Photo: WeWork University Park
Consider this: over 10,000 coworking spaces across the globe will be open by the end of the year. Over the course of the past two years, coworking spaces have increased the number of members by nearly 50%, with the vast majority of members—around 80%—planning to remain in coworking spaces the following year.So what is coworking? What are the origins and where does this new office option fit in the world of commercial real estate?
Coworking, Evolving Through the Years
Coworking spaces are evolutionary beings: over time, these spaces have evolved from singular executive suites into open work spaces, reminiscent of the funky, amenity-rich offices of tech giants like Facebook and Google. They have conference rooms, lounge space, colorful design, fully-stocked kitchens, and office staples such as printers and supplies.
The original iteration of coworking spaces started with executive suites, which were leased by small law firms, remote sales offices and other small professional service firms who needed a home base with someone to answer the phone, a conference room to meet clients and a business address for mail delivery.
With the dawn of free wifi and improved portable technology, many startup companies, sales teams and freelancers began to opt out of structured workplaces and into less traditional office structures–coffee shops, internet cafes and the like. Companies enjoyed the versatility and flexibility that came with telecommuting–workers could independently work from home or, alternatively, collaborate with peers in coffee shops.
The modern day coworking space encapsulates the value brought forth from both of these predecessors. They offer plentiful open areas for the exchange of ideas, conference rooms and thought leadership workshops as well as the amenities of a classic office environment, such as a dedicated workspace, secure networking, and a place to meet with clients. From stocked kitchens to abundant open areas where workers can meet and collaborate with friends from other companies, these spaces embody the unique offices that creative minds grew up dreaming about. “Free” advice is rampant throughout the coworking office, and CEOs from companies in similar stages can sit side-by-side and strategize about the next big steps for their businesses.
Not Just Startups
While we typically think of these coworking spaces as full of small start-up companies, a number of national and international firms have taken space in them across the country. Dell, attracted by the opportunity for a collaborative environment in which to test and develop new products, rents desks at coworking outfits in Miami, Chicago, and NYC. General Electric utilized coworking spaces in Boston to temporarily house Current, its new energy services company, during its relocation process. Advisory firm KPMG currently leases 75 desks at WeWork’s Manhattan space. In Austin, AQUILA’s own national client rented a coworking space for a year in order to test the market before signing an 8+ year traditional lease.
Several factors facilitate the movement of large companies into coworking spaces. Interest in testing a new market, offering an alternative to employees who don’t live near a corporate campus, and situating a certain branch or division of the company in a collaborative and creative atmosphere are just some of the reasons major brands seek coworking spaces.
What is the take away for brokers here?
From a real estate perspective, coworking companies have introduced a new type of credit tenant that pose low risk and long-term leases to landlords. These coworking spaces can then turn around and offer prime class A office spaces to the smaller, high risk tenants on a short-term basis. The flexibility of these spaces allow the tenants to easily grow, move or relocate.
To visualize the potential savings for a tenant using a coworking space, AQUILA created the model below comparing the growth of a company using a traditional lease structure versus that of a coworking arrangement. In this particular example, the tenant starts out with 100 employees and is projected to grow at an annual rate of 25%. Because landlords traditionally only allow tenants to take spaced base on what is available in the building—sometimes in 5-10 thousand square feet per year increments—there is the potential for large amounts of wasted space as the tenant grows. This traditional lease expansion scenario is represented by the red lines. The light blue lines represent the coworking expansion scenario. Because the tenant can flexibly lease desks as they need them during their expansion period, they greatly minimize the unnecessary space they’re paying for, as represented by the shaded area.
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The overall flexibility available through coworking options opens up a whole new potential for the commercial real estate world, both for tenants and landlords, and the potential is quickly being realized: coworking is now amongst the fastest growing segments of landlords. From the tenants’ perspectives, gone are the days of planning your space needs years at a time. Instead, you can simply add the cost of a desk to your per-employee cost as you grow. Not to mention, coworking spaces are outfitted to handle the IT needs and in-office amenities of companies of any size, so day-to-day operations can be focused on developing and selling products and services. For traditional landlords, coworking spaces should not be seen as a threat to their spaces. Instead, consider them as places for your future tenants to grow and incubate before they are able to sign a long-term lease in your properties, thereby increasing their value while minimizing your exposure to signing short-term low-credit tenants.
Photo courtesy of WeWork