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Building Owners Boost Stakes in Cowork Competition

With or Without WeWork, Major Investors Plot Strategies to Grow Shared-Office Footprints
September 28, 2018

Tishman Speyer will open its first Studio coworking space in Manhattan's Rockefeller Center (above), followed by openings in Tishman-owned office buildings in Boston, Washington, D.C., Chicago, Beverly Hills, California, and Frankfurt, Germany.

Help Wanted: General Manager. Must love coworking.

That’s the gist of a recent job posting on career-focused social media site LinkedIn by New York-based Tishman Speyer, one of the nation’s largest office landlords, seeking a professional in Beverly Hills, California, to lead the investment firm’s newly established coworking operations. The need is accelerating as the landlord grapples with fast-growing shared office space provider WeWork and similar startups that have severely disrupted the traditional office-leasing business model during the past eight years.

Tishman is one of several of the world's largest established commercial real estate landlords, spanning from Blackstone Group to Hines, that are now placing major financial bets in the burgeoning world of office coworking. Major landlords nationwide are hiring more cowork-knowledgeable staff, acquiring or partnering with existing cowork firms, rolling out their own amenity packages and branded concepts and launching other new strategies as they figure out how to capitalize on the growing trend.

“There’s currently a gold rush going on in coworking,” said Scott Homa who, as director of U.S. office research for brokerage Jones Lang LaSalle, tracks the fast-growing coworking industry.

Tishman, a decidedly traditional and well-heeled global property investor, is about to take a serious stand of its own and roll out six self-operated coworking spaces called Studio, beginning with its most prominent property: New York’s famous Rockefeller Center, which will see the debut of the first outpost on Nov. 1.

That will be followed by Studio openings at Tishman-owned office buildings in Boston, Washington, D.C., Chicago, Beverly Hills, California, and Frankfurt, Germany.

Meanwhile, investment behemoth Blackstone’s EQ Office has entered into its first coworking partnership with Brooklyn firm Industrious at an office complex in Los Angeles and Teachers Insurance and Annuity Association of America’s real estate investment management unit TH Real Estate leased more than 250,000 square feet in New York to WeWork.

A modern twist on the aging shared executive suites concept, coworking is a shared-office space trend largely made popular by WeWork and numerous imitators. Coworking operators typically sign a direct lease with a landlord, then build out that space with a number of desks and amenities, many geared toward providing a sense of community and fun.

Those companies then sublease the built-out space on short, flexible terms for a premium to individuals or companies looking for desks or small office space. The concept is frequently praised for its trendy, collaboration-friendly, open-concept feel and rich social and hospitality-like amenities that include everything from beer taps in community kitchens to shared movie nights.

It's not just popular with entrepreneurs or niche industries. Marquee companies such as online retailer Amazon, computer company IBM and social media provider Facebook are leasing hundreds of thousands of square feet from coworking companies today.

A recent national report from Jones Lang LaSalle noted that flexible office space, including co-working, has grown its footprint by an average annual rate of 23 percent since 2010. Flexible-space square footage in the United States went from 12 million in 2010 to more than 27 million in 2014, approaching 60 million as of mid-2018.

A sign of just how rapidly the concept is growing: WeWork now says it is the largest office space occupier in Manhattan.

Some landlords still outright reject the concept, worried about the toll the influx of workers take on a building and about whether the trend is just a passing fad that could disappear in the next economic downturn.

But, more and more old-school investors and developers are making their first inroads into the sector as the industry grows.

And several of the big global developers, like Houston-based Hines, are in the early stages of figuring out just how to play in the coworking arena.

“Coworking is a new factor that’s shaping the industry, and you have to adjust to the reality that it’s a trend that is here to stay,” said Paul Twardowski, senior managing director for Hines’ Western U.S. and Asia Pacific regions.

Here are some key recent moves by some of the largest commercial real estate operators in the realm of coworking. Data comes from company filings and announcements, industry reports and interviews with building operators.

Growing Investments

SoftBank Vision Fund grabbed the headlines for a series of injections into WeWork totaling $5.4 billion. In the past year there have been plenty of other big investments by the established commercial real estate giants, including Blackstone Group’s $640 million acquisition of London coworking provider The Office Group, and Brookfield Properties’ more than $200 million in investments in coworking firm Convene. Brookfield had unsuccessfully attempted a $3.7 billion acquisition of coworking behemoth Regus parent International Workplace Group.

Boston Properties, TH Real Estate and The Carlyle Group are among the other big landlords and investors now openly embracing coworking in their office buildings.

In some cases, the established investors are forging their own paths in the realm of shared spaces with enhanced amenities, enabled through new software applications. Among those is Tishman Speyer, best known for projects like its redevelopment of Yankee Stadium and an upcoming major mixed-use development near the San Francisco Giants’ ballpark.

It’s scouting for a West Coast pro with expertise in areas ranging from hospitality and sales to customer service and community building, according to its early September job posting. It also recently had a LinkedIn job posting for a “Coworking Ambassador” in New York.

Last year, Tishman Speyer rolled out a suite of services called Zo at its Rockefeller Center complex, with plans to expand it to its other properties. The app-enabled service allows time-strapped tenants to book appointments for health screenings, medical services, child care and personal grooming services, many of which are offered on-site.

The company is now seeking to boost its profile in coworking, which like on-site services is deemed an important factor in competing for tenants increasingly in search of a work-life balance at a reasonable cost for their workspace.

It is introducing its own coworking concept called Studio at Rockefeller Center in New York City, in the building at 600 Fifth Ave. It will be the first of six Studio locations around the world that are part of an initial roll out of coworking spaces "that have been meticulously curated to build both community and cater to individual needs,” according to Thais Galli, senior director for innovation at Tishman Speyer.

Tishman officials said the debut New York space, spanning 35,000 square feet, has drummed up enough advance demand ahead of the November opening that the company is already planning to expand it.

"We've seen great demand for flexible office space from our enterprise clients and prospective tenants," Galli said. "Tishman Speyer understands the importance of agility and the need for companies of all sizes to be able to move quickly and scale as needed."

The company also recently confirmed coming Studio openings planned for its buildings at 125 High St. in Boston, 900 19th St. in Washington, D.C., The Franklin complex in Chicago, 407 Maple Plaza in Beverly Hills and Frankfurt's TaunusTurm complex.

Late last year, global office owner Hines issued a request for proposals, seeking potential partners for flexible-space arrangements.

Hines’ Twardowski said the company has staff members specifically responsible for charting its coworking future. Decisions to be made in its multiple office projects in the pipeline worldwide include what kinds of services to offer and how much space in a given location should be devoted to co-working.

The answers will vary from city to city, and often between neighborhoods in the same city, he said. Who to partner with, and how much coworking to offer, have implications for matters including what tenants will be willing to locate in a building, and who will be willing to finance projects.

“If you have 10 percent of a building leased to a coworking company, maybe that’s fine, but once you get over 50 or 60 percent, maybe you need to factor that into your decision a little differently,” said Twardowski, who is based in Hines’ San Diego office.

Coworking considerations, for instance, will play a role in Hines’ big upcoming San Diego projects, including a planned third high-rise office tower at its La Jolla Commons complex in University Town Center, and a major mixed-use overhaul of the Riverwalk golf course in Mission Valley, slated to include offices.

At those and other national and global locations, Hines may ultimately decide to invest on its own in order to create shared-space elements that can help draw and retain tenants, by serving not only cowork members but also the larger permanent corporate occupants of its buildings, he said.

For instance, many large law firms need temporary shared spaces where lawyers visiting from out-of-town can conduct their work. Other common-space elements like on-site restaurants and fitness centers may need to be reconfigured to better accommodate the coworking culture.

The thinking is that if a large owner like Hines is footing most of the bill for cowork-related building improvements, it might as well find ways to capture more of the long-term returns on that investment. “It’s a constantly evolving thing and there’s never going to be one solution for all locations,” Twardowski added. “There’s going to be a different need and a different mix for each situation.”

Blackstone Group’s EQ Office had a similar train of thought when it entered into a partnership with Brooklyn coworking firm Industrious in its 1.3 million-square-foot Los Angeles office complex called the Howard Hughes Center near the Los Angeles International Airport.

Industrious will operate coworking facilities of as much as 140,000 square feet for teams of up to 200 people as well as maintain the common area on the ground floor of the six-building office complex.

“This is part of an industry shift away from arms-length leases,” Jamie Hodari, chief executive and co-founder of Industrious, previously told CoStar. “Part of the reason why landlords in circumstances like this prefer a management arrangement with an operator like us is that it greatly enhances and expands the scope of what we are able to do for the building."

Despite rising valuations and capital investments, some of the big office owners are not yet sold on the touted glories of WeWork and its fellow coworking upstarts. Responding to an analyst’s question during an April 2016 earnings call, Empire State Realty Trust Chief Executive Anthony Malkin noted that while his company leases to traditional shared-office service providers like Regus, it was not rushing to make deals with the fast-growing WeWork.

Malkin cited security matters and potential damage done to buildings by large volumes of users at WeWork and similar cowork spaces, representing risks to owners not justified by the rents being collected.

“They beat the hell out of the buildings, bathroom systems and again, as I said, why should we take a venture capital risk where our only upside is to collect rent?” Malkin said, according to a transcript of the earnings call.

The New York City-based real estate investment trust, which owns properties including the Empire State Building, does not appear to have softened its stance in the past two years -- though Malkin acknowledged at a New York University forum earlier this year that his firm has adopted WeWork-like space-sharing practices at its own headquarters office.

Other landlords such as Los Angeles’ Kilroy Realty Corp. appear to be taking a cautious approach, too. The real estate firm has only one significant lease to a coworking firm in its 13.9 million-square-foot portfolio. It leased 93,000 square feet to New York’s NeueHouse, an upscale creative-industry-focused shared office space concept, in a former CBS radio building in Hollywood, one of the hottest coworking markets in Los Angeles County.

Boston-based Pembroke Real Estate is also wading into the sector, recently leasing to IWG’s Spaces cowork concept at one of its Australia buildings and weighing similar arrangements elsewhere.

Jones Lang LaSalle’s Homa said major property owners are now investing in the cowork model, with owner/operator arrangements expected to provide a buffer during future economic downturns. Among other factors, shared-space office facilities tend to be run more cost-efficiently than may have been the case a few years ago, with building owners increasingly targeting and accommodating large, credit-worthy corporate users.

As coworking becomes more mainstream, it garners increasing acceptance from corporate users and their landlords, along with others who finance new office projects. Whether they go it alone or choose to partner with middle-man entities like WeWork, office owners are using coworking as a competitive element, similar to the way that on-site gyms and cafes were viewed as differentiators a decade ago.

“It really becomes all about enhancing the tenant experience,” Homa said, noting that results of the latest cowork investments by major office operators are likely to play out over the next several years.

Lou Hirsh, San Diego Market Reporter  CoStar Group   
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