December 13, 2017 / 9:12 PM / a year ago

Exclusive: Big office building owners seek 'co-working' partners

NEW YORK (Reuters) - Leading U.S. office building owners, Equity Office and closely-held Hines, are seeking partners to gain experience in the flexible workspace business that is changing how office space is leased, sources said.

The Request for Proposals (RFP) from both firms shows landlords are heeding the increasing demand from tenants for flexible workspace, where collaboration among a mix of various workers is encouraged in what is known as “co-working.”

The RFPs for both Equity Office, owned by the Blackstone Group (BX.N), and Hines were previously unreported.

The explosive growth of firms such as WeWork, the largest leaser of office space in Manhattan the past three years, has pushed landlords to offer ‘co-working’ options to tenants.

These ‘co-working’ firms are increasingly grabbing business from landlords’ traditional Fortune 500 corporate clients. For example, WeWork might be both the tenant of a large property owner and a competitor, subleasing space to co-working members.

The genesis of Equity Office’s request for proposal was to explore how to make the sprawling Howard Hughes office complex in Los Angeles more attractive to tenants, said Rob Harper, head of U.S. asset management at Blackstone’s real estate group.

“We’re thinking very creatively about how we deliver that service and who we might partner with to create the best possible environment for our tenants,” Harper said.

Responses to the Equity Office request for proposal are expected within days, Harper said.

Three sources told Reuters about Hines’ separate RFP, but that company declined to comment.

OFFERING MORE SERVICES

Landlords are also keen to offer better services as a more mobile workforce and rising rental rates have forced offices to shrink, which has increased competition to attract tenants.

In Manhattan, the biggest construction boom since the 1980s also is boosting the supply of new buildings, further increasing the pressure on landlords to offer more amenities and services.

“We’re at an inflection point in the industry and we’re all trying to figure that out,” said Scott Rechler, chairman and chief executive of RXR Realty LLC, one of the largest property owners in Manhattan.

“But I do think there’s an element of co-working that’s structural and is here to stay,” he said.

Co-working space IMG - tmsnrt.rs/2AB52hI

(For an interactive view, click: tmsnrt.rs/2kqtOWJ )

Rechler is partnering with Convene, an on-demand provider of meeting sites backed by Brookfield Property Partners (BPY.O) that will soon roll out flexible workspaces at RXR’s 530 Fifth Avenue, similar to a recent roll-out in Los Angeles.

In the Manhattan market for smaller spaces, those below 12,000 square feet, co-working firm Knotel will have leased almost half of the space landlords have made available in 2017 by the end of the year, said Knotel CEO Amol Sarva. Tenants are demanding both more flexibility and more engagement from landlords, said Marcus Moufarrige, chief operating officer at Sydney-based Servcorp Ltd (SRV.AX), whose firm offers flexible workspace in 160 locations in 22 countries.

Tenants are looking for alternatives to rigid five- or 10-year leases in order to better manage their space needs, said Moufarrige, who earlier this year moved to New York to better gauge the co-working landscape.

Manhattan is considered the epicenter of co-working because jobs growth has been higher than the national average and its dense urban setting is attractive to a young workforce.

“The yield from flexible space is much higher than from traditional space,” he said. “This is driving the landlords to fear disruption and therefore try to pre-empt it with the RFPs.”

GOLDEN GOOSE

Landlords are divided in how they view co-working, said Alex Snyder, a senior analyst at real estate-focused CenterSquare Investment Management in Philadelphia.

For U.S. landlords, co-working has mostly been a means to attract tenants and lift rents, he said. The services that flexible office providers tout do not lift revenue by much, he said.

“The golden goose is still rent,” Snyder said.

Landlords lack operational expertise because they have been slow to recognize what co-working firms provide, said Jeffrey Langdon, managing director of Adaptive Office Resources, a consultancy in Rancho Santa Fe, California.

A building owner’s prime endeavor has been the acquisition of an asset while a tenant’s needs have been secondary.

“Owners think about where do I deploy my capital?” Langdon said. “They don’t have any idea how the end user is thinking and working.”

For Jamie Hodari, co-founder and chief executive of Industrious, one of the largest co-working firms with sites open or soon to open in 24 U.S. cities, flexible workspace is an “outsourcing” industry on the brink of rapid growth.

Landlords don’t have the expertise to compete with co-working firms, which will force them to either partner with a flexible workspace provider or go it alone, Hodari said.

“We’re really at the end of the experimental era,” Hodari told the “RETHINK Office of the Future” conference on Nov. 30.

Reporting by Herbert Lash; Editing by Daniel Bases and Nick Zieminski

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