Landlords With Empty, Costly Coworking Spaces Need To Spend Even More To Fill Them Again
Last year, one in five North American coworking locations either closed down or changed hands, according to a January report by coworking listing site Upsuite, leaving landlords to deal with a 25M SF fallout.
Many coworking and flex office operators fill their spaces with large, open floor plans, surrounded by offices as small as 80 SF. Their build-outs can cost up to 25% more than a traditional office takes to construct, experts say. The money landlords spent to attract Regus, WeWork and others, only to have them give up their spaces, has turned into a sunk cost.
“Truly the build-out, in my opinion, is a complete loss unless you’re able to find that one in a million tenant who wants to sort of take over the existing design and make it their own,” said Jeff Garrison, whose company, S.J. Collins Enterprises, is developing an Atlanta office building that includes coworking space. “That’s very difficult to do because [each company’s offices] have their own personalities that they try to reveal through their design.”
Coworking space can average between $135 and $150 per SF to build in most major markets, according to Heather Stanley, the manager of asset design and support for Boston architectural firm Dyer Brown, which has an office in Atlanta. Traditional office build-out costs range from $110 to $120 per SF, she said.
“It's so tough because every tenant's program is so different,” Stanley said. “I don't think you'll ever get a tenant to take it as it is.”
Typically, landlords pay to build out spaces for their tenants with the expectation that they will recoup their costs over the life span of the lease, but coworking operators large and small have given back a significant amount of leased space over the last year as the coronavirus pandemic has forced many to work from home.
WeWork and Regus have given back 165K SF in Metro Atlanta since last year, according to Colliers International research. Regus has closed 39K SF at Concourse Corporate Center One, 25K SF at The Proscenium in Midtown and 21K SF at Buckhead Tower, and WeWork shuttered its 80,200 SF location at 101 Marietta St. in Downtown Atlanta. The coworking giant has closed multiple locations in New York, Los Angeles and Washington, D.C.
The contraction is an abrupt shift from coworking's expansion in the years before the pandemic. Atlanta has nearly 2.3M SF of coworking and flex office space today, according to Colliers, down slightly from its 2020 peak, but nearly double what it had in 2017, when the market stood at 1.3M SF.
Coworking space design is now a pricey obstacle for landlords to try to overcome. The layouts don’t work for traditional office tenants, who look for spacious private offices offset by rows of workstations or cubicles around the main floor, with a smaller focus on common and amenity spaces.
Coworking spaces are usually designed with an open central space populated by desks, tables and couches that encourage collaboration and mingling. Most coworking operators design the individual offices, which usually ring the open spaces along the walls, to house one or two people per suite, with groups of six at the higher end of the size spectrum, said Jamie Russo, the founder of Everything Coworking and the former CEO of the Global Workspace Association.
The average coworking private office is designed for an average of 50 SF per person, sometimes even smaller, she said — a two-person suite averaged around 80 SF.
“Most corporations don't have micro-offices,” Russo said.
Common areas, which range from 20% to 40% of a typical coworking floor plan, are designed to attract members. Private suites are how operators determine how many people can ultimately work in a single location and are used to monetize the coworking facilities. The more people, the more revenue. But long hallways of one- and two-person offices make these spaces expensive and hard to translate to a traditional office tenant, she said.
Some landlords see the benefits of unused coworking space. Madison Marquette President Bill Weghorst told Bisnow he expects many office tenants will struggle to decide on long-term lease commitments for the next 12 to 24 months. That may force some to seek short-term renewals.
“You're trying to figure out what that next user is going to be. But the thing we don't really know right now, is this going to be a short-term blip?” Weghorst said. “Nobody really knows that answer right now.”
Other landlords may take on the spaces themselves and try to continue to operate them on their own. That ability to charge higher rents in exchange for flexibility is alluring to some landlords, said Arun Nijhawan, whose firm, Lucror Resources, has operated its own coworking space at Downtown Atlanta’s historic Flatiron Building since 2016. But that strategy also comes with risks.
“If the landlord doesn’t have the skill set to do that, then obviously they shouldn’t do it, because they’ll lose a ton of money,” Nijhawan said.
S.J. Collins’ project, The Interlock, was initially supposed to have a 120K SF WeWork taking up a majority of the 200K SF office building planned for the project’s first phase. Earlier this year, S.J. Collins amended its 2019 lease with WeWork earlier this year, reducing its footprint to 40K SF. The lease was renegotiated before S.J. Collins started building out the space, said Garrison, a partner at the firm.
Garrison said former coworking spaces could be ideal ready-to-occupy suites for companies wanting flexible, short-term holdovers.
“If you're creative and you're in a good location, you can find a way to reposition those spaces,” he said. “You would keep it as is. Now's a good time to do that.”
While WeWork is still planning to open at The Interlock in West Midtown, its sign atop the 36-story 101 Marietta St. in Downtown Atlanta is coming down soon.
The Dilweg Cos. owns the building, where WeWork signed an 80K SF lease in January 2019, with an option to expand to 100K SF. Roughly two years later, landlord and tenant “mutually agreed” to terminate the lease.
Dilweg Managing Director Jerry Banks, in an interview this week, declined to say how much Dilweg spent on WeWork’s build-out, other than “it was a lot” and on par with other WeWork tenant improvement packages elsewhere.
Dilweg is now actively marketing the space, spanning floors 28 to 31 in the distinctive tower, and Banks said Dilweg has devised a number of potential ways to adjust the space for multiple smaller users, including offering to shell out tenant improvement allowances.
“It’s probably going to be a reasonable [cost] number to adjust,” he said. “There may be some adjustments to make adapting it. And we have those designs, but we think they are very doable.”
That will cost some money, he said, but perhaps not as much as it would to tear out all the infrastructure, shell out the space and redesign it for a single user.
“We're going to make the right deal for the right tenant that comes along that makes the most sense for that building,” Banks said. “That other tenant is in the past.”