Converting Your Vacancy Into a Coworking Space
As Coworking becomes more mainstream, many building owners and property managers are looking to incorporate Coworking spaces into their portfolio by converting a percentage of their traditional space to Coworking.
Let’s take a look at the biggest factors differentiating coworking from a traditional tenant, and whether a change to Coworking would be a viable option for your vacancy.
The most important factor in determining whether Coworking is a viable option for your vacancy is your location. It’s vital to understand the demographics of the city/region, the demand for Coworking in that location, and the forecast for the industry in the coming years.
Earlier this year, Yardi Matrix compiled a report detailing statistics on a city by city basis for Coworking. One of the most valuable findings was that while NYC had a commanding lead in terms of square footage allotted to Coworking, there were 10 other markets that currently house over 1 million sq ft of shared spaces. In other words, you don’t have to be in NYC, LA or the Bay Area to be in a major Coworking hub.
There seems to be a strong correlation in terms of less vacancies equals more Coworking space. Houston, Dallas, and Phoenix have three of the highest vacancy rates in the nation, and also three of the smaller percentages in terms of space allotted to Coworking. It’s important to do research like this to see whether your market is ready for more Coworking.
Deskmag, a tremendous asset for Coworking surveys and research, found that ‘location of the space’ was the #1 most important reason someone would choose a given space. Coworkers want to have easy (or relatively easy) access to the space, and in an ideal location.
In terms of amenities in and around the vacancy, be aware of what’s a dealbreaker and what’s something that’s just nice to have. If you’re in a building with the most beautiful rooftop terrace in Miami or in Chicago but it’s unusable for half the year due to extreme temperature or weather, how much value is it providing your space?
Factors such as proximity to mass transportation, parking situation in or near the building, and ample dining and entertainment options within walking distance, are all vital in a decision. Lacking in these aspects would be considered a dealbreaker.
If it’s NYC and you don’t expect the majority to drive to work, that’s very different than Miami where public transportation is unreliable and the vast majority of people need to drive and will pay monthly parking.
Be careful when weighing a great location in a central business district against the higher cost.
Urban vs Suburban
You could say, if everyone else is thriving downtown, why can’t you? But what if you’re the breakthrough in an area with minimal competition?
It can be difficult for operators to turn a profit in a market where a dedicated desk is going for $400. Millennials are trending away from the downtown core in many cities if they’re being priced out. Don’t be surprised if they’re the ones who can afford the space if you’re in a suburban or secondary market. Landlords in secondary markets commonly have higher vacancy rates to deal with as well.
According to Deskmag, survey results show that 60% of the Coworking community commutes between 5-30 min to work, and the average commute is just 21 min.
Some analysts believe the Coworking industry is expanding so rapidly and continuously taking more percentage of available space, that it’s important to jump on it now. Others believe entering suburban areas where costs are lower, and landlords have higher vacancy rates, is the way to go for now.
High Floor vs Low Floor
Consider if your vacancy is on a low floor, the traffic coming through a lobby or mezzanine area will create a sense of excitement and exposure to the building itself.
Of course, there’s value in having a 40th story bay view if you’re on the water. It’s not like you can go wrong filling that vacancy with Coworking. But keep in mind the inherent benefits that come with having a successful Coworking space in areas prone to heavy foot traffic.
If someone is seeking, for example, 5K sqft or an entire floor, and they walk in on ground or mezzanine level and see a thriving Coworking space, it can also serve as a vision for how the property manager can work with them or what kind of space they can have within that building.
We know usually the top floors will be the first to sell. There’s more appeal to them. The bottom few floors of a high rise are the hardest to sell. A Coworking space there could be ideal.
Coworking vs Traditional Tenants
Coworking provides an excellent opportunity for a partnership to a landlord. If there’s a vacancy or an open floor, look into a partnership with a Coworking space as a viable alternative.
There are major differences that will play a deciding factor.
Say you devote 5% of a building to Coworking, which is significant. You’d have a higher density flow of people coming and going. But you’d have people that don’t work traditional business hours, so would you need to look into extra security? You have potentially higher wear and tear on the property. And many landlords still have the wrong image or perception of coworkers.
There is undoubtedly a stereotype the Coworking industry has long worked to move away from. Coworkers often do fit this made-up image of what a high class tenant is. This industry has evolved from a frat house feel with liquor, ping pong tables, and bean bag chairs. It’s a professional, entrepreneur, small business, and now enterprise business world.
As a landlord, offering Coworking space means you’re offering month to month memberships, which can make it challenging for the owner of a building. Lease terms and stability are an important factor in getting financing. Coworking, by its flexibility and turnover, is not extremely stable.
In traditional CRE, you may not have any marketing components at all once the 5 or 10 year lease is signed. In Coworking, the constant turnover means you need to get new foot traffic every single month, and a fresh sets of eyes on your space whether it’s digitally or physically. This is partly why partnerships are ideal, and DIY owner projects are less common.
Comparing DIY, Partnership, Outsourcing Models
The thought of the DIY model creates hesitation. Property managers will want to partner with someone knowledgeable in the industry. Many of them will say they’re in the business of renting floors, not going out and acquiring members, marketing a Coworking space, hiring a community manager, and other tasks innate to the Coworking industry.
You have the ability to do something like a profit share, say with a coffee company. Your kitchen or cafe area is a real coffee company, coming in and paying you rent inside your Coworking space.
The rest of the tenants in the building can access the Coworking space or floor and purchase a cup of coffee or a snack, which again, brings free exposure and positive marketing to your space.
There is a lot of acquisitions, partnering, or management-style contract profit sharing in the news recently. Just last month, Convene, a giant in the Class A flexible workspace industry, expanded on it’s partnership with RXR Realty in NYC. Convene will occupy four floors in RXR’s fifth avenue Manhattan location, the largest of their now four locations in the strategic partnership.
The third option is outsourcing. This gives certainty to how much rent the landlord will collect every month, so this might be their first choice. But of course, the operator might feel like their
best bet is a partnership. Negotiations can be tricky, but the growing success of shared spaces is going to lend to more overall knowledge of this industry and more lenders and landlords willing to invest in Coworking.
The property manager can turn to the operator to manage it, with people the operator hires, and pay them a management fee every month to do so.
One thing that often stops property managers from getting into the Coworking world is that they simply don’t understand the industry. ‘How are we going to manage it?’ ‘All these people coming in and out.’ ‘We’ve got all these invoices’ etc. These are common concerns.
While turning your vacancy into a Coworking space revolves around different factors than leasing to a traditional tenant, there is capacity for income here, especially given the disparity in price per sqft.
This is a continuously growing and evolving industry, which is following the path of the modern working adult: technology-driven, business savvy, and social.
Review all the factors: quality property, good market, ideal demographics, relatively high disposable income, rising demand for Coworking. If they check all or most of the boxes, certainly consider tapping into this market.