Co-Working Spaces: Hot Trend in Commercial Real Estate

An inside look at what is driving this development and the experience it delivers
by RaeAnne Marsh

The Department

Co-working space has been around for a long time. Ryan Bartos, executive vice president of JLL, which specializes in commercial real estate services and investment management, notes that Regus, now the world’s largest provider of flexible work spaces, has been around since 1989. “The big change that we’re seeing from the late 1990s to now,” Bartos says, “is a shift to a more open, collaborative form of co-working, with amenities like cutting-edge, open floorplan build-outs and very creative benefits like free beer!”

Observes Craig Coppola, principal with commercial real estate brokerage Lee & Associates, “Two major changes have driven this trend. First, technology is now so easy and so prevalent that working from anywhere is now possible. Second, the arrival of the millennial cohort. These young adults are technology natives and are so comfortable with living, working and going wherever they want. With these trends, people started working everywhere. However, Starbucks is not office space, and there is a desire to have a community of like-minded mobile workers.”

And there is a difference between dedicated co-working spaces and what developers often refer to “creative work space,” notes Daniel Kite, founder and CEO of Workuity, explaining the latter may be just common areas. “For us, ‘creative space’ is really community space, fostering connection and bringing people together in the environment.” Available work space in a co-working facility ranges from an open seat to a reserved desk to a small suite, all in a secured room.

“The collaborative nature of co-working is what gets me and our team at The Department most excited,” shares Kyle Frazey, managing director. “In additional to business benefits, we see real friendships that develop as people work in close proximity to each other. I can think of the many conversations, laughs, coffees, lunches, after-work drinks at the Irish pub downstairs that I’ve had in the last 18 months with members of The Department.” Noting that a lot of those interactions would never have happened if those individuals hadn’t intentionally chosen to office in a shared environment, he says, “Our goal is to bring together a robust group of leaders, investors and entrepreneurs to see the long-term impact those people and organizations can have in our city over the next several decades.”

Solopreneurs who don’t have the infrastructure and comaraderie of a team can find it in a co-working environment with many like-minded professionals going after the same goals, Frazey explains. “At The Department, our goal is to encourage an entrepreneurial ecosystem in the heart of Downtown Phoenix. When high-capacity leaders and entrepreneurs are working together in the same place, good things happen — ideas come to life, businesses start, problems are solved, et cetera.”

DeskHub

Jay Chernikoff, founder and CEO of DeskHub, points to the ability to provide many types of meeting space, from small conference rooms to large open spaces for networking or training events, as another nice feature of co-working spaces. “This allows companies to impress potential clients with a myriad of meetings options and also for expanded networking and collaboration with others in the space and in the community.”

The Department, for instance, hosts networking events for members and also invites those who are interested in seeing the space. And Workuity, in addition to events and parties for its members, schedules Lunch & Learn events Wednesday afternoons in a theater space that seats about 20 people. “A member company can provide lunch and do a presentation,” he says. Non-members may also rent a conference room or meeting space.

Galvanize hosts dozens of events each month, from small tech meet-ups to large events like Phoenix Startup Week, when “we hosted 1,000 people across our campus,” relates Diana Vowels, general manager of Galvanize Phoenix. Some events are members-only, which include mentoring and workshops; some are open to the public. “Our primary objective with events is to support our member companies, students and the tech community.

Galvanize

“We focus on tech events or topics that are aligned with growing the Phoenix tech scene or development of the downtown area, particularly the Warehouse District, where we’re located.”

In fact, Galvanize is as much about education as it is about co-working. “Everything we do is intended to bring education and co-working together,” Vowels says. “One of our members, David Talenfeld of Botanisol Holdings, was preparing to meet with potential investors and wanted pitch practice. We scheduled a practice session and invited other members to give David feedback and help him prepare. Three other member companies attended and provided him feedback to help perfect his pitch before seeking funding.” And for the community: “We held a Lunch ’N’ Learn session, with Margaret Mitchell, a technology executive, who presented a session on loyalty, data and gamification. The session was open to all Galvanize members and AZ Tech Council members.”

Cost Savings

On the financial side, co-working space provides flexible terms with minimal cost exposure. Many are month-to-month, averting the pressure of a long-term lease. Kite points out that Workuity, in fact, does not even offer a long-term lease. (It does, however, offer members the security of a price guarantee.)

Bartos notes co-working also offers new companies the chance to connect with other new companies, often allowing for fresh new ideas and strategies. “If — or when — the startup outgrows its co-working space, it usually has access to other trusted service providers.” There is benefit for more establish firms as well, in both the same manner as startups and as a landing spot to test new markets before they commit to a more long-term, established location, he points out.

Businesses that are relocating or opening satellite offices may turn to co-working spaces rather than having to open and manage an office, Kite observes, noting Pinterest is now putting sales teams in different co-working spaces.

Co-working is not just for the one- or two-person business. Chernikoff points out it is often an economical choice for teams since the base needs of a small team often require many of the same items. And at Galvanize’s Phoenix campus, where Vowels says most companies are comprised of fewer than 10 people, “We can accommodate teams as small as two and as large as 40.”

Co-working provides businesses the flexibility of short-term (month-to-month in most cases) office leases with the benefit of cutting-edge and client-facing space, says Frazey. “In essence, they get the best of both worlds: state-of-the-art office space that meets their team needs and, at the same time, affordable costs with low commitment.”

The Department

Kite points to another positive aspect of flexibility: “They can get bigger or smaller [space] on demand.” This accommodation is possible, he explains, because there is movement of tenants.

In a normal office environment, tenants pay not only for their lease, but for so many additional costs: CAM charges, cleaning, Internet, printer leases, furniture, supplies, drinks, et cetera. “At The Department, members are paying for 1 known monthly cost that includes Internet, printers, coffee/soda/water, daily cleaning as well as being able to work in the coolest office space in Phoenix,” says Frazey. “There are also no guarantees on leases, no credit checks, no cost to buy furniture, and any individual or small business can start tomorrow. The only thing a tenant is giving up is their own dedicated space, but I would argue that the collaborative nature of the shared environment is actually a benefit to their business as well!”

In a traditional office, the conference rooms, lounge areas and breakout spaces get used infrequently. Co-working takes those unused spaces and makes them shared amenities. Instead of one company using a conference room 10 percent of the time, Frazey explains, a co-working space allows 10 companies to each use the conference room 10 percent of the time, maximizing usage and still delivering a great amenity to the tenants.

Workuity opened just two months ago, but members of longer-standing operations voice strong support for the cost advantage (and address other advantages in their Feedback responses on page 10) as they share their experience:

Workunity

“We save about $500 per month in services plus about $3,000 in startup costs (purchasing fixed costs),” shares Jeremy Veatch, co-founder of Ironwood Venture and a member at The Department. “And that doesn’t include the free Cartel Coffee Lab coffee bar!”

Says Tighe Wilhelmy, co-founder and VP of Velawcity, “DeskHub saves our company about $2,000 per month. This number includes the savings from rent, electricity, Internet, snacks, parking, happy hours, et cetera.” He adds, “Startups don’t have the luxury of working in Class A office space in Old Town Scottsdale for under $1,000 per month with a traditional lease. Not to mention, term flexibility is priceless. Most startups believe they will survive, but should plan conservatively with respect to expenses. It’s imperative for a company to mitigate its risk during early stages, and the liability of a traditional lease is one of those primary risks.”

Mallory Dyer, CEO of GraphLock, relates, “If we were going to move into our own office space, we would be spending thousands of dollars each month on rent, electricity, Internet, phone, office supplies, et cetera. At Galvanize, we pay a monthly fee where all of this is already bundled in. So we probably have over a 75-percent savings!”

The Atmosphere of Space

Also important is the aesthetic environment. “For professionals with an eye for design, especially those in the tech startup world, the aesthetics of their office space becomes really important,” Frazey says, observing that people want to work in an office that’s inspiring. “We spend the majority of our lives at work and yet so many people spend that time working in dark, dreary offices.” Although he admits he has no data (“as yet,” he says) to back up his impression, he expresses his belief that an inspiring office space increases productivity and overall job satisfaction. Feedback around the office supports him. “A lot of our members have chosen The Department, in part, because of the design. They have said it feels inspiring, energizing and fuels their creative juices.” It’s even helping their recruiting. “One company was recruiting seasonal college interns, and they had several applicants say they would work for free if they could work out of such a cool office space.”

As a business enterprise itself, the shared office has to be able to increase density without anyone feeling cramped. “One of the major design challenges is creating private spaces, while still keeping the open feel,” Frazey relates. “A lot of users want to have a private office or a private desk, but at the same time love the open concept and the energy it creates.”

At The Department, the space was designed so that the best window views are shared amenities next to lounge spaces instead of being locked down in private offices. Workuity uses a lot of glass for the partitions, keeping the upper part clear to maximize the natural light so that the space is open and airy but still provides privacy to the members.

Are there disadvantages? Well … “The disadvantage I hear about the most is productivity,” Frazey says, relating that there are many studies about increased or decreased productivity from a shared or open environment. He’s experienced it both ways. “I have had days when I am more productive and energized working in the open space and other days when I am very distracted and unproductive. However, once you get into the flow of working in an open space, it gets a lot easier to stay on task. It becomes very energizing and fun.” An important etiquette note: “Headphones on is the universal co-working sign of ‘do not disturb!’”

This is a point in Coppola’s assessment of the co-working popularity. Referring to real estate’s cyclical nature, he reflects, “Let’s see what happens through a whole cycle. The idea of companies going virtual is really cool. Certainly there are some savings in rent but the real question is, does this make our team more capable and productive?”

But there are other elements that factor into the attraction of co-working spaces. As Frazey explains, one of the main advantages for solopreneurs is the ability to meet clients in a professional space. “They are tired of doing every meeting at a coffee shop. The co-working space allows small teams and individuals to have a professional option for their client meetings.”

The physical address matters as well. “At The Department, our address is 1 N. 1st Street. Allowing tenants to share this address can be a huge advantage. A small business with ‘1 N. 1st in Downtown Phoenix’ as its address holds a lot more authority than a P.O. box or shopping center address in the suburbs,” says Frazey.

Speaking of the trend generally, Bartos observes that co-working spaces thrive when they are close to public transit and offer walkability in highly amenitized areas, as these factors track closely with the demographic of employees who tend to work in co-working spaces. But there are trends within the trend, and Kite emphasizes the importance of the Biltmore Center’s 24th-and-Camelback address his flagship location for the professional clientele of the niche Workuity aims to serve.

The Market View

Observes Coppola, “Startups really love co-working spaces. Short term leases, small spaces that can grow, and a community are all desired in new companies.” More stable companies, too, love this type of space when they are growing into new markets or they simply want to have a place for a mobile worker to land. “Traditional offices are under attack from the co-working spaces for the above reasons and because the economy is almost at full employment,” he says, and, noting that companies are in a war for talented associates, explains, “If those associates want cool space and flexible hours, then the company is forced to make those changes. This would include the groups that want a creative environment, and you might just put some of these people into co-working space.”

Offering a landlord’s perspective, Coppola enumerates issues that face buildings which lease to co-working groups. “The biggest is the credit of the tenant, as most of these are local and not heavily funded,” he says. “Second, the potential parking use, as each individual may overload the parking.” Additional considerations include access to amenities, transportation, and housing. “Finally, one consideration most would not think about is hours of service. The HVAC, security and access might need to be 24/7 or at least late into the night and weekends. This puts additional demands on the building and operating expenses.”

Bartos, conceding that some landlords are cautious about co-working groups, suggests that an owner who understands what these users are trying to achieve might see a longer-term benefit. “When companies scale out of these types of facilities — as they tend to do — the existing landlord often can get first crack at retaining these groups as a tenant, with a long-term solution of his own.”

Taking that view from a different perspective, Frazey reflects that co-working allows landlords to serve an underserved market in the office leasing world — micro businesses. “Historically, there hasn’t been much upside for landlords to cater to those small businesses — they have no credit, they have limited resources and they can’t commit to long-term leases.” He sees the co-working environment providing a great option to both landlord and tenant. “It allows for great, affordable options for the micro-business, while bringing a totally different market opportunity, energy and tenant mix to the landlord.”

The co-working industry has evolved from its beginnings of thousands of independents simply offering open desks. Says Kite, “The better operators recognized a huge demand in the corporate world for five- to seven-person teams.” He predicts facilities will continue to get bigger as they consolidate from small players and out of the coffee shop. And there must be a service aspect to the operation. “I run it like a hospitality business,” says Kite, who brings his background in that industry to the management of Workuity.

“Co-working is the fastest-growing segment [of commercial real estate] outside of pure tech,” Kite observes, and relates an upcoming change he expects to further bolster it: In 2019, all companies will be required to carry long-term leases on their books as debt, but not short-term. Noting the average occupancy rate across the industry for facilities more than a year old is about 90 percent, he affirms, “There’s great retention, and always a waiting list for one type or another.”

 

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