March 19, 2018 / 5:10 AM / in 3 months

Cracking the co-working code in commercial real estate

NEW YORK (Reuters) - Real estate brokers scoff that just a fraction of U.S. office space is occupied by co-working and other flexible workspace options, yet data shows over one-quarter of new leases signed in the past two years came from this burgeoning business.

Jonathan Iger, chief executive of the William Kaufman Organization, is interviewed at the firm's office in New York City, U.S. March 13, 2018. Picture taken March 13, 2018 REUTERS/Herbert Lash

A double-digit growth rate, driven in large part by the upstart WeWork, indicates co-working is more than a fad as more shared-space providers establish multi-city networks and landlords step into the fray with their own flex-space formats.

Commercial real estate is in flux and no one knows what the industry will look like in a decade, but sitting around won’t help the outcome, said Jonathan Iger, chief executive at the family-owned William Kaufman Organization (WKO), founded in 1924, which has launched its own flexible office space concept.

“It’s this whole sharing economy that we’re all very cognizant of,” Iger said, referring to the efficient use of space to lower tenant costs while allowing landlords to charge more per square foot.

Flexible workspace has been growing at an average annual rate of 23 percent since 2010, according to Jones Lang Lasalle Inc JJL.N, and including co-working, is now the primary growth driver in the U.S. office market.

(For an interacctive graphic showing flexible office space growth, click: tmsnrt.rs/2FNerRO )

Co-working and other flexible workspace formats accounted for 18.1 million square feet, or 29.4 percent of new space that was leased in the United States over the past two years, JLL said in a February report.

By 2030, flexible space and shared amenity areas will account for 30 percent of office space, the report forecast.

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Co-working got its start from freelancers who needed offices rather than coffee shops and was followed by start-ups that liked how it freed up capital for more hiring and other expenditures. Now large companies are a visible clientele.

But outside of WeWork, bankrolled by Softbank with a $4.4 billion investment, and flex space leader IWG’s (IWG.L) Spaces unit, no other co-working firm has established a nationwide U.S. network with dozens of locations. That may soon change.

Serendipity Labs, a Rye, New York-based firm, opened its first co-working site in Manhattan last week and plans more than 125 U.S. openings over the next three years after 18 firms signed area of development agreements, the company said.

Flexible office space provider Knotel has been rapidly expanding its network in New York and San Francisco, while co-working start-up Industrious in February raised $80 million to double its number of sites to up to 60 this year.

‘MORE PEOPLE ON THE FLOOR’

Iger’s WKO owns five large traditional Class A, or prime, office towers in Manhattan and rolled out its own flexible format last month called Swivel. The site has meeting room sensors to better understand usage and features a rotating wall to create two rooms from one.

Landlords have been forced to focus on how to maximize space as the massive Hudson Yards development on New York’s far west side rises with its efficient floor plates.

“When you read about Hudson Yards versus older stocks of buildings like my own, it’s about the density, the additional bathroom, the column-free spacing, which all is a way of saying we can put more people on the floor than you can,” Iger said.

By moving the reception, pantry, conference room and lounge into an area shared by five tenants, the Swivel layout slashed the space a tenant takes by roughly 30 percent and also its rent by the same percentage, Iger said.

The new floor plan WKO installed at its century-old converted warehouse in New York’s Meatpacking District allows firms to increase their workforce by about 50 percent, he said. Taking a cue from co-working firms, the commercial real estate standard of pricing space by square foot has been dropped, he said.

“We’re no longer looking at this on a price-per-square foot basis,” he said.

FOCUS ON HOSPITALITY

Serendipity Labs’ rollout is a franchise model that draws partners mostly from the hotel industry who have signed area of development agreements for the suburbs or secondary markets, said John Arenas, founder and chief executive.

The franchisee commits between $1 million and $1.5 million, depending on a location’s size, and will operate several sites within its area of operation, the company said.

“We’re targeting hospitality operators, those who own and operate hotels,” Arenas said, noting the company owns sites in Manhattan and Chicago. “They see workplace hospitality today as they saw the maturity of the hotel business 20 or 30 years ago. They’re getting in early,” he said.

Maximum Hospitality, a franchisee of Serendipity Labs in Nashville, Tennessee, already has marketing, accounting, legal and sales teams for the hotels it manages, Arenas said.

“The corporate culture of other companies is really a landlord-tenant culture, whereas our culture is a guest-member service provider culture,” he said.

Reporting by Herbert Lash; Editing by Daniel Bases and Susan Thomas

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