Coworking Spaces Seen as Key Tenant for Houston Office

A Spaces branded coworking space overlooking Kirby Grove in Houston.

Coworking reigns as a core strategy, rather than a craze, against the backdrop of commercial real estate evolving from a space-leasing business to a service-delivery business, said speakers at a ULI Houston luncheon in November. Panelists also touched on the implications for Houston of the release of Emerging Trends in Real Estate® 2019.

Jonathan Brinsden, CEO of Midway, a Houston-based real estate development and investment firm whose focus is urban, infill mixed-use development, said that his firm and other commercial real estate players are no longer just landlords—they’re hospitality businesses.

Coworking represents the rise of the real-estate-as-a-service model, according to Brinsden, who is also a ULI trustee.

“Real estate is transforming from a space utilization business to a service business,” said Brinsden, whose company has signed deals with coworking king WeWork Cos. “How do you deliver the best possible service and experience to me as the user? That entails a lot of things now—people want flexibility, people want amenities.”

In that vein, Paul Layne, Central Region president of the Howard Hughes Corp., a Dallas-based real estate developer, said his company is incorporating coworking spaces into multifamily properties as it strives to supply “white-glove service” to tenants. Howard Hughes specializes in hospitality, master-planned, mixed-use, office, residential, and retail projects.

Layne said he’s working with WeWork and one of its chief rivals, IWG PLC’s Regus, on several coworking leases in the United States.

Coworking is “a fantastic concept,” said Layne. “It allows a partnership with the landlord and the coworking entity to provide short-term solutions for companies that don’t want to sign a five- or 10- or 15-year lease. You have to embrace it.”

The embrace of coworking speaks to the notion of providing white-glove service to tenants, according to Layne.

From left to right: moderator Jimmy Hinton, managing director, research, HFF; Paul H. Layne, president, central region, The Howard Hughes Corporation; Byron Carlock, partner, PwC; Jonathan Brisden, CEO, Midway; Cara Underwood, managing director, Principal Real Estate Investors; and Tim Williamson, executive vice president, Cadence Bank; speaking at a ULI Houston event at the Junior League of Houston.

“We’re trying to listen better to our customers that pay our rent,” he said, “and then react in a very immediate way.

“I think that’s where the world’s going, and it’s needed and it’s expected,” Layne said of delivering a higher level of service. “If you’re going to get the highest rents out there, I think that’s what you’re going to have to do.”

As Howard Hughes and others react to tenants’ wishes, amenity-rich coworking spaces—with features such as shared conference rooms, exercise areas, and food-and-beverage stations—are gaining ground.

According to commercial real estate services company CBRE Group Inc., coworking providers accounted for 4.4 percent of square footage leased in major U.S. deals during the first half of 2018, up from less than 1 percent in 2013. If coworking’s share of major leases maintains that pace, its leasing activity will surpass that of the legal, government, and insurance sectors by mid-year 2019, CBRE says.

A February 2018 study of 20 major U.S. markets by data provider Yardi Matrix tallied nearly 1,200 coworking spaces encompassing almost 27 million square feet (2.5 million sq m). WeWork and Regus dominate the coworking industry in the United States, with the Yardi Matrix study reporting they occupied nearly 17 million square feet (1.58 million sq m) in those 20 markets. WeWork is now the largest private office tenant in Manhattan.

According to the Emerging Trends in Real Estate® 2019 report, copublished by ULI and PwC, about three-fourths of WeWork members are small businesses, including first-time entrepreneurs, startups, and nonprofits. Yet more than one-fifth of Fortune 500 companies are WeWork members, the report says.

Attendees of a sold-out ULI event at the Junior League of Houston.

The ULI/PwC report notes that WeWork seeks to create a sense of community, accentuated by a move toward higher-quality building finishes and tenant improvement costs—a standard that is spreading into the office market at large.

“Investor attitudes toward the coworking industry changed significantly in the past year,” the ULI/PwC report says. “Regarded skeptically a year ago, particularly in regard to short-term member leases that underlay coworking tenants’ longer-term building leases, investors are now considering how to use coworking strategically, particularly in urban areas.”

As such, a number of companies are getting in on the coworking action. For example:

  • In October 2018, CBRE launched a coworking subsidiary called Hana.
  • Life Time, long known solely as an operator of fitness centers, jumped into the coworking industry in April 2018 with the opening in the Philadelphia market of its first Life Time Work location.

Brinsden equated WeWork, Regus, Hana, Life Time, and other coworking brands with hotel franchises that boast valuable operating models.

A report from commercial real estate services company JLL says that given the amount of venture capital being pumped into the coworking sector, the industry’s aggressive growth shows no signs of letting up. JLL predicts that coworking will make up 30 percent of the U.S. office market by 2030.

Along those lines, a recent survey by commercial real estate services company Cushman & Wakefield Inc. and professional association CoreNet Global found that corporate real estate professionals expect 23 percent of their global employees to be taking advantage of coworking within the next five years.

In light of current trends, “we expect flexible space to remain one of the office market’s primary growth catalysts for quite some time,” the JLL report says.

At the ULI Houston event, Byron Carlock, the Dallas-based leader of PwC’s U.S. Real Estate Practice, indicated that his firm is also one of the drivers of that growth. Thanks in part to its reliance on coworking space, PwC has erased $1 billion in occupancy costs from its P&L and has shrunk its per-person footprint while bumping up its headcount by 30 percent, he said.

“When we need swing space for special projects or special meetings, we have relationships with WeWork to take conference rooms for a day or a week or a month,” Carlock said, “and not have to take more permanent space.”

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