Even in a booming market, flexibility is essential. At FlexOffice 2018, hosted by NAIOP and the Global Workspace Association, experts talked about how owners can add coworking spaces in their properties to balance their portfolios, enhance value and boost returns in a changing office market.
“Office owners are spending more and getting less” these days, said Austin Flajser, president of Carr Companies. “There is a desire [among tenants] for more flexible terms.” Tenant leases that are expiring in the next year or so were signed before the era of coworking. Many tenants will refuse to sign another 10-year lease. That can be a problem. “Lenders may not understand why up to 30 percent of a building is rolling over every year,” he noted.
“Tenants don’t need the customization they used to,” Zach Wade, CEO of MakeOffices, agreed. Office space is becoming a commodity. All panelists stated that they’re seeing fewer 10-year leases.
Wade added that coworking can change the CRE building model. Building out a suite is expensive, takes a long time and causes unnecessary stress for both the company that’s building out the space and the company that’s moving into the space. Instead of trying to sell space to a company for a long term, he said short-term, flexible leases can reduce that stress.
To make a successful push into coworking, Flajser said owners should begin looking ahead before current tenant deals expire. When a large tenant moved out of a Carr property in Washington, D.C., leaving it 35 percent vacant, the company decided to turn the space into specialty suites and coworking space instead of leaving it vacant while trying to find a tenant. It reconfigured the building with amenity hubs that renters could then buy back. The project added $2.23 per square foot of income to the bottom line, Flajser noted. Moving to a mix of coworking drove profitability. “I’m going to do that 10 times out of 10,” he said.
Coworking gives property manager access to more potential customers, Wade said. But those customers come and go. So MakeOffices developed a “Town Hall Strategy.” In one building, it turned two floors of a building into what he called “a beautiful, engaging shared space.” This allows smaller tenants in the building to use a space that would once have been available only to major renters.
Wade said the goal is to create a “neighborhood” in the building, where tenants from throughout the building can meet, eat and work together. “It drives engagement, it’s the ‘third place’ that everyone is talking about,” he said. Even though the building is more expensive per square foot than nearby buildings, renters are signing five-year leases and there is a waiting list to get into the building.
“Operators need to reposition to provide flex space and change the way buildings are used,” said Mark Kennedy, chief strategy officer for Coworkatthemall.com. That could mean executive suites or town halls, or a number of other approaches. The bottom line is that providing useful, flexible space increases a building’s value immensely, he said.
But what about the business cycle? Flajser said an economic downturn may not damage the coworking model. With many companies getting smaller in a recession, they may be eager to move to smaller, more flexible spaces. Still, he said Carr is moving slowly and carefully into coworking. It’s partnering with landlords to spread the risks that would come up in a downturn.
“The value of coworking is that it gives renters options,” Kennedy added. But it also gives owners options. “If I have a 30,000-square-foot tenant who’s in trouble, there’s nothing I can do,” he said. “By having flexible space within your portfolio, you can pare the space down as necessary,” bringing other tenants in to fill the gap.
The changeover from traditional leases to coworking spaces isn’t going to happen overnight, and building owners are going to need to collect a lot more data to convince lenders that the coworking model works. Still, it’s happening, and it makes sense to these panelists. Today, “diversifying your stacking plan in an office building is less risky than not doing so,” Flajser concluded.
Rich Tucker is Director of Public Policy Communications at NAIOP, where he develops and executes communication strategies to raise the visibility of NAIOP’s advocacy work on behalf of the industry