The shared workspaces market in Israel is one of the current hot trends in the office space market. The pace of growth is still at its height, and profit margins in the sector are still higher than normal, meaning relatively high in comparison with the risk. Economic theory therefore dictates that the high profit margins will bring ever more competitors into the market, who will increase the supply and cause a gradual decline in prices until the number of players in the market stabilizes and profit margins converge to a normal level. The obvious question is therefore whether the sector is still a red-hot business opportunity.
High churn rate
The labor market has been turbulent in recent years. Among other things, the proportion of self-employed workers is rising, creating strong demand for shared workspaces. There were 1,130 shared workspaces with 43,000 members worldwide in 2011. Today, the number has risen to 13,800 shared workspaces with one million members - a weighted annual growth rate of 50%.
Israel currently has over 40,000 square meters of space classified as shared workspace (200 sites with an average space of only 200 square meters each). Most of them are located in the central region, but quite a few have arisen over the past year in other areas in Israel, from the north to the south. In the Tel Aviv area, which contains the most sites, there are 72 shared workspaces.
There are 14 shared workspace sites in Jerusalem, 10 in Ramat Gan, nine in Herzliya, eight in Rishon Lezion, seven in Ra'anana, five in Netanya, four in Beer Sheva and three each in Or Yehuda, Binyamina, Bnei Brak, and Rehovot. 25 other cities have one shared workspace site each, among them Givatayim, Hod Hasharon, Rosh Pina, and Arad.
Competition in the market is already fierce. The two largest companies have 15% of the market, and 65% of the players in it have only one site each. The leading chain according to the number of sites is Regus with 13 shared workspace sites, including five in Tel Aviv, followed by WeWork with 10 sites, five of which are in Tel Aviv. Merkspace has four shared workspace sites, all in Tel Aviv. OpenValley, Mindspace, Netgev, PICO Group, and Sarona Space have three sites each, and all the other shared workspace companies have one or two sites.
Revenue from shared workspaces comes mostly from renting out offices and workspaces. 20% of revenue comes from renting out meeting rooms, 5% from sales of food and beverages, 8% from participation fees for workshops and events, and 3% from miscellaneous sources. There are sites that also rent out parking spaces, or which include parking in the rent for offices and workstations as a customer service.
The market features a high churn rate. 80% of the leases are for one month with an extension option; only 20% are for longer periods of several months or a year in advance.
At least 1,000 square meters
What about profits? We have constructed a generic model that calculates the return on an investment that includes several variables and makes a number of assumptions.
The main assumptions were the initial investment to adapting the area - NIS 3,000 per square meter, length of the company's lease for its area - 10 years, occupancy rate - rising gradually to 85%, revenue per station per month - NIS 1,700, and rent - NIS 65 per square meter per month. A site located in a central urban area is worth the same as the second circle around Tel Aviv.
The results of the model indicate that it is difficult to make and sustain a profit on workspaces with an area of up to 600 square meters (half of an average floor). In order to attain a return justifying the risk of opening of opening a shared workspace, a site with 1,000 square meters or more is needed; according to the model, this will yield a 15% return. On a space of over 2,500 square meters, the improvement in the marginal return per square meter is insignificant.
In the bottom line, the main tips for developers considering an entry into this sector are to act quickly and get in ahead of other players. If the area is rented, it is best for the lease to be for as long a period as possible, with an extension option, because the initial investment in setting up workspaces is significant. If the developer owns the site, the space should be planned in modular fashion, which will make it possible to make changes relatively easily after a few years.
A space should be positioned in order to make it stand out above the competition. One possibility is having it appeal to a specific market, or giving it a special design style. In addition, it should provide added value for tenants - happy hour, cheese, and Kabalat Shabbat are no longer enough. Creativity should be exercised with diverse possibilities that will enable customers to develop their businesses, such as meetings with consultation companies, professionals, investors, etc. In the long term, the shared workspaces market is likely to continue generating large returns from office rentals, mainly due to the added services that it provides and the operational aspect of the business.
Forecast: Special niches, fewer players
It appears that the shared workspaces market is definitely here to stay, at least in the short and medium term. Many resources have been invested in the workspaces that have been opened so far, and the use of them as shared workspaces will be the most profitable use for at least 5-10 years.
The market will probably experience ups and downs, and will be affected in general by the state of the market and business turnovers. In the end, however, the trend will become integrated, and will become an integral part of the conventional offices market. The growth rate in it will moderate and converge to the GDP growth rate. At some stage, a price war is possible, leading to plunging prices and a reduction in the number of players. At this stage, we expect to see a trend towards integration and mergers between companies.
Another possible direction that the market could develop in is the creation of special spaces for specific industries or sector. "The Wing" shared workspaces site was established in the US in October 2016 for women only. The idea won few admirers; it was believed that it would close down within a short time, but the site now already has 1,500 companies.
It appears that in an era in which the travel time to work will only increase (and certainly in traffic-jam plagued Israel), many companies will search for alternatives through which they will be able to provide their employees with an excellent work environment near where they live. Even large and well-established companies are adopting the model, and are moving their employees to shared workspaces in order to absorb the energy and the special spirit of innovation there.
Many companies do not take full advantage of the space in their offices because of workers who travel outside the office or other reasons, and many companies therefore realize the inherent potential in the shared economy in order to save on costs and improve the level of service that they provide.
Moti Dattelkramer is head of corporate finance at BDO Consulting Group Israel, and Rotem Silberberg is principle of real estate for the company.
Published by Globes [online], Israel business news - www.globes-online.com - on April 15, 2018
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