Coworking: A Viable REI Strategy

Some real estate developers and investors grimace when discussing coworking or flex space. Some admit they don’t understand the concept. However, many forward-thinking real estate professionals and landlords are considering coworking and flex space a viable investment strategy.

In 2019, Ropes & Gray commissioned a study to determine how the coworking phenomenon is driving change in the real estate industry. Study findings revealed:

• Coworking is forcing traditional commercial real estate (CRE) models to evolve. Eighty-nine percent of study respondents say landlords have borrowed “real estate as a service” model from coworking.

• Real Estate Investment Trusts (REITs) are natural long-term buyers of coworking

• Two-thirds of equity investors, those who invest indirectly via a fund or directly via a joint venture, cite two drivers for their interest in coworking as an investment: Increased desire for corporations to reduce capital expenditure and growth of mixed-use developments that incorporate a live-work-play environment.

The study concluded:

1. Coworking has only just begun to disrupt the traditional office sector.

2. Equity investors anticipate membership growth among both large and small operators.

3. To meet market changes and increased demand by companies looking to offer flexibility to their workers, coworking providers will be shifting toward management and partnership agreements with landlords.

Coworking During the Pandemic

While commercial real estate investors and experts remain cautious about the coworking model, the flexible, shared office paradigm makes sense in a post, work-from-home (WFH) environment.

Faced with economic uncertainty, corporations and mid-sized enterprises look for business solutions that provide flexibility. They seek short-term leases, the ability to downsize or grow within a space, a sense of community and an outlet for social interactions following months of quarantine.

Flex space offers these benefits creating new demand from enterprise clients.

A Stabilization Strategy

As businesses of all sizes discovered they could operate from home, landlords have been faced with fewer lease renewals, space vacancies, lower occupancy rates and even some forfeiture.

Here’s how coworking can serve as a stabilization strategy for landlords and commercial investment stakeholders.

Stabilize occupancy. To achieve profitability in a low-margin industry, coworking operators look for a minimum of 7,000 square feet. Landlords seeking to stabilize their occupancy find that coworking spaces serve as anchor tenants for their buildings. Rather than run a coworking space to diversify their building, landlords can grant a lease to an operator as a sole occupancy tenant or invest in a joint-venture style operator model.

Opportunity to generate income. Under sole occupancy arrangements, building investors secure several thousand square feet with one tenant. For those landlords relying on bank financing this may be favorable. Lenders generally view this model as having a stable and predictable source of income.

The downside to this approach is the risk of having a tenant with fixed rent overhead whose income is based upon short-term contracts.

In a joint-venture operator model, property owners and operators enter a management and/or profit-sharing arrangement. The property owner provides the space while the operator provides the brand, management and experience in running a shared office space business.

Instead of paying rent, the parties share the profits. When designed with mutual-agreed upon goals, this model is a win-win for both parties. Landlords generate income in a profit-sharing arrangement while operators avoid the liabilities of a long-term lease and build-out expense.

Tenant diversification. Coworking members technically are not building tenants. Nonetheless they often steward word-of-mouth referrals for the building, bring visitors to the site, and increase visibility of the community culture.

By providing options for tenants with traditional long-term leases based upon price per square foot or month-to-month membership based on all-inclusive price per office, landlords provide greater reach for tenants with diverse business needs.

Improve neighborhoods and build community. By adding coworking to your portfolio, building owners and investors attract a mix of multi-generational entrepreneurs and established enterprises looking to retain and develop talent. This ability to attract business and increase economic development improves neighborhoods and builds community.

Coworking Must-Haves

When considering coworking as a real estate investment strategy, it is best to partner with an experienced advisor or consultant with background in coworking and flex space. Be sure to evaluate the following must-haves to increase the probability of a successful venture.

Location. While amenities and niche spaces attract a small number of tenants, location is the primary draw. When looking at opening a coworking or flex space, consider the population within a 20- to 30-mile radius of your planned space. Research mean income, type of housing and long-term growth projections.

Square footage. Industry data shows that profitability begins with spaces 7,000 square feet or greater. With the move from open desks to private offices, it is important to have enough offices to offset un-monetized community areas.

Office size options. Successful shared space businesses cater to a mix of small, medium and large teams. Therefore, when planning your space include a variety of office sizes to accommodate member diversity. Experts recommend a minimum of 80/20 designated offices to open desks.

Parking. One of the first questions prospective members ask operators is: “Will all my team members and guests have a place to park?” Adequate parking is a necessity; and when possible, tenants seek free parking.

Space plan. As noted above, the ideal space offers an 80/20 mix of designated offices versus open-space desks. To meet the growing demand for collaboration and socialization, consider including a community lounge, conference/meeting/training space, sitting areas scattered throughout the offices and a common reception area. Many successful spaces also include kitchens, storage and event space.

Community partnerships. Prior to building or adding a flex space to your business portfolio, take time to know your intended business community. Develop relationships with business associations, economic development professionals, merchants, school districts, libraries, and local politicians. Get concept buy-in from community partners who can benefit from your space. Your involvement with their organizations facilitates community advocates and referral partners for your endeavor.

Less than twenty years ago coworking began as a small venture designed for technology innovators. Now a business hub with economic infusion for local economies, coworking and flex office spaces are an integral component of the commercial office space ecosystem.

With more than two million people working in more than 22,000 coworking spaces worldwide, the value of coworking as an investment strategy offers opportunities and long-term value for investors, operators and the future of the American workplace.

An entrepreneurial consultant for 35 years, Terri S. Turner and Robert L. Curland formed EnCorps Partners, LLC in 2014. Specializing in flex office development and consulting with owners and operators on best practices, the two partnered with building owners to launch and manage properties totaling more than 100,000 square feet. They opened their flagship property, Cowork KCI, in March 2020. A leader in the industry, Turner serves as President of the Kansas City Coworking Alliance.