Leasing Commercial Space for New Uses

THE BOOM AND BUST OF THE COWORKING MARKET HIGHLIGHTS THE RECENT EVOLUTION OF THE REAL ESTATE INDUSTRY TOWARDS NEW PRODUCTS WITH A HIGHER SERVICE COMPONENT

by Giacomo Morri and Paolo Benedetto, SDA Bocconi School of Management; Bocconi Department of Finance
Translated by Alex Foti


The macroeconomic shocks inflicted by the 2008 economic crisis, new digital technologies and recent social changes have contributed to the emergence of new types of properties that respond to the changed work, life and travel needs of people and companies. The aim is to guarantee users lower usage costs and, above all, greater flexibility. New operators have emerged offering real estate services aimed at creating global communities of digitally interconnected users in world cities. Here are some examples of global and local operators in various segments.

The Student Hotel, a Dutch group that arrived in Italy with the opening of TSH Firenze Lavagnini in 2018, offers spaces for student housing, hotel accommodation, co-working, and other services such as bars and restaurants.

DoveVivo, a company active in the co-living sector, which manages around 1,200 apartments owned by 450 different landlords offers individual rooms or beds in sub-leases. In July 2019 it raised funding for €72 million for further national and international expansion into the student housing segment.

WeWork (today WeCompany) has been the major player in the co-working market segment. In several cities around the world, it is the first surface conductor and although its IPO has faltered in the U.S, it is planning its first Italian opening in Milan in 2020.

Talent Garden, present in eight European countries with 23 campuses. Among other services, it offers co-working spaces dedicated to freelancers, startups, companies and large companies working in IT. In March 2019, it raised €44 million to expand its campus network and expand its Innovation School.

New types of real estate also mean new potential value drivers and the need to understand the principles and the correct techniques to estimate the value of these assets. As for any other company, also in real estate the value of assets depends on the product supplied to the market, i.e. the use of space.

These new types of real estate assets are characterized by a greater service component and the presence of a managing intermediary, such as in the hotel sector. In fact, commercial real estate is shifting from a classic ownership and user model to a model where a manager is interposed. This way, traditionally fungible properties such as office and residential buildings become trade-related properties. The activity performed inside becomes fundamental for the sustainability of the rent, since value, and therefore price, of the space is linked to economic performance of what goes on inside it and tends to be proportional to it. In other words, it becomes essential to analyze the sustainability of the cost of space for the manager, which in turn derives from an analysis of economic sustainability of the business which settles there.

In conclusion, the evolution of real estate formats creates new challenges to an understanding of the dynamics of value formation and, consequently, in corporate valuation. Buildings are increasingly similar to complex companies, where economic results are strongly influenced by active management. As with any other building, however, the principles and techniques for estimating the value of assets cannot but find their foundation in market prices.