The coworking phenomenon continues to dominate headlines as this business model captivates companies eager to embrace the shared space concept for their workforce, as well as building owners seeking to satisfy the demands of their tenants. Scott Marshall, global chief client officer, CBRE, kicked off a session on this topic at CRE.Converge 2019 in Los Angeles by stating, “Coworking is becoming the Kleenex of this industry.” That is to say, “Whether you’re talking to a buyer, occupier or lender, [people] look at what Industrious, Hana and others are doing in the space and call it all coworking.”
He noted that, “When you peel the onion back, they are all different: The operator and solution are different. The agreement and lenders are different. We look at it as flexible workplace. It truly is a solution on behalf of the occupier.”
Katharine Lau, Industrious senior director of real estate, shared the evolution of her company’s approach to the coworking model. Lau said that Industrious was founded in 2013 and grew through signing leases with fixed rent, tenant improvement allowances and landlord relationships that were month to month. Over the last year or two, Industrious has recognized a new opportunity.
“Customers see the ‘workplace as service’ as a more permanent real estate solution, which in some ways creates a competitive dynamic between landlords and coworking providers,” Lau said. “We’ve now moved to a partnership where we can be on the same side as our landlord partners. … These management agreements take many forms such as revenue share, which works for REITs, or profit share, where we are aligned on the risk and reward front.” To that end, Industrious formally shifted from leases to management agreements 12 months ago across its entire pipeline, providing a way for landlords to participate in the upside in a meaningful way. Their competitors are doing the same.
Marshall said that CBRE research supports a strong alignment with the owner through not only profit and revenue sharing but also co-investing alongside the owner, putting 25 to 50% of capital in so that interests are further aligned.
Charlie Hobey, managing director, EQ Office, provided a landlord’s perspective. “We’ll do either a management agreement or lease,” Hobey said. “But the benefit of the management agreement is that it deals with the disintermediation issue and gives us visibility to a new pipeline.” For EQ, he said, the economics are better and it gives them more control of the space with greater input over who is using the coworking space. Further, the company considers this not a legal partnership but a collaborative partnership, where they look to the flexible office operator for their expertise and technology.
The panelists also provided perspective on what tenants are demanding.
While Wi-Fi technology, cloud computing and mobile applications have encouraged the growth of flexible office by untethering employees from their desks, Hobey added that the workforce has grown up. He sees a change in the attitude of the occupier; it is no longer about which office location is closer to the decision-maker’s house but what the company can do to attract the best employees.
Marshall concurred, noting that this war for talent is a driving force in the expansion of coworking. Tenants think about, “How can I put my company in the best position to recruit and retain talent?”
The panelists shared that tenants historically looked to “check the box” for workplace amenities like a lounge or gym, thinking that would be enough to create a great employee experience. But occupiers have matured quickly. “It’s no longer about checking boxes,” Lau said. “Now occupiers need to know how to deliver great features in a cohesive way; coworking providers are at the forefront of what that looks like.”
Hobey gave credit to the flex office operators for even more than that, noting that they have done an excellent job of identifying the pain points along the customer journey that traditional landlords have often missed. These pain points include identifying space, building out space, acquiring furnishings, finding IT providers and negotiating a lease – issues that landlords deal with every day.
The panel also shared what to think about when negotiating that first lease or agreement with a coworking provider. These can include looking at unit economics, past performance, customer satisfaction scores, financial profitability, churn rates and other metrics. Marshall added that corporate users today are looking for flexible office operators in buildings to provide greater options to expand or contract.
Looking ahead, the panelists believe that some owners may look to implement their own coworking concepts. However Lau advised that owners need to do their research, adding that people take for granted how operationally intensive the business really is due to the amount of support teams necessary to make the locations successful every day.
When asked about WeWork’s impact, the panelists all agreed that no matter the outcome, WeWork has forever redefined the industry. Marshall said, “We need to take our hat off to what they have done to evolve the industry and make coworking a household name for everyone from start-ups and Fortune 50 firms.” In closing, the space will continue to evolve but there will be a normalization of the industry’s growth rate, which can mean increased profitability across the board.
Jessica Spaulding is owner and president of The Spaulding Agency, a full-service, highly-experienced, boutique-style public relations and marketing agency, with specific expertise in commercial real estate as well as community, workforce and economic development. She brings to her work extensive professional experience in media relations, marketing and brand strategy as well as strategic website development and social media implementation. Prior to the creation of The Spaulding Agency, Jessica led one of the top-ranked, award-winning public relations, marketing and digital agencies in Orange County.