With flexible or coworking office space thriving in urban centers and spreading to the suburbs, developers need to take a close look at opportunities in their own markets, according to speakers at The Office Conference 2017, a collaboration between NAIOP and the Global Workplace Association (GWA), held in Brooklyn, New York last month. Here are four takeaways:
Developer/Coworking Firm Partnerships
Look to partner with a coworking company to increase profits on the space and increase opportunities in the building. Mara Hauser, CEO and founder, 25N Coworking, Geneva, Illinois, with two coworking locations open and a third on the way in Frisco, Texas, said that after the successful launch of her first coworking venture in Geneva, she wanted to expand to a second. She asked herself: What do we do really well? What is our core competency? She concluded it wasn’t about owning or operating real estate. “What 25N is good at is managing and marketing coworking space and creating excitement in the actual space as well as the surrounding building,” she explained. Looking for a real estate developer/owner to partner with, she contacted the economic development agency in Arlington Heights, Illinois.
Meanwhile, in Arlington Heights, Stoneleigh Companies LLC, had just completed an adaptive reuse on an old hotel building, creating 214 luxury apartments — and 16,000 square feet of vacant retail on the first floor. “The Village of Arlington Heights suggested that we meet with a group out in Geneva that was doing coworking space,” recalled Richard Cavenaugh, president and CEO of Stoneleigh Companies, LLC, Barrington, Illinois. “I met with Mara and visited her space in Geneva: with the social aspects [of the coworking space], the sense of community, the colors used and the fun of that facility, I thought what a great way to drive velocity, image and intensity [to a multifamily project].”
Stoneleigh and 25N Coworking sealed a partnership arrangement on the Arlington Heights retail space. 25N would run the business for the developer. “The way we structured [the arrangement],” said Cavenaugh, “my firm owns the space — we put up most of the capital [to finish the space]. Now, after only six months, 25N is earning enough money to pay us a return.”
The two companies are working on a project at a 384-unit apartment complex in Frisco. They will open a new 12,500-square-foot coworking facility there. Further, they are negotiating a 35,000 coworking space in Florida.
A similar arrangement has proven beneficial for Nick Clark, CEO, Common Desk, Dallas, Texas, who characterizes his company as a flexible office and hospitality platform, and Greg Fuller, president and COO, Granite Properties, Inc., a development company, Plano, Texas.
Clark illustrated how a partnership is helpful to the developer beyond just the revenue stream of the coworking space: Many Fortune 500 companies today are using flexible or coworking space for small teams of employees around the country, according to Clark. If a company took coworking space for a 50-person group that subsequently expanded to 120 employees, that coworking company, if it were leasing space in the building, would do everything in its power to move the Fortune 500 company down the road to its larger facility. But if it were partnering with the developer, it would bring in the developer’s leasing team to help the company lease larger quarters in the building.
Coworking Expanding to Suburban Markets
John Abuja, SIOR, CCIM, senior vice president investments, Marcus & Millichap, noted that many of his clients are redesigning vacant space into coworking operations in the suburbs. A key reason might be because the suburbs continues to be a rich millennial market…despite news to the contrary. Currently, according to Abuja, 64 percent of the U.S. population lives in the suburbs, but 70 percent of millennials live in the suburbs — not the downtown.
Coworking Space Pricey to Create
Coworking costs a lot more money to build than a traditional office space and it is more management intensive. Noted Granite’s Fuller: “It looks as though you are providing them [coworking space users] with less — no ceiling, no floor and all open space, but it costs more because you have to put in conduit for every wire that goes through that building versus just putting everything above the ceiling. The space has to be cool and cool costs money.”
Lenders Not Completely Comfortable with Coworking Space
One trend that has been slow — “glacial” in the words of one speaker — to change is an understanding by lenders of coworking space valuation. “Most people in the financial community have not experienced what coworking does going into a downturn, only [what is does] coming out of one. That has some of the people in the capital markets a little gun shy,” said Robert Saunders, president and CIO, Kaufman Jacobs, Chicago, Illinois.
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