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Landlords Start Tapping Into the Coworking Craze

'Coworking is Becoming the New Amenity'
June 26, 2018
Beer and kombucha on tap in the kitchens. Lounge areas with ping-pong tables. Community events like movie screenings and hackathons.

Coworking amenities have been attracting thousands of entrepreneurs, start-ups and established firms - and their significant lease dollars - to independent operators like WeWork across the country.

Now, office landlords that have watched as coworking has exploded through the market are getting in on the action more directly.

Last week, the Blackstone Group L.P.’s EQ Office announced a licensing agreement deal with Brooklyn coworking firm Industrious that would partner the companies at one of its Los Angeles office complexes. It follows moves by other companies such as Brookfield Office Properties and Tishman Speyer, which also have been dipping their toes into partnering with, or imitating, coworking firms.

“Coworking is upping the game for everybody, and it’s allowing landlords and occupiers to see there’s a whole different service-level offering we should be looking at that goes above and beyond providing space,” said Peter Belisle, southwest market director at Jones Lang LaSalle Inc. “It’s about focus on the soft services, not just the brick and mortar.”

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.

But EQ Office and Industrious' new deal isn't a direct lease, but instead is more of a partnership for the 1.3 million-square-foot Howard Hughes Center located at 6100 Center Dr. in Los Angeles’ Westside. Industrious will operate coworking facilities of up to 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,” said Jamie Hodari, chief executive and co-founder of Industrious. “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."

Industrious, which independently operates two coworking locations in Los Angeles, will provide amenities not just directly to coworking customers but all other tenants or visitors to the office campus as well.

Hodari says his company will help the campus to feel more cohesive and similar to the type of property one might find at a Google headquarters campus - even if there are several different companies doing business there.

The property is also undergoing significant renovations that will add additional amenities including a farmer's market and programmed fitness events to revamp it to the standards sought by the surrounding "Silicon Beach" tech community.

In an era when office amenities are becoming an increasingly important factor in a company's ability to attract and retain talent, thanks in-part to tech campuses, the whole package could give the landlord a boost to attract new firms to the sprawling campus looking to cash in on the shared services.

“Coworking is now becoming the new amenity,” said Kay Sargent, senior principal and director of WorkPlace practice at HOK, who focuses on workplace design and strategy. “Years ago, everybody had a gym but now it’s coworking. What we learned is, you can’t just put in a space and say you have it. People go to gyms for the comradery, instructors and classes and that’s why corporate gyms aren’t used as much.”

She said the same can happen in coworking. “You have to create a sense of community,” she said.

The deal is the first of its kind for EQ Office, which announced its name change from Equity Office last week.

EQ Office leases space to other coworking operators including Regus, WeWork, Convene and Mindspace. It says it won’t necessarily stop continuing to do deals with others. But this program with Industrious is a pilot. If it’s successful, EQ plans to implement it in other buildings.

The company said the goal is create collaboration, conferencing and amenity experiences across the campus.

“Our partnership with Industrious enables us to creatively deliver another office product in our market for those that seek space on more flexible terms with low customization,” said Spencer Rose, managing director of the western region for EQ, in a press release. “This ultimately allows us to meet the needs of a variety of customers.”

Financial terms of the license agreement were not disclosed.

EQ is not the only landlord with this idea. Their announcement follows a deal Brookfield Property Partners made with coworking group Convene last year. That deal partners the companies in their 8.6 million-square-foot, Class A office portfolio in the Downtown Los Angeles market.

In that agreement, Convene has been opening suites of flexible workspace and on-demand meeting and event spaces as well as cafes with locally-sourced food and beverage options to tenants in the building. It also operates common space in the building lobbies, as well as programming and other services for the tenants.

“Our partnership with Convene will facilitate the successful rollout of the company’s unique hospitality services within our Downtown Los Angeles office portfolio, greatly enhancing the flexibility and sense of community we offer to our tenants, and ultimately pioneering the future of interconnected office communities,” said Bert Dezzutti, western division executive vice president at Brookfield Property Partners, in a statement when the program was instated last year.

Some coworking companies are expecting this trend to ramp up considerably. In fact, coworking goliath WeWork offers a service line called Powered by We that landlords or companies themselves can call upon to give their own real estate the WeWork treatment.

Partnerships with landlords can be safer bet for the coworking firms in many ways too.

"Coworking operators are realizing we have to rent this space and it’s a risky proposition," said Sargent. "So they are partnering with the developers and saying I'll come in and operate it and it'll spread out the risk and it will benefit us both."

On the other end of the spectrum, some landlords may be interested in cutting out the middle man entirely and taking on the responsibility themselves.

Tishman Speyer rolled out a pilot series of amenities and services for its tenants at Rockefeller Center in New York City last year. Called Zo, the suite of services provides access to everything from back-up childcare and rideshare services to medical services and food service to Tishman’s tenants and their employees.

“Zo represents a shift in the mindset of how we run our business and our portfolio,” said Rob Speyer, chief executive of Tishman Speyer, in a press release when it was announced. “Our most important job is to serve the 250,000 people who work in our buildings each and every day. Instead of defining ourselves by the square feet we own, we will define ourselves by the quarter million people who use the square feet and how well we tend to them.”

Overall, this is likely just the start of a broader shift in the office market - and could be the beginning of a fight for who can figure out the perfect formula first.

“Programmatic services are a big shift in real estate services,” Belisle said. He compared the shift to the luxury cruise line industry where cruise operators differentiate themselves based on their intimate client relationships and collection of services and events onboard.

“These luxury operators are doing education programs, seminars, hiring guest speakers and providing geography and history of stops on the ship's itinerary,” he said. “They are providing more than a boat and three meals a day.”

Observers watching this trend unfold don’t believe this is a flash in the pan either. It's likely not just soft services that will change in this new kind of office market structure going forward, Sargent added.

“This absolutely is going to change the way we deliver space and it’s going to challenge leases as well,” she said.

Jacquelyn Ryan, Los Angeles Market Reporter  CoStar Group   
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