As billions in institutional capital flow into Coworking and sophisticated Coworking operators compete on a global scale, even the most experienced among them will make mistakes. Some mistakes, such as poor hires or misdirected marketing efforts, can be quickly corrected, but poor real estate decisions can have lasting consequences that may compound over time. Let’s take a look at 4 costly CRE mistakes.
Our team at Savills Studley has advised and represented many national and regional Coworking operators and gained unique insights into the Coworking industry, especially as it relates to commercial real estate. Overall, the industry has done a great job improving best practices in architecture, design, operations, marketing and technology, but it has room to improve in making smart real estate decisions.
Tunnel Vision: Overly Rigid Search Criteria Leads to Missed Opportunities
A foreign operator recently called seeking help in opening its first US location in Los Angeles. After describing the brand and business plan, their head of real estate got into specifics: “We need 30K SF, walking distance to the beach, and our max budget is $48 per square foot.” Anyone who knows the LA market knows these parameters are not realistic.
In location selection, Coworking operators fall into two types: (1) The Repeaters who stick to the same site-selection criteria predetermined in their business plan (or stay wedded to what has worked in another market), or (2) The Reality players who use their criteria as guidelines, not blinders.
Operators opening in new markets should take care to be open minded, rather than limited by their own CRE strategy. Tour and consider any property that has the right amount of available space, a landlord open to a Coworking tenant, and demographics that support strong demand.
Too many times we have seen an operator eliminate a building ripe for Coworking based on non-material factors. Then, like clockwork, within 6 months a High Valuation Coworking Behemoth, whose name you know well, announces it has leased the property. The group that passed on the building is left kicking themselves.
In competitive markets, too many operators prematurely dismiss viable locations. How ironic that operators in an industry borne and built on flexibility often lose out due to rigidity!
Not Appreciating Submarket Nuance and Local Competition
Every market is unique. In vertical and dense New York City, for example, one might walk 10 minutes, take a five minute subway, or a two minute cab ride from office to office. In Los Angeles, however, going from one workplace to another may require 30 minutes driving time and 10 minutes to park. It’s not enough to parachute into town for a day or two of building tours and expect to make a fully informed decision.
Every market has nuances of its own, and it takes time to learn individual market traits. Consider that WeWork has two locations 0.4 miles away from each other in downtown Santa Monica (312 Arizona Ave and 520 Broadway), each with its own distinctive vibe, both at capacity with waitlists. Also consider that Brentwood has a 4.3M square foot office market in West LA, but it has no successful Coworking operators and likely won’t have any anytime soon.
Brentwood is only about 2.5 miles away from downtown Santa Monica, where there are a multitude of successful operators, but those 2.5 miles could be fatal to the success of an operator’s business.
To an LA native, this difference seems obvious, but nuances between Mid-Wilshire and Miracle Mile, or Culver City and Fox Hills, may be more subtle. Yet, they are crucial to understand before signing a long term lease and investing precious time and capital.
Important factors to consider:
- Where is the competition is looking?
- Will your target member base likely overlap with nearby competitors?
- How will public transit impact your member base, now and in the future when access may change?
- Analyze driving times – how far away can members realistically commute from?
- What amenities are there today and what is planned for the next 12-24 months?
- What types of employers and which companies are growing in the submarket? Ancillary businesses like to be near rapidly growing companies (e.g., the Netflix effect in Hollywood).
While time is precious, and it may not be realistic to fully grasp the geographic intricacies of a particular city, do not dismiss analyzing the submarket and local competitors. Do your homework and consider all of the choices a tenant could make; this information is readily available for those who know what to look for.
Failure to Understand Unique Landlord Motivations
It is true that most successful national and global operators have succeeded by creating a brand and a business that can be replicated in multiple markets. This does not mean, however, that negotiations can proceed in a cookie-cutter fashion.
How Coworking operators approach and negotiate with landlords can determine whether they get the desired space. Landlords are individuals and each has their own motivations and pain points. Approaching every space and every landlord the same way will undoubtedly cause you to miss out on opportunities.
Typical office tenants (law firms, banks, technology companies, etc.) often have the luxury of being able to approach landlords as if space is a commodity and they are the consumer. Coworking operators need to think differently. When an operator is leasing 30,000 SF and getting an $80/SF Tenant Improvement Allowance, the landlord is literally making a $2.4 million investment in the company.
Although it is nice to tout architecture and design, in the landlord’s eyes, there is little to no salvage value if the operator goes bankrupt because large 40 square foot interior offices used in Coworking are not valued by the overwhelming majority of office tenants.
It is essential to take a close look at the property, landlord and submarket and ask:
- How long has the space been on the market?
- How much additional space is vacant in the building?
- Are any of the larger tenants in the building planning to move?
- Does the landlord have a mortgage maturing a plan to refinance?
- Is the landlord planning to sell the building?
- What’s the vacancy rate of the submarket where the property is located?
- Are there a lot of other tenants in your size range currently touring the market?
Years ago, in a lease negotiation meeting between a well-capitalized, national Coworking client and one of the largest institutional landlords in the country, the landlord poked and prodded to better understand the operator’s relationship with enterprise clients.
The operator named a handful of blue-chip companies it had close relationships with and its track record of hosting their satellite teams in several of their locations throughout the country. It just so happened that two of the companies named were already tenants in this particular building, and the landlord’s fear that the operator’s tenancy might cannibalize some of their other tenants became much more realistic.
The unique circumstances of each building’s owner can have a direct impact on the economics of a deal and should inform your approach. In a typical landlord meeting, a Coworking operator’s relationships with enterprise clients would be largely positive. In this situation, however, it was a factor that derailed its negotiating position.
Although this property was part of a 3 million square foot campus and it would have been tough to know every tenant in the project, the point remains that thorough research can help you avoid putting your foot in your mouth.
Being Generic – Failure to Differentiate
Differentiation is important. Package yourself appropriately and succinctly. Five years ago, Coworking was a new topic when approaching landlords. In today’s market, however, every landlord is familiar with WeWork and more broadly, the workplace-as-a service industry. In most major markets it is even likely that multiple Coworking operators are engaging with landlords simultaneously. This has made preparation, packaging, and a good first impression even more vital.
Knowing who you are and what you stand for and being able to articulate your message are critical in differentiating yourself from the competition. This holds true whether you are The Wing and cater to a women-only member base, or NeueHouse that connects creative elites, or Industrious, which serves as home to established professionals who have upgraded from the Regus’ and Premier Business Centers of the world.
While negotiating on behalf of Industrious with a wealthy, old-school 70+ landlord revealed that he thought of Coworking as space for a gaggle of millennials whose parents wanted to take back their hijacked kitchen tables by sending them to a shiny, new creative office to tinker with their technology while listening to electronic music and drinking craft beer.
Industrious showed the landlord that their members’ average age across their dozen locations was 37. A few simple and accurate data points gained the landlord’s full attention, and we became a top contender for the space.
Avoiding these costly real estate mistakes will help Coworking operators gain a hold in desired markets. Unless you have a $24B valuation and the ability to securitize a lease without blinking, you have to approach your real estate decision making with discipline, agility and opportunism to win success.
Because this business isn’t getting less competitive anytime soon.