Coworking Spaces: The Developer’s Opportunity

Coworking space is an interesting, technology-driven phenomenon growing rapidly and is seen as an alternative to leasing office space. While the data is a little vague, the vast majority of coworking spaces are focused on independent consultants who seek a more social working environment with collaborative interaction. They are looking for a convenient, flexible, work conducive, space away from the home office.

Citizen Space in CA was an early example (photo from sharedspaces.eu)

These facilities are not typically subsidized by state or county tele-work programs, but most are for-profit ventures that offer a comfortable place to work for a few dollars an hour. They come with the amenities and facilities appropriate for doing business, meeting areas, coffee, wireless technology infrastructure, and often support.

For a small business just starting out with limited cash flow and — perhaps more importantly — limited credit, staff members (or independents) can rent a desk, an office, or a team area with no-long term obligations (usually). In fact, there are really no obligations. Some of these facilities operate 24 hours with a reduced cost for the night shift, thereby increasing flexibility.

From a developers perspective at first glace, this type of space could represent a risk or threat to typical office space. But on the contrary, this type of space represents a significant opportunity to help attract and keep tenants. It only requires a little bit of a different mind set.

Coworking spaces are not just for the small guys, and this is where the opportunity for landlords exists. Larger tenants and corporations are using this type of space as well because it serves their needs across a few important fronts:

  1. It provides highly flexile expansion space for rapidly growing companies.
  2. It provides a remote location for specialized teams.
  3. It provides highly fertile grounds for the incubation of innovation.

And a big one for the larger guys is that it reduces overhead costs, mainly because it becomes variable cost real estate. They only pay for it when they use it.

This is the opportunity: The landlord can actually save the tenant money.

While developers and landlords might look at this space and be concerned about what the long-term future may hold, I believe that this represents a significant opportunity for the landlord to actually increase and improve the tenancy of his building. If properly developed and presented it can represent a big win – for landlords and tenants alike.

When thinking about this type of space, the requirements are still basically the same as traditional office space. The real difference comes in the term (hours instead of years) and the form of the agreement (there is none). This essentially shifts the risk from the tenant back to the landlord, but when combined with a traditional lease, you offer a very attractive amenity to tenants, which will keep them in the building.

Capitalizing on Leasing Differences

In a traditional office space lease arrangement, the landlord leases the space for a long term. Most are typically a minimum of five years. There are numerous incentives for developers to lease a space long-term, most notably because they essentially lock up income for a long period of time, and that is worth a considerable amount of money in terms of the value of the cash flow for the building. There is a leasing and carrying cost for doing short-term deals.

But this will become an important option for a larger office building.

Cowork space is much different because it operates more like the parking garage. The most common arrangement is similar to that parking space — you pay to park for a couple of hours and then you’re on to your next meeting. In a cowork space, tenants essentially rent spaces by the hour, the day, the month, or in some cases longer. But only occasionally is it much more than a month at a time.

So if you as the developer or landlord own an average office building, any of your current tenants may be vying to get expansion space or to unload unwanted office space, but they are locked into long-term leases that make that very difficult, if not impossible. If you offer them flexible pay-as-you-go work spaces, you’re offering a differentiated amenity in an environment that inherently fosters innovation rather than stagnation.

For the landlord there is a significant cost advantage as well. One is that you can lease the space to multiple organizations when it is not being occupied, as most cowork facilities currently operate at about a 50 percent capacity. Another is limited build out costs — you build it once and it is reused over and over since these spaces are designed to be highly flexible.

Thirdly, it also gives the landlord some degree of flexibility in providing a greater range of leased space. So a tenant that may not fit under a traditional lease can now be accommodated through the shared space arrangement.

And finally (and possibly most significantly), landlords do not have to guarantee the best views or optimal locations since the tenants have little at stake. Sure, they still need to be designed, built, heated, cooled, and lit properly, but now the landlord can take non-performing space and make a significant improvement to the buildings financial performance.

Yes, there are operational expenses, but that can be handled through the building, or frequently there are companies that set up and operate these facilities for landlords so they avoid increased costs and staff.

Capitalizing on Operational Differences

Operationally speaking, the types of tenants in a coworking facility are dramatically different than traditional office spaces. Clearly these facilities do not work for highly secure companies. The demographics are also key, you are probably not going to be successful with one of these if it is in a remotely located suburban office building, unless there is a significant commuting or tele-commuting population close by.

If we look at what this space represents it is a pay as you go, highly flexible office environment, then we are starting to see more and larger facilities that cater to a broad spectrum of different types of businesses. It is variable real-estate cost. These types of facilities are quickly filling a very strong need and we will continue to see more of them.

In the end, the developer is helping the tenant to offset his rent, with a portion of space rented on an as-needed basis. The tenant benefits from a reduced fixed overhead expense. The landlord gains flexible space that can be occupied more densely and utilized by almost all tenants in the building.

When these spaces are designed properly and the economics are structured correctly, coworking spaces can actually provide an attractive option for both developers and landlords alike — not to mention foster innovation for tenants themselves.

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