The commercial real estate industry is undergoing massive structural change through a concept known as space-as-a-service. Space-as-a-service (SPaaS) is a paradigm shift in the way in which the commercial real estate industry has provided products and services to tenants and has changed the role of commercial landlords from rent collectors to service providers.
Co-working, co-living, and now a retail concept called “brandboxing” are all examples of the SPaaS business model, in which landlords essentially provide a suite of services that enable tenants to easily utilize the space. That entails everything from digital connectivity to furniture, fixtures and even the staffing required to operate their businesses.
While WeWork, the largest lessee of commercial office space in New York City, did not invent the idea of space-as-a-service, its tremendous success has undoubtedly been an impetus for changing the way the industry looks at the tenant-landlord relationship says Michael Beckerman, CEO of CREtech.
“By bringing SPaaS to the office sector of the real estate industry, suddenly, everything was now up for discussion: lease terms, space form and function, and even running office spaces more like hotels than those traditional sprawling offices of the 1950s. Those same landlords who once ridiculed WeWork’s business model, giving it a laughable ‘unicorn status,’ are now actively competing for SPaaS enterprise tenants,” Beckerman said in a recent blog post.
Technology drives shift to space-as-a-service
SPaaS is a byproduct of a set of technology-enabled structural changes in the CRE marketplace. Technology is paving the path for fundamental changes in how businesses operate, how people work and live and where they do it. The greatest enablers for this transformation have been the exponential growth of high-speed connectivity, ubiquitous use of smartphones, the proliferation of cloud computing and IoT devices and the adoption of artificial intelligence and robotics. Together, these technologies are re-shaping the way in which we as a society and workforce use and occupy space.
Space-as-a-service disrupting residential real estate markets
While the SPaaS model has led to WeWork’s tremendous success, the next significant evolution — co-living, or the sharing of living quarters — is just beginning. Co-living is expected to become the next big disruptor in the multi-residential real estate markets in dense urban areas, where high rents and high cost of living make it financially attractive to share living quarters with strangers at all-inclusive rates under short-term agreements.
Co-living startups Common, Ollie and WeLive (the co-living offering by WeWork) are are making strong headway into multi-family residential markets, and investment in the sector has been increasing at a dramatic rate. Most recently, Property Markets Group (PMG), a venture capital firm which launched its own co-living business, X Social Communities, announced that it has committed $300 million in equity and said it plans to take a cannibalistic approach towards the apartment sector.
Retailers adopting space-as-a-service
Retailers both large and small are moving to embrace the space-as a-service business model. PropTech startups Fourpost and BrandBox, are transforming the traditional retail model by adapting the co-working concept to retail through a concept dubbed “brandboxing,” which offers flexible terms and all-inclusive set-ups to online retailers to test and scale their products in local malls across the U.S. The Mall of America and West Edmonton Mall, owned by Macerich, a self-managed Real Estate Investment Trust, are both piloting the SPaaS model in their properties this season.
What does the shift to space-as-a-service mean for CRE landlords?
For commercial real estate landlords, whether in retail, office or multi-unit markets, this transformation has changed their fundamentals from the provision of real estate to providing service, data and branding. In the future, the value and success of CRE landlords will be dependent on building “user experiences” (UX) around their physical assets. Landlords will need to think creatively about ways to use data analytics, to better understand their occupants and customer journeys within the context of how they engage with the physical asset or building.