Coworking isn’t a trend. It’s a paradigm shift,” says Maureen Ehrenberg, global head of Real Estate Strategic Services for WeWork. One, she notes, building owners and managers are finally warming to.
“It wasn’t long ago when landlords couldn’t quite get their head around the model,” she continues. “Today, they’re the first to say it has changed real estate, and the model isn’t going away in this sharing economy. It reflects the new culture of work.” In fact, building owners and operators are dipping their toes into the coworking waters and growing their own brands in an attempt to get a piece of a pie that’s built, ironically, upon the very spaces they own.
COMING TO TERMS
“Coworking” has become the sort of informal term for the entire movement. Under that umbrella are such derivatives as flex or incubator space, hot-desking or even executive suites, each with its own focus. Wording aside, the common thread is space on demand or space as a service, as opposed to the traditional leasing position of space as a product.
As provider Knotel explains it (though note that not all coworking firms share the same take on the subject): “In a nutshell, flexible office means managed space for one company and one company only, in that company’s brand and tailored to its preferences. Compare that to coworking spaces, which house individuals and smaller companies in spaces that reflect the branding and preferences of the coworking operator.” Got that?
Missing in this definition is the key emphasis by virtually all providers on the sense of community they foster in that shared or managed space. And the range of amenities, which can stretch from fitness centers and (of course) coffee to the barest of bare-bones offerings.
OF STUFF & STAFF
Whatever the term, this growing stuff-on-demand culture is an important driver of the coworking movement.
But, it doesn’t stand alone. Consider also the escalating cost of real estate (see the “Coworking by the Numbers” sidebar, above), the reluctance of startups to commit to longterm leases before their model gels and the ability of larger occupiers to swell or shrink their ranks as market need and economic dynamics dictate. The growing number of employees who are becoming gig workers—staff-on-demand—also fits the model nicely.
As do recent changes—or “upgrades,” as the Financial Accounting Standards Board euphemistically puts it—to lease reporting rules, putting all leases (including that of equipment, by the way) on the books.
“New accounting regulations requiring firms to disclose real estate lease obligations will increase the visibility of a firm’s real estate strategy,” says Colliers International in a recently released study. “These changes should benefit the flexible workspace sector, compelling companies to take less core space than with traditional long-term leases.”
No wonder commercial real estate research source Yardi Matrix points to an impressive trajectory for the sector. The current drop-in-the-bucket 1.7 percent of the entire U.S. office inventory that coworking represents should swell to 30 percent by 2030, they predict.
The two major players in the market are Regus and WeWork. At midyear, Yardi Matrix put the Regus portfolio at roughly 900 units. Ehrenberg says WeWork was at 625 and growing. “Our brand is strong and our workplaces are highly in demand,” she says.
Yes, the firm hit some much-publicized heavy weather last year that caused ripples throughout the sector. But, prime investor SoftBank has since injected more capital into the model—a clear vote of confidence—and a new WeWork CEO, Sandeep Mathrani, comes with a serious real estate pedigree. Both bode well for the company’s future.
SPACE FOR EVERY NEED
The explosion of coworking has created markets for virtually every need, and sites today can cater to attorneys (Chisel); women (The Wing and The Coven); and startups (Emerge212). Others, like WeWork and relatively new entrant Hana by commercial real estate giant CBRE, cover a broader waterfront, with the major emphasis on regional to global concerns.
“We average 50,000 square feet,” says Hana CEO Andrew Kupiec. “We’re looking at units as small as the high 20s up to 90,000 feet.” And, at least for now, “we seek locations in the top 25 global markets.” To date, Hana has eight units, three in the United Kingdom and five in the United States.
It’s a small portfolio, but stay tuned. In terms of growth, “we’re working with owners on the supply side and occupiers on the demand side,” he explains, “and that will dictate our rollout plan.” He adds that the sweet-spot percentage in a typical building is 20 to 25 percent coworking to traditional space.
Not every major-market asset can pass coworking muster. “Some floorplates won’t work well,” says Ehrenberg. “Considerations like the building location, access to public transportation, building systems, building infrastructure, the number of elevators, the availability of natural light and air quality are all very important contributors to productivity and wellbeing. We also look at the overall market and its potential for coworking.”
Finally, it’s also a matter of the building owner’s vision, she says: “Do they want the building to offer coworking, and, if so, in what capacity?”
GROWING THEIR OWN
Some building owners answer that question by creating their own coworking spaces. Last year, Tishman Speyer unveiled Studio in the Washington, D.C., market, and in the retail sector, Macerich is partnering with provider Industrious to bring incubator space to its malls. WeWork and Hana also will work with owners to “white-label” their own concepts, although doing so, says Kupiec, masks the significance of aligning with a growing brand backed by globally recognizable CBRE. But not all Hana installations are in CBRE properties. In fact, fewer than half are.
Not so with SharedSpace. The company, launched in 2016, is the brainchild of Daniel Levison, managing partner of building owner CRE Holdings.
“I could go to other buildings,” he says, “but, honestly, I’d prefer to do it in buildings we own. If one of my tenants has to contract, or they can’t grow because the neighboring tenant still has six months left on their lease, I can accommodate their needs in my swing space. These are things that build loyalty.”
He is upfront about the degree of amenitization in his coworking spaces. While there’s plenty of conference room space, the furniture is fairly basic. (He does offer all tenants occasional treats, such as Waffle Wednesdays, to ramp up the community factor.)
CRE Holdings has a small portfolio, roughly 175,000 feet in and around Atlanta. Levison is currently looking in other markets, like Memphis, Tennessee, and Birmingham, Alabama. His acquisition strategy is value-add, which gives his coworking operation a very different profile.
“We look for markets with higher vacancy rates, 12 or 15 percent, and buildings that can benefit from capital improvement,” states Levison. “We can dedicate 8 or 10 percent of the building to SharedSpace.” Counterintuitively, the elevated vacancies feed the coworking model. “When vacancy in a market is higher, coworking is beneficial for startups, as well as existing companies that need to avoid the risk of a long-term deal.”
There is little investor overlap between SharedSpace and CRE Holdings, one very much treating the other as a client. And, here, Levison employs a growing approach to landlord relationships: partnerships.
“In a traditional lease that most coworking providers have, the owner will give you free rent or TI [tenant improvement] dollars to get the space built, but they won’t give you both unless you’re a partner,” he says. “We have to share the risk and reward. Otherwise, the dynamics work against us.”
For third-party providers playing in the global market, landlord agreements are a bit more flexible, as WeWork’s Ehrenberg points out. She says that, again, the specific agreement is based on need, market and which services the owner chooses from their broad menu. “It depends on what the landlord wants to offer based on their understanding of the needs of their existing tenants, as well as how they’re looking to position the asset overall in its market.”
Hana’s Kupiec agrees: “We take the heavy lift and can structure our deals to fit. But, we approach our partnerships as increasing the tenant experience and, ultimately, increasing the overall value of that asset or portfolio,” implying more of a shared-risk scenario.
Whatever the arrangement—indeed, whatever the specific type of space, as Ehrenberg notes—coworking done right, “with the proper design, environment and community and the necessary amenities, is a highly curated experience. It’s designed to provide companies the opportunity to be more flexible and adapt more quickly to their business needs. This enables a highly productive use of the right spaces at the right time, and enables their employees to improve work performance and to better enjoy what they’re doing.”
As Ehrenberg said earlier, coworking is a paradigm shift. Which means that, for building owners, it’s more than just an option. It’s a matter of remaining relevant.