WeWork, Airbnb, Common, Knotel, Sonder, Industrious, Starcity, Selina… All flexible, fast-growing, high-service space providers. All have emerged this decade and have made a noticeable mark on the way occupiers think about real estate. Which brands will emerge as winners or flame out through this cycle and the next is up for debate. The fact that space-as-a-service is here to stay is not.

Those in commercial real estate finance circles have debated for the last couple of years whether leasing space to WeWork makes an office building more or less valuable. WeWork has expanded its leasing footprint, revenue, and corporate losses rapidly in a bid to lock up market share in the category they successfully defined. A worry for landlords and financiers is whether those leases come with any meaningful guarantee if the economy suffers a downturn and coworking leases fall apart.

But leasing office space and subletting by the desk is not the only trend in the flexible space revolution. Traditionally, the high-touch, flexible space concept that was traditionally reserved for “hospitality” as a stand-alone asset class. Today, we’re truly seeing hospitality become a concept applied to all major asset classes of real estate.

Here we identify the five operating models of emerging flexible and high-service space operators. We’ll walk through them from most capital-intensive to least (from the space brand’s perspective).

Ownership

Investing in growth by buying properties outright is the most capital-intensive play that a potential space provider can undertake. It also puts them in direct competition with other landlords, potentially limiting their flexible space brand’s reach. But, this is also the simplest model, and the most akin to the traditional role of the landlord: own the building and provide space directly to the end tenant.

We’ve seen both large and small flexible space operators roll out high-service commercial and multifamily space this way over the last couple of years. Established landlords have also made forays into established branded or non-branded flexible, high-service portions of their buildings, though none have made enough of a dent to become nationally recognized — it’s more of a value-add to specific buildings already in their portfolio, rather than a way to scale.

We’ve also seen the rise in branded regional operators, some of whom are employing the direct ownership model to flex space. One such example is SharedSpace, who has successfully leased up three locations so far in the Atlanta market in a bid to become a top community coworking brand in the Southeast.

Master Lease

Next in line is the master lease. This strategy has been pursued by some of the co-living operators, as well as multifamily/hospitality cross-over brands like Sonder and Selina. In a master lease, the branded space provider promises to rent all available space in a building from the landlord for a predetermined price, and then rent it out to the end occupiers. This gives the brand the ability to arbitrage to make their money, and it also exposes them to the risk of losing that bet and losing money. The master lease may include more creative structures such as revenue-sharing, but the key idea is the brand being on the hook to rent out all the space from the landlord and then controlling the entire tenant experience.

Lease

The standard lease model has been heavily used heavily by WeWork, as the co-working brand usually leases only a portion of the rentable square footage of an office building. With the long-term lease in hand, WeWork builds out the space to their own branded design, and then rents it out to shorter term occupiers by the desk (either in open space or in private offices). WeWork does offer concessions for tenants to commit to longer than the minimum one month, so not all of their “tenants” are month-to-month.

The lease model can also include revenue sharing components.

Property Management

Property management agreements are the tool of choice for major co-living brands like Common (though they’d also dipped into the Master Lease category). As a property manager, most income is passed through to the Landlord who pays the brand for keeping the building full and happy. The tenant’s experience is largely determined by the brand, but without the brand needing to put up big-time cash for the building or even the build-out, which the landlord would be required to fund.

While revenue sharing may be an option here as well, the brand doesn’t expose itself to as much risk if the building doesn’t perform well financially, so the upside in this regard may also be more limited.

Branded aggregation

Branded aggregation has been the rapid-growth tool of AirBnB. The short-term stay brand neither owns, leases, nor holds any rights against the supply side of their marketplace. Rather, they have branded the booking and feedback experience of staying in someone else’s home, and added other services on top. This model has also seen growth in the pop-up retail market with platforms like StoreFront.

Branded aggregation is a classic play for online marketplaces that have experienced rapid scale, though it’s something relatively new to real estate. For those interested in learning more about this strategy, check out Brian Chesky’s episode on the Masters of Scale podcast, which is hosted by Reid Hoffman, founder of LinkedIn and investor at Greylock:

Brian Chesky - Masters of Scale

BRIAN CHESKY: Joe and I are broke. We're losing weight and I didn't have a lot of weight to lose. You know those…

mastersofscale.com

Coliving Video

Want to learn more about the emerging Co-living space? Check out this video of our interview with Sterling Jawitz, early Common employee and founder of VisionaRE Partners:

‍