The Reason Co-Working Spaces Are Not Just For Startups Anymore

In an economy increasingly driven by agility, offering flexibility for what were traditionally tangible assets has a significant financial value. JL

Roger Vincent reports in the LA Times:

Their appeal has broadened to mainstream companies looking for the flexibility to ramp up or wind down operations as quickly as situations demand. Other big tenants just want to avoid the hassle of setting up and maintaining their own offices.“You can say, ‘Give me turnkey space,’ and they can do it very quickly, and that is changing the nature of the office market.” Tenants love the flexibility of renting space monthly, weekly or even daily. By packing people in more densely than conventional offices, co-working is expected to reduce overall office demand 3% by 2030. Co-working operators may also snag tenants that would sign with a landlord.

Co-working is often more pleasant these days than putting in eight hours at a traditional office.

If you’d prefer a workspace that looks like a chic hotel lobby with waiters at your service, that can be arranged.

Want to be around other women in a cabana on an outdoor terrace? There’s a place in West Hollywood for you.

Is your goal to hang with other creative types? There are co-working clubs that want you as a member.

But while the offices strive to be oases of fellowship, the co-working business is more like a free-for-all.

Co-working offices emerged a decade ago as offbeat, bare-boned affairs that served start-ups and the self-employed of the emerging gig economy. But now their appeal has broadened even to mainstream companies looking for the flexibility to ramp up or wind down operations as quickly as situations demand. Other big tenants just want to avoid the hassle of setting up and maintaining their own offices.

And as co-working has evolved and its appeal has proved more than a fad, a rush of start-ups has joined the competition, including one from the real estate services industry, which has long had a near monopoly on leasing office space.

The new players are driven both by opportunity and competition: specifically, the ravenous reach of WeWork, the co-working pioneer that has spent freely to lock up market share and shows no signs of slowing.

WeWork has been willing to absorb massive losses as the company follows the internet model of getting big before getting profitable — best epitomized by ride-hailing giant Uber, which raised $8.1 billion in its initial public offering last week even though its total operating losses exceeded $10 billion over the last three years.

The two companies share a common lead investor — Japan’s SoftBank Vision Fund, itself pumped up by Saudi Arabia’s huge sovereign wealth fund.

A WeWork co-working space in New York. (Justin Lane /EPA-EFE/REX)

And while questions swirl about whether Uber will ever make a profit, so do they for WeWork. The company has ridden the coattails of the country’s long economic expansion, and it could be vulnerable in a downturn.

But its competitors can’t assume that the market will inevitably humble WeWork — as Amazon has demonstrated by rising from cash burner to cash cow.

“You can say, ‘Give me turnkey space,’ and they can do it very quickly, and that is changing the nature of the office market,” said analyst Steven Kurtz, of accounting firm BDO, who has tracked the growth of co-working.

WeWork, which started out nine years ago in New York with six floors in a SoHo building, now has more than 400,000 members paying for access to 45 million square feet worldwide. That’s more space than exists in all of downtown Los Angeles.

Locally, the company has gobbled up about half of the 4.5 million square feet now devoted to co-working, said Peter Belisle, Southwest director of real estate brokerage JLL.

In addition to the three floors it occupies in the Pacific Design Center’s Red Building, an expensive trophy property in West Hollywood, WeWork

recently leased an additional 45,000 square feet in the center’s Green Building.

It’s packed with recording rooms, photo studios, makeup rooms, casting rooms and other facilities for the entertainment industry. Members include Brian Grazer and Ron Howard of Imagine Impact, filmmaker Kevin Smith and actors Anna Faris and Topher Grace.

Meanwhile, rivals are offering their own unique versions of co-working space, which Belisle predicted would double in Los Angeles over the next three to five years.

One of the most high-profile new entries is the Wing, a New York-based company founded by two female entrepreneurs that opened a branch last month in West Hollywood. It’s taken a niche approach by tailoring its offices and services to women’s needs and preferences.

The scale of the furnishings at the Santa Monica Boulevard outlet is smaller. The thermostat is kept at 72 degrees, rather than the chillier temperatures men seem to like. The attention to detail even extends to the upholstery, with chairs covered in soft fabrics that don’t cling to dresses.

“All of these tiny considerations are made with working women in mind,” spokeswoman Zara Rahim said.

The outdoor patio at the newly opened Wing co-working space in West Hollywood. (Carolyn Cole / Los Angeles Times)

And larger considerations, such as providing child care for women juggling parenting with business or school, aren’t forgotten.

That formula has proved a success, with the company opening seven offices nationwide since it got its start three years ago in New York’s Flatiron district.

The Wing also offers “support circle” meetings to talk about parenting issues, mental health, physical illness and recovery from addiction, as well as other programs.

It’s just one of the latest crop of co-working companies offering events, meetings, lectures and other get-togethers known as “programming” as key selling points as they look to differentiate themselves from one another — and from conventional office landlords focused on keeping the lights on and the lobby clean and secure.

WeWork may have set the pattern by hosting happy hour parties and TED Talks, and it’s continuing to innovate. At its Playa Vista location this summer, WeWork tenants will get the chance to pitch their business ideas to investors — “Shark Tank” style.

Even private clubs that primarily offer posh spots to do business deals, hang out and entertain clients are getting further into the business. Soho House in West Hollywood is planning a SoHo Works offshoot offering 24-hour co-working offices.

And h Club, a members-only club for Hollywood creative types, recently opened in the former Redbury hotel at Hollywood and Vine. Among the attractions are “bespoke bedrooms,” screening rooms, a tea room — and h Space: “designated co-working space designed for productivity.”

“This is about a fundamental shift in how real estate will serve businesses,” Belisle said.

The level of tenant pampering being instigated by co-working providers has caught the attention of landlords, who are upping their game to attract tenants, said real estate executive Martin Caverly of Los Angeles landlord and developer Lowe.

Building owners may do something as simple as turning unused lobby space into a coffee bar, or partner with support-service firms such as Convene that provide co-working space while also offering hospitality services to the entire building.

At the Wells Fargo Center in downtown Los Angeles, Convene sends up breakfast every morning for about 200 workers at the headquarters of the financial firm Oaktree Capital Management. Catering is just one of the New York company’s services.

In its own space at the office complex, Convene built plush meeting rooms and dining spaces that building tenants can rent on an as-needed basis for events they can’t host in their own digs.

Convene is located in the Wells Fargo Center in downtown Los Angeles. (Luis Sinco/Los Angeles Times)

Convene also offers co-working space meant to appeal to individual contractors, but most of it is designed to serve midsize companies in need of temporary quarters in downtown L.A. that reflect their corporate self-image.

“We’re the business class of co-working,” said Ryan Simonetti, chief executive of Convene, which sometimes shares revenue with its landlord partners.

The emergence of co-working space as a popular office category poses some financial risks for landlords, according to analysts at Green Street Advisors.

By packing people in more densely than conventional offices, co-working is expected to reduce overall office demand in the country as much as 3% by 2030, in an industry accustomed to growth, a recent report by Green Street said.

Co-working operators may also snag tenants that would otherwise sign directly with a landlord.

Landlords, who like to lock in tenants for a decade or more, will feel pressure to offer more short-term leases to compete with the easy in-and-out options offered by co-working operators.

“Office landlords will be increasingly forced to react” to competition from co-working companies, Green Street said, by launching their own flexible office offerings, financially partnering with co-working operators or outright competing for tenants.

Tishman Speyer, one of the world’s largest office landlords, is doing just that.

The New York company announced last week that it has opened co-working offices at a building it owns in Beverly Hills and is expanding the concept, called Studio, at other properties in major U.S. markets as well as Europe and South America.

The company said it was moved to open more co-working offices after all 35,000 square feet in its first Studio in Rockefeller Center in New York were leased within five months in what Studio’s managing director Thais Galli called an “immediate and overwhelming success.”

Real estate brokerages, which profit from arranging leases for co-working businesses and their landlords, are also looking to get involved by joining their landlord clients in the flexible office field.

Los Angeles-base CBRE, the world’s largest brokerage, recently launched a co-working subsidiary called Hana that will open its first California branch later this year at the Park Place office complex in Irvine, in partnership with the property’s owners.

Hana will provide some traditional co-working space along with private, customized office suites pitched toward rapidly growing companies that may have offices elsewhere in the complex and need extra space. Hana will also offer meeting rooms and catering to other tenants or visitors.

Park Place will have only the second Hana in the country, but CBRE plans to roll the concept out in other major markets overseas and in the U.S., Hana Chief Executive Andrew Kupiec said.

“Wherever an NFL city might be,” he said. “That’s where both owners and Hana see the biggest opportunities.”

Co-working companies make money on the difference between what they pay landlords for the large chunks of space they need — typically on leases of 10 years or longer — and what they are able to recoup by charging a premium for deluxe space or filling multiple tenants into close quarters.

Either way, the trend has caught on because tenants love the flexibility of renting space typically on a monthly, weekly or even daily basis.

But although that business model has proved successful amid a favorable office market that has been on the upswing since 2013 as businesses staff up, it has not been tested in a downturn.

No downturn is on the immediate horizon, but a sharp pullback could sting WeWork and other co-working providers and their landlords if rents were to drop and tenants — with no long-term leases to tie them down — decamped for cheaper space.

Bankers nervous about just such a scenario scuttled a deal between WeWork and the owners of a London office building because the co-working giant wanted to lease all eight floors, Bloomberg reported.

When the economy tightens, “not all of these guys are going to survive,” Caverly said.

For now, though, WeWork is continuing its expansion, though it recently has created a parent company called the We Co. as it diversifies into other businesses such as community-oriented apartment living.

Kurtz, of BDO, says that as he sees it, co-working has successfully disrupted the office market and is not going away.

“The modern co-working companies,” he said, “are addressing the pain points of traditional office leasing and changing the way people are leasing space.”