October 24, 2018
The coworking phenomenon has turned the commercial real estate industry upside-down. As it continues to expand and operators consolidate to increase market share, landlords may be wondering if they can reap greater value by cutting out the middleman and designating coworking space within their building that would be managed in-house. While it’s tempting, there are many potential pitfalls that landlords should consider before diving in.
First, landlords should explore why coworking has been so wildly popular and what features they would need to mimic to achieve similar results. Coworking operators’ success can be attributed to three primary factors: strength of scale, advanced technology capabilities, and differentiated environments. All of those elements require significant capital investment and time to implement, which may only be a viable option for the largest real estate owners.
Real estate owners that move forward with developing flexible workspaces will need to build out spaces that reflect the “cool” vibe many coworking operators offer. With the proliferation of coworking spaces, operators have had to go even further to differentiate themselves. This has given birth to the latest iteration of coworking spaces that are dedicated to a niche group of users, such as women, government contractors or artists. This hyper-specialization allows the operator to design, decorate and market a space more specifically to the clientele by adding workbenches for craftsmen or partnering with on-site childcare services for working mothers, for example.
Users appreciate the flexible terms allowed through coworking and that space is available immediately, which is a very different operating model than what most landlords are accustomed to offering. Catering to those requirements may be the most challenging – and risky – adaptation for landlords. The biggest risk in managing a flexible workspace is taking the focus away from an owner’s core competency – real estate investment.
The current market presents an opportunity for current coworking operators to act as consultants to landlords pursuing an in-house flexible workspace. Coworking providers with experience in launching, marketing and operating a coworking space will have valuable insight for landlords looking to institute their own flexible workspace, whether at a single property or across a portfolio.
Landlords, especially at the local and regional level, should weigh the benefits of entering a profit share agreement with a coworking operator, rather than managing a flexible workspace themselves. The hotel industry has used this model for decades, where the building owner shares in the profits with the hotel operator. A profit share would benefit both parties by allowing each to remain focused on its core business while minimizing risk to each party. This approach gives owners more opportunity for upside and makes coworking operators lower-risk tenants, especially at a time when many major providers have yet to be profitable.
Coworking will continue to evolve to meet user demands and develop a profitable business model. But one thing is for certain: coworking is here to stay. Savvy landlords are already incorporating design elements to reflect coworking spaces, including large common areas on each floor, shared meeting space and high-density occupancy. These amenities will only become more popular as companies that start in coworking space graduate to private suites and expect similar environments.
There’s plenty of opportunities for building owners to embrace the coworking trend, but they need to start now by exploring how to integrate flexibility into their properties to stay ahead of the market.
– By George Vogelei, EVP, Washington D.C.