Development Magazine Winter 2015/2016

Development - Ownership

The Future of Shared Office Space

A freestanding conference table at WeWork South Station in Boston’s historic Leather District, where freelancers, tech startups and others can work for as little as $45 a month (for flexible access), $300/month (for a desk) or more than $550 a month (for a private office). WeWork

Coworking centers and executive suites continue to evolve and morph into new types of workplaces that create experience and community for users. 

COWORKING CENTERS and executive suites facilities that offer shared workspace have become one of the hottest trends among tech startups, freelancers and creative types seeking community and collaboration with like-minded entrepreneurs — or simply turnkey workplaces that don’t require a multiyear commitment. These shared office spaces operate as temporary work hubs that anyone can rent by the hour, day or month. Yet each is as diverse as the people who frequent it. 

Executive suites are fully furnished offices and other types of workspaces that are typically leased on a pay-as-you-go basis. They enable individuals or companies to occupy office space without signing a long-term lease, paying a security deposit, leasing equipment or contracting for telephone, Internet and other services. 

Coworking centers differ from executive suites in two important ways: culture and community. Coworking center members who rent plug-and-play communal space typically have similar interests, participate in educational opportunities, share ideas and socialize during events such as happy hours to reinforce a sense of belonging.

Today, the shared office movement, which has been building momentum for years, is skyrocketing. It’s also revolutionizing how, when and where people work. In 2005, there was only one coworking space in the U.S. By 2013, they had mushroomed to more than 3,000 worldwide.

Workforce and Workplace Trends

Coworking’s spike in popularity mirrors the rise of the nation’s independent workforce, now 30 million strong, with 17.8 million clocking in full time, according to data from MBO Partners. Government data supports this trend. The U.S. Bureau of Labor Statistics reports that 14.76 million people were self-employed in the third quarter of 2015, an increase of more than 200,000 since the third quarter of 2014.

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interior office space
interior office space with a think pod

Regus’ flagship business lounge at 747 Third Avenue in Manhattan features meeting rooms and a videoconferencing studio as well as these open workspaces. The company’s business lounges are designed to meet the needs of both local independent workers and business travelers who need a professional place to work. The company’s Thinkpods (bottom) enable workers to plug in and do “focus” work in business lounges around the world. Photos by Regus/BusinessWire

The growth of independent workers is also outpacing hiring within the overall U.S. labor force. Full-time independent contractors and freelancers accounted for a 12 percent increase in the nation’s workforce over the past five years, compared to a 7 percent increase in overall U.S. employment. MBO’s study also projects that 40 million Americans will choose to be self-employed by 2019.

Behind this explosive growth are new technologies that enable today’s highly mobile workforce to conduct business remotely and the freedom to collaborate anywhere, any time using tools such as Yammer, Jive and Huddle. Corporate downsizing, employee dissatisfaction with traditional jobs, long commutes and new online marketplaces that make matching companies with freelance talent easier and more cost-effective are also fueling workers’ drive for independence.

CoreNet Global, which tracks the amount of space companies allocate to workers, says dedicated office spaces continue to shrink as more collaborative office layouts and open spaces take hold. Today, the average is about 176 square feet per worker, down from roughly 225 square feet in 2010.

Millennial workers between the ages of 18 and 34 are now the driving force behind the freelance economy in the U.S. According to research by Coldwell Banker Commercial Affiliates, 63 percent of these “digital natives” are as comfortable working from a mobile device as they are at a desktop computer. They value autonomy, prefer offices with an open floor plan and are more willing than earlier generations to share their workspace with someone else. At the same time, 77 percent place a high premium on face-to-face communications in conducting business.

This generational shift in the use of physical space has vast implications for the real estate owners, developers and designers who are acquiring, retrofitting and outfitting the office buildings of the future. When workers can connect with colleagues as nimbly across the world as they can across a hallway, and no longer have one fixed office but rather thousands they can quickly and affordably access around the globe, what role should commercial real estate play in an increasingly virtual, hyper-connected world? The industry is discovering that the big corner office baby boomers once coveted is suddenly morphing into an entirely new product.

“Our overall economy is shifting toward small businesses, where there is net growth, resulting in increased demand for flexible office space,” says Andrea Foertsch, founder and principal of Disruptive Space as well as author of “Workplace Innovation Today: The CoWorking Center,” a NAIOP Research Foundation study. “Freelancers and startups now have places to work other than their kitchens or neighborhood coffee shops. The energized, motivated sense of community that coworking offers has proven its value and caught on. Shared office providers are supporting small business growth as well as flexible shifts in the use of building space. Building owners run a greater risk by not facilitating this explosion of shared office space than by facilitating it.”

Much of the nation’s shared office space is concentrated in New York City, where the largest players are Regus, WeWork and Jay Suites.

The Executive Suites Pioneer

Regus, a publicly traded multinational corporation with 3,000 locations in 900 cities and 120 countries, is the largest shared office provider in the world. Headquartered in Luxembourg, the company is still headed by its founder, Mark Dixon, who launched Regus in 1989. Dixon pioneered the executive suite concept and has since added coworking spaces and business continuity “recovery workplaces,” as well as virtual offices, to the company’s mix. (Virtual offices, which assign users a local phone number and mailing address, allow even the tiniest businesses to create the illusion of a branch office without actually having a physical location.)

Regus caters mostly to “road warriors” — company teleworkers — as well as startups and consultants who prefer prestigious Class A office suites, video conferencing facilities and meeting rooms with high-speed Internet service, drop-in business lounges and on-demand administrative services like those found at a traditional office. The cost of renting a Regus day office in Manhattan ranges between $35 and $73, while a one-day coworking space costs $26 to $51. Leasing a 300-square-foot, six-person corner suite for one month at the company’s Park Avenue site can run upwards of $8,000.

A Coworking Center Hybrid

WeWork, a coworking startup cofounded by Adam Neumann and Miguel McKelvey, leases office space wholesale from landlords, then reconfigures and sublets that space to over 25,000 members at 61 locations in 18 cities and four countries, at last count. WeWork emerged on New York’s coworking scene in 2010, when rents for office space were just starting to recover from the recession.

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person at a standing desk

WeWork South Lake Union in Seattle features a mural of local icons, bench workspace and private offices with adjustable-height desks. WeWork

Casting itself as a hip “community of creators,” WeWork largely attracts tech-startup millennials with amenities such as free beer and foosball, social networking events and services from third-party providers ranging from Zipcars to group health insurance. The cost of membership at its Midtown locations ranges from $45 for one day of pay-as-you-go access each month to $450 per month for a dedicated desk in an open space and $4,500 for a private, six-person studio. The company — which was valued in June 2015 at a lofty $10 billion, twice what it was worth six months earlier — is gobbling office space at warp speed throughout New York and in other top-tier American cities, dipping its toe into overseas markets and becoming an investor magnet for hundreds of millions of dollars in venture capital.

Therein lies a cautionary tale for building owners and developers. A WeWork investor presentation under wraps until recently contains highly optimistic financial projections and market assumptions underpinning the firm’s lightning-fast growth, which has sparked worries about the shared office industry’s ability to withstand another downturn, should WeWork’s rosy forecasts prove unrealistic. According to CompStak, WeWork has signed leases for more than 2 million square feet of office space in New York alone. Lease terms at its New York and San Francisco locations range between 10 and 21 years.

Memories of the 2000 dot-com crash remain all too vivid for many real estate owners and tenants who suffered deep losses when their buildings’ underlying values collapsed. Once the dot-com bubble burst, Regus was among those holding long-term leases on vast amounts of office space throughout the U.S. that were suddenly underwater. In 2003, Regus’ American subsidiary filed for bankruptcy, although the company restructured shortly thereafter and has since returned to profitability. CompStak estimates that Regus now holds roughly 1.5 million square feet of leased space among its 39 New York shared office locations.

A Third Model

“When office rents are at an all-time high is not the best time to expand. There’s a lot of risk,” says Juda Srour, who founded Jay Suites with his brother Jack in 2009, just before office rents in the tri-state area bottomed out.

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Jay Suites’ 34th Street space occupies two floors of an 11-story building and includes this 2,000-square-foot furnished, Wi-Fi equipped outdoor terrace.
LiquidSpace.com

The company, a cross between an executive suites provider like Regus and a coworking center operator like WeWork, provides high-end, shareable business centers at seven prime Midtown and downtown locations as well as virtual offices for 5,000 members across a wide range of professions. Members include tech startups, hedge funds, brokerages and law firms. Jay Suites relies on all-inclusive pricing for fully furnished executive suites and day spaces at each of its New York sites. Company leaders believe this gives Jay Suites a competitive advantage.

“After the recession, we were very bullish, scooping up lots of space at discounted rates,” Srour says. “But office rents in New York have literally doubled since then. Once your lease contract starts, it’s uphill from there in terms of rent escalations, real estate taxes and, in some areas, BID [business improvement district] taxes.”

“We’re privately owned, so it’s important that our acquisitions are structured in a way that lets us grow properly and operate at 100 percent efficiency,” adds Michael Rutledge, the company’s director of business development. “Some of our competitors who are taking Class A space with multiple year leases are having a hard time filling those spaces, because their price points don’t match the market need. They’re also seeing a lot of customer turnover, because a la carte pricing for shared workspace and services can get very expensive very quickly.”

An executive suite at Jay Suites, which runs $1,500 a month plus an upfront $3,000 deposit, requires tenant commitments ranging from three months to five years. Booking an office for the day is a flat $150. Virtual offices, complete with a Manhattan mailing address and phone number, start at $75 a month, with incrementally higher prices for optional services.

“Forty percent of our new business comes from customer referrals,” Rutledge says. “We’re also getting new customers who are switching from our competitors, who have already tested the market, know what they want in a space but aren’t getting the privacy they need to properly conduct their business. That’s why all our rooms are soundproofed and well-insulated, so there’s no noise pollution.”

Looking Ahead

How are real estate developers responding to these changing workplace trends? Rudin Management Co. is among a handful of prominent developers that have invested in and remain confident about WeWork’s prospects.

“I think it would have to be a pretty significant economic recession for WeWork to be in trouble,” predicts Michael Rudin, vice president at the family-owned firm. “They’re geared toward people and companies that are a bit more flexible and came about at a time when things weren’t great. I can’t speak to all their leases, but most were signed when rents were much lower than they are now. In a downturn, they should have a bit more runway to weather that storm. But you never know. Every building is different. Every submarket is different. WeWork may have flexibility in their membership and fee structure to adjust down, to keep their members in their spaces and keep paying rent to their landlords.”

Shared office spaces are also converging with residential real estate aimed at meeting millennials’ combined needs for social/work hubs, affordable housing and amenities that enhance their well-being.

Lifestyle hotels are being built by Hong Kong property company Great Eagle Holdings Ltd in partnership with NeueHouse, a hip provider of arts-oriented workspace in New York and Los Angeles, with a third location scheduled to open in spring 2016. NeuHouse plans to open coworking spaces near Great Eagle hotels, hoping the two brands play off each other and increase business for both.

In 2013, the Rudin Co. leased a building it owns on Wall Street that had been damaged by Hurricane Sandy to WeWork to be converted into microapartments and community space. When the conversion is complete, WeWork plans to rent the renovated apartments to members who are seeking affordable housing in the city.

“What attracted us to this residential concept was a shift toward more flexible, plug-and-play space,” Rudin explains. “WeWork supplies all the furniture in the room, TVs, a sound system, a little kitchenette. A tenant will just move in with their suitcase and clothes. It’s definitely a risk. But WeWork is seeing a lot of interest from its members for that type of housing.”

WeWork is also partnering with Vornado Realty Trust to replicate its WeLive residential brand, as it’s been coined, at a 250-unit microapartment project under redevelopment in a former office building in Arlington, Virginia’s Crystal City neighborhood, just outside Washington, D.C. It plans to set aside two floors in the building for a new coworking center.

At the same time, WeWork, Jay Suites and other shared office providers are joining up with companies like LiquidSpace, HiRise, Kinglet and other online portals that connect landlords who have extra space to rent with on-the-go professionals who need work space quickly.

According to Alex Kopicki, cofounder and CEO of Kinglet, which connects Baltimore and Washington-area landlords with entrepreneurs, startups and small businesses, “coworking has become part of a larger trend of flexible office ecosystems that appeal to more mature small companies that want some of the benefits of coworking but not necessarily all of the social elements.”

“I am seeing more and more coworking model hybrids, such as WeWork, that attract next-stage companies after incubation,” adds Foertsch. “From my perspective, there’s plenty of room for more hybrids in the market.”

Traditionally slow to change, the commercial real estate industry is gradually shifting from being a space provider to creating experience and community for the next generation. The future of office workspaces will belong to owners and developers who not only understand and can weather the market’s vagaries, but who also respond to their tenants’ nascent work and lifestyle needs by creating diverse, dynamic places that inspire people to perform their best and live life to the fullest.

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