touching nearly every vertical ripe for disruption, or at least providing just a little grease for the wheel. These software-augmented approaches to the simplest of individual bartering work on the principles of search and discovery, trust, payment and transparency. They eliminate waste and quickly create value on both sides by tapping into what's commonly referred to as “idling capacity.” This idling capacity, when discoverable ' and monetizeable ' has already built exchanges of significant value seemingly out of thin air (As mentioned above, Airbnb is valued at $10B; uber.com is valued at $3.5B; LendingClub.com is valued at $3.8B). To those of us in the commercial real estate industry, and the occupiers who spend a significant portion of their hard-earned revenue paying rent, the question is, could a peer-to-peer marketplace ever make our business more efficient, much less deliver eye-catching value to both landlords and tenants alike? We think the answer is yes.

Using Vacant Space

There is likely no industry with more potential idling capacity than commercial real estate. In the industry, we are used to this idling capacity (we call it “vacancy”) and, no matter how healthy our markets or portfolios, we always have some of it. While we first look to vacancy as a trailing indicator of the health of a marketplace, we, as industry professionals, rarely focus on truly new and innovative ways to go about actively reducing it. We constantly blame the state of things on “the market” ' one that is beginning to move more slowly than the frequency and number of trades within it.

Fortunately, however, others are innovating around us. The tech sector, despite multi-million dollar valuations, IPOs, and seemingly endless venture capital, is today the most highly conscious of the high costs of office occupancy, and most sensitive to the need for flexibility and choice in their real estate needs. These occupiers have quickly adapted to inherent market inefficiencies in commercial real estate. The result has been a trend in occupying, designing, and ultimately paying for space in new and innovative ways. The same individuals who share rides to the office and use Airbnb when traveling for business are sharing office spaces ' or more particularly, renting or subscribing to just the spaces they need for their people, and sharing the resources they cannot otherwise afford. They are co-working, or time-sharing a traditional office environment.

This occupier trend cannot be ignored. In the last four years alone the number of co-working spaces worldwide has doubled year over year. In 2013, an average of three co-working spaces opened daily in 81 countries. See, Deskmags Co-Working Timeline. Co-working, incubation and special-use spaces are quickly growing to become local office occupiers that are garnering the attention of the commercial real estate business. Take 1776dc.com, an incubator and co-working space that was opened in early 2013 in Washington's central business district by two locally successful entrepreneurs, Evan Burfield and Donna Harris. Within the first six months of operation, 1776 doubled in size to 30,000 square feet ' adding more seats, special-use areas, private offices and even classroom space (which were then sub-sublet to General Assembly, a coding school). Meanwhile, uncertainty in the economy and business climate has caused a significant reduction in the lease terms and occupancy footprints of the typical occupier in major markets, Washington, DC, included, where lease terms have shrunk 25% in just five short years. See, JLL Research.

An Evolutionary Concept

Despite its popularity and innovative companies within the spaces, however, co-working is still evolutionary, not revolutionary like some of the aforementioned models tapping unforeseen economies of scale. Co-working operators are simply master-leasing space for substantial lengths of term and relying on the network effect to sublet their space for a profit, often very efficiently and with little to no risk or downtime (WeWork.com, which has quickly grown to 16-plus locations in 24 months, is an excellent example). Some might argue there is no appreciable difference between the co-working and the “executive suite” model (including third-party solutions like Regus, Servcorp, Metro Offices and HQ, as well as space that is built, serviced and operated by landlords themselves in their own buildings such as Carr Workplaces and PowerSPACE), but for the design of the spaces within them, and the recent meteoric growth in size and scale of the former. Either way, the real winners end up being the co-working and shared space operators, who are essentially savvy sublandlords ' aggregating, commoditizing and up-charging large market rate swaths of space to those seeking more flexibility and less space.

Digging deeper, however, one might conclude that the recent rise of co-working signifies a much larger trend in how occupiers are thinking about space, and a potential enormous backlog of spaces that could, and should, be made more readily available to these new, nimbler tenants ' beyond even just tech and creative tenants. This would certainly include occupiers from any industry sector that are simply looking for cheaper, more flexible space, whether a smaller company with little structure or capital, an established company looking to test a new location in a new market, a contractor requiring a specific type of space in short order only in a particular location for only a particular period of time (let alone spaces that could easily be utilized for disaster recovery or risk mitigation).

It is no surprise that the rise of co-working closely coincides with the most recent financial crisis, and the rise of the “knowledge worker” in an increasingly disaggregated global economy. Could there be a model that effectively offers most or all of the benefits of these “big box” flexible space retailers ' well-located, upgraded space, typical office amenities, property insurance, and even community, but on a hyper-local, on demand, almost ad-hoc basis? More specifically, could you devise a peer-to-peer marketplace to facilitate the connections, interactions, and transactions required to deliver the same type of space that is being “manufactured” by coworking, executive, or even “spec” suite operators virtually anywhere there is idling capacity, anywhere there is under-utilized office space? Could we get more of the “right” space on the market, or market it in such a way as to achieve better product-market fit with today's occupiers?

The answer is yes, and there will be a platform and exchange developed to encourage individual bartering of office spaces, and/or specific components within them ' from seats to suites ' between landlords and tenants, but in a manner that will create needle-moving value to space owners, both landlords and sublandlords alike. We just need to take the evolution that has occurred one step further.

The Right Space

We can already see the rising success of desk-licensing, or co-working management software like sharedesk.com or desktime.com, whose goal is to help freelancers find the best co-working space or desk-licensing option; or liquidspace.com, which aims to fundamentally change the way we work by facilitating the right physical connections with the right people virtually anywhere within a company's portfolio or the world around it. However, while these platforms deliver a tremendous amount of value, these solutions still require a “host,” such as a co-working operator, a corporate occupier, or someone with extra room in their leased space to deliver value. They are merely speeding up the evolution that is already occurring.

The new paradigm will support new occupier strategies that are trending in today's marketplace, and translates them into a more traditional format ' from the dollar values sought, to the documentation, even down to the insurance that allows one to occupy virtually any commercial space. This new technology platform will leverage the requirements that are under-served in the marketplace, and the connections between them, to unlock real value; value to the landlord, or sublandlord (the acceptable rent dollars), and the opportunity to create even more value (for the occupier). This is the same type of value that allowed Henry the homeowner to pay off his house with his treehouse. In this way one will not manufacture the space, or the experience of a flexible work arrangement. The new commercial leasing paradigm will move either individuals, or groups of already-connected individuals, toward collective action to rent the space that makes the most sense for them individually, but delivers the most value in a more traditional sense.

Similar to the efficiencies of other peer-to-peer networks, space owners can compartmentalize their unused space ' whether a floor, a suite, or a grouping of seats (or other resources) ' by location, time, unit price, and total rent desired and offer it directly to the market nearly immediately. Now, owners of space that had been unavailable but for an “all or nothing” situation, where only a perfect or near-perfect fit yielded a transaction, can access formerly untapped networks of individuals and small companies to manufacture the perfect fit. The fit is not necessarily just about the space itself; it can encompass complementary requirements previously unknown to the potential tenants.

For example, a digital marketing agency and a more traditional PR company can share space and add value to both companies. Or, going by usage, a company that needs mostly open space but a few offices can share a larger space that is 80% open and 20% perimeter offices with a more traditional firm. Another example would be a VC, angel or group of private investors and several companies they have invested in or advise. Or, perhaps, in the case of attorneys, it might be a group of sole practitioners who have different but complementary focuses and are open to some collaboration. The idea is that these aggregates could occur on Day One in a fully vacant space with full control of the occupants, rather than a master leased space with less control.

Moreover, this new commercial real estate technology will operate on emerging online peer-to-peer principles:

• Discovery (spaces are broken up, categorized, and marketed appropriately);
• Trust (documentation and review/approval is handled through the technology platform);
• Payment (deposits and rent are collected through the technology platform); and
• Transparency (landlord and prospective tenant information is openly visible to those that need to know).

If it catches on like the executive suites concept and co-working spaces, it could signal a new paradigm for the commercial real estate industry, and a potentially lucrative avenue for e-commerce. Stay tuned.

Alex Lassar is a Senior Vice President at Jones Lang LaSalle. Elizabeth Kluger Cooper, a member of the Board of Editors of our sister newsletter, Commercial Leasing Law & Strategy, is an International Director at the firm.