JH Berry & Gilbert, Inc

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Coworking space: Three key perspectives of a rising CRE trend

August 9, 2017

by Michael Reilly

J.H Berry & Gilbert

The growing popularity of the coworking space has been a buzz of conversation in commercial real estate circles over the past few years, and it’s a trend that offers unique business opportunities for tenants, landlords and brokers alike.

Coworking spaces are offices available on a membership or subscription basis that are mutually shared by a combination of freelancers, independent contractors and employees working remotely. They are outfitted with the standard amenities found within a traditional office space, such as a specific workspace, secure internet and networking, and private conference rooms to meet with clients.

The design layouts are modern and open, and tenants typically work in proximity with others who occupy the space on an as-needed basis. They accommodate various business models and remain open during usual business hours or for 24 hours a day. Also, coworking providers often create a platform for networking and collaboration within the space.

According to the 2017 Coworking Forecast, more than 1.2 million people around the world will work in a coworking office environment this year, and the majority of coworking providers expect to add more memberships in 2017.

The tenant’s perspective

The desire for tenants to have more flexibility in their office lease is one of the driving factors behind the emergence of coworking spaces. Tenants are no longer required to plan their space needs for years in advance. Instead, they can simply add the cost of a desk to their per-employee cost as the company grows.

While many think of coworking spaces as reserved for startup companies or small businesses, many national corporations also utilize this office model. It allows these firms to easily test new markets, offer an alternative to employees who face an inconvenient commute to a corporate office, or as a temporary office during a company department’s relocation or reorganization.

Also, as mentioned earlier, since the critical IT infrastructure and other amenities are already in place, it allows the tenant to focus more on day-to-day business activities.

The landlord’s perspective

Most would think coworking spaces are viewed as a threat to the traditional office landlord. However, in many cases, they serve as an incubation space for future tenants to grow before they can sign a long-term lease in one of the landlord’s properties. That helps increase the tenant’s value while minimizing the landlord’s exposure to signing short-term, low-credit tenants.

By owning coworking space and traditional office space, landlords can create a sustainable pipeline of prospective tenants at the coworking space that feeds into their office space, thereby reducing their vacancy rates.

The broker’s perspective

For brokers, coworking spaces have introduced a new type of credit tenant that poses a low risk and the potential for long-term leases for landlords. The landlords of these coworking spaces can then turn around and offer Class A office spaces to the smaller, high risk tenants on a short-term basis.

The cost-savings of a coworking space are also a helpful asset for brokers while negotiating a lease. The cost of a traditional Class A office can vary nationally, while the per square foot cost of a coworking space averages two to three times that of traditional office space costs. However, since most traditional office leases come in increments of several thousand square feet, many tenants end up paying for space that they can’t immediately utilize.

Additionally, coworking space is popular among an increasingly millennial and entrepreneurial workforce. Brokers would be well-served to incorporate coworking spaces into their portfolios to meet the demands of these tenants.