Prospects for Coworking And Other Non-Traditional Leasing Models
To many, “coworking” means “WeWork.” But WeWork is only one of numerous coworking companies, and coworking itself represents only one subset of the larger market for flex space. Brokers would be wise to familiarize themselves with this market because, according to experts, it’s poised for enormous growth.
A COMPLEX MARKET
Ben Wright, the head of flexible office solutions, North America, for the commercial brokerage and marketplace SquareFoot, identifies no fewer than six categories of flex space, all of which offer shorter terms than standard office leases. The categories range from “agile suites,” which typically comprise 1,500 to 5,000 square feet and resemble traditional offices; to coworking space, which usually features large open formats with large tables and few private offices.
Adding to the complexity of the market is the presence of many players. “It’s an enormous, fragmented industry, and there are close to 6,000 operators in the world,” says Joe Brady, CEO, Americas, of The Instant Group, a workplace innovation company.
Many of these operators experienced major difficulties with the onset of the pandemic. When people stopped coming into the office, the operators lost significant revenue, and some had to shut down. Flexible formats with high density also suffered because of concerns about transmissibility of the virus.
Today the forecast is far rosier, thanks to the increasing popularity of hybrid and remote working models. Wright anticipates that flex space will comprise 30% of the overall office market by 2030. That’s not necessarily bad news for landlords, either. They may be able to enjoy a piece of the pie.
CONSIDERATIONS FOR LANDLORDS
At first glance, flex space does not appear to be a natural fit for landlords. Arlon Brown, SIOR, senior vice president, SVN Parsons Commercial Group in Framingham, Mass., offers a dual perspective. His company owns some office space, so he understands the landlord’s point of view as well as the broker’s. For a landlord, he suggests, the costs of creating space for short-term use may outweigh the benefits.
If you look at the economics of the deal with interest rates and the rising costs of materials, there’s not a lot left to amortize these improvements if it’s less than a five-year deal.
Brown explains that 15 to 20 years ago, it was easy to re-lease space with a traditional layout. Landlords simply had to repaint, recarpet, and possibly replace ceiling tiles. Now, in contrast, “every single tenant seems to want a different configuration, so you’re constantly refiguring. And if you look at the economics of the deal with interest rates and the rising costs of materials, there’s not a lot left to amortize these improvements if it’s less than a five-year deal.”
He adds: “If you’re leasing something for a year and the tenant is in it for six months and then you try to refinance, the bank’s not going to look at you.” Then there is the brokerage fee, which Brown in his broker hat appreciates, but Brown in his landlord hat does not.
John Adams, SIOR, first vice president of CBRE in Knoxville, Tenn., agrees that the upfront costs of buildouts can be high. But he believes that flex space is becoming more attractive to landlords in fluctuating markets where the future of the office is uncertain or where there is demand for shorter leases. Knoxville is a good example of the latter because of its proximity to the Oak Ridge National Lab, which many companies work with for a year or two on government contracts.
Adams also reports that landlords of buildings with many small spaces are having a tough time leasing them, and he’s not surprised. “For the most part, a 1,500-square-foot tenant is not going to sign a five-to-seven-year lease term and then go furnish the space,” he states. Flex space, in his opinion, may provide a reasonable solution.
Increasingly we see landlords and property investment groups create their own opportunity for flexible space offerings that cut out the middleman providers.
Some landlords are experimenting without the help of a specialty operator. “Increasingly we see landlords and property investment groups create their own opportunity for flexible space offerings that cut out the middleman providers,” says William O’Brien, SIOR, president of M.C. O’Brien, Inc. in Brooklyn, N.Y. A related trend is observed by Mike White, SIOR, broker in charge of Charleston Industrial in Charleston, S.C., who says some landlords are setting aside suites or dividing up larger open areas to accommodate “per desk, per day” pricing models.
Other landlords have embraced flex space not simply as a post-pandemic stopgap, but rather as a long-term investment. Brady and Wright both cite two leading landlords—Tishman Speyer and Hines—that have introduced their own flex models, each of which comprises a range of space types. If these models attract significant numbers of tenants in the post-pandemic market, competitors may follow suit. As Brady notes, “Landlords follow the money.”
Not everyone is optimistic about the long-term prospects for flex space. White expects the pendulum to eventually swing back to more traditional office models. Adams and his colleagues currently occupy flex space, and they are happy there, but he believes they will move to a more permanent location once their headcount is finalized.
Brown points out that some tenants of flex space may encounter unpleasant surprises when they start paying extra for conference rooms, printer use, and administrative help. “It’s like holiday shopping,” he says. “You see your credit card bill and can’t believe you spent so much money.” Demand may suffer as a result of these a la carte costs.
With flex space moving to be one third of the market, having knowledge of the market, the appropriate operators, pricing, and more is essential.
O’Brien, on the other hand, is impressed by the resiliency of flex environments and believes that they’re primed for growth as they adapt and cater to remote and hybrid work trends. Wright urges brokers to stay on top of the trends, especially because he’s seen “countless examples” of tenants using SquareFoot’s site-to-source coworking options while simultaneously working with a broker. “With flex space moving to be one third of the market, having knowledge of the market, the appropriate operators, pricing, and more is essential,” he says.
Brady concurs with the need for knowledge. In his opinion, the office market is at a profound inflection point. “There’s going to be more change in the next 10 years than in the last 100,” he states. “So the need for agility is even more important.”
John Adams, SIOR
Arlon Brown, SIOR
William O’Brien, SIOR
Mike White, SIOR