What’s the Impact of Coworking on Commercial Real Estate?

Work just isn’t what it used to be. Technology has practically made the 9 to 5 obsolete. Furthermore, a workstation could be in a typical office or at home, in a coffee shop or on a park bench. And finally, millennials—people born between 1981 and 1996—shun the idea of working in a traditional commercial office environment. They seek flexibility and a balance among work, play and entertainment all in one location. Enter the coworking concept.Coworking involves people who are self-employed and some working for different employers all sharing a space and office equipment as well as a few good ideas over a complimentary cup of coffee.
For the commercial real estate industry, coworking is setting the stage for what could be a wave of change. As more and more workers seek flexibility, coworking spaces are destined to take up a greater percentage of square feet in office buildings large and small.

Coworking by the Numbers

So just how popular have coworking spaces become? According to a survey conducted by Deskmag, a magazine about coworking, about 1.7 million people will be working in some 19,000 coworking spaces across the globe by the end of 2018. Of the total number of coworking spaces, 29 percent were opened over the last year. About two-thirds of that total anticipates expanding their area by an average of 70 percent, and a third are planning to open at least one more location.

Coworking in Texas

In 2017, Texas had 473 coworking centers, falling just short of New York’s 475 and a little more than half of California’s 912 centers. And the numbers in Texas keep growing.

Take a look at WeWork, the largest coworking space provider in the world. WeWork has five locations in Austin, two in Houston, and five in the DFW area with a new 52,000-square-foot space scheduled to open in 2019 on two floors of the Victory Plaza building in Victory Park.

And that’s just WeWork. There are many other coworking office firms in Texas including CommonDesk, Serendipity Labs, and HeadSpace.

The Advantages of Coworking

So what makes coworking spaces appealing to independent contractors, startups and large companies? In a word: flexibility.

A lone freelancer can work quietly in a dedicated workspace or sit in an open area alongside other “members” in order to share ideas and seek advice. For the founder of a startup, there is likely someone from a company at a similar stage of development willing to talk strategy. Then, as your startup grows, you simply add the cost of another desk, rather than try to plan space needs in advance.

But why do large companies such as Dell, General Electric, Microsoft, Bank of America and Salesforce.com move into coworking centers? For some it’s the chance to test a new market without a large initial investment or time spent finding the perfect location. Also, many large companies have come to see coworking as a means of attracting and retaining top talent. Coworking centers offer amenities, networking opportunities and thought leadership workshops that knowledge workers want.

Coworking and Commercial Real Estate

The flexibility that coworking options provide equates to great potential for the commercial real estate industry. For tenants, there is no longer the challenge of planning space needs years at a time. They can abandon the five or 10-year lease in favor of simply adding another desk for each new employee. Also, because coworking centers already have IT infrastructure as well as in-office amenities, tenants are free to focus on developing and selling their products and services.

But how does this translate into an advantage for landlords? After all, a 10-year lease on a space provides steady, long-term revenue and predictable returns for investors. Actually, there are several advantages.

First, coworking is better able to withstand a future economic downturn. In fact, the recession of 2008 that caused many companies to downsize is partially responsible for the rise in coworking. Now, shared spaces are denser than the average office.

Secondly, by incorporating coworking space, a building owner is following demand and investing in a portion of the workforce that will continue to grow. Millennials are expected to make up 50 percent of the workforce by 2020 and 75 percent by 2030. Not that millennials are the only ones coworking, but they do constitute the majority of centers’ memberships.

Third, leasing vacant space to a coworking office firm is an excellent way to increase income. According to Deskmag, the average coworking space can yield two to three times more revenue per square foot than a traditional space.

Finally, CRE investors and building owners should look at coworking spaces as breeding grounds for future tenants. A startup that might have been a high-risk tenant initially will have time to grow. Then, once they are established and after they’ve come to appreciate your building, they may be ready to sign a long-term lease.

What’s On the Coworking Horizon?

Every day across the country there are thousands of vacant spaces that could be used for coworking. They’re called restaurants.

A recent article from Restaurant Hospitality reported that startups like Kettlespace and Spacious are doing for restaurants in New York City and San Francisco what WeWork has done for office space. Dining rooms that sat empty from 8 am to 5 pm now have freelancers and telecommute workers setting up shop for a few hours. It’s an easy way for a restaurant that only serves dinner to make some additional money.

What about lunch? Some dinner service restaurants offer food for coworkers. Restaurants that serve all day often keep a front room open for lunch patrons, while serving coworkers at the back of the space.

Whether in an office building or a restaurant, coworking spaces will remain a force for years to come. Commercial real estate investors, property owners and industry professionals should view them as beneficial amenities in their buildings.

 

The information contained in this article is general in nature and should not be construed as financial, tax or legal advice.  As with any financial or legal matter, consult your tax advisor and legal counsel.