Office Space Disrupted
The business incubator was coming into its own as a legitimate economic development tool when I entered the economic development profession in early 2000. Incubators are bricks-and-mortar facilities offering small office or warehouse space for start-up companies at below market rates. These facilities are often subsidized by a local government, educational institution and/or an economic development agency. However, incubators included more than just affordable commercial space, it came with additional business services, business advising, and mentoring with the intent to ensure a greater chance of success when the startup was stable and profitable enough to move out of the incubator and into the real world. Over the course of the decade, incubators evolved into “accelerators,” which de-emphasized the physical aspect and emphasized capital creation. Concurrently to the emergence of business incubators were executive office suites, or “office hotels” as they are nicknamed. These are for-profit ventures offering short-term office space with an array of in-house business services often catering to the traveling business person or short-term project consultant or contractor. Both offer short-term rentals with built-in services, i.e. copier, PO boxes, conference rooms, etc. The difference being that the later caters to established businesses, and the former to the business start-up.
Today, we are seeing the emergence of coworking space. Coworking strongly resembles a convergence of the two aforementioned concepts. The tenant mix includes both start-up and established businesses, which all benefit from the convenience of not having to be distracted with the burdens of maintaining one’s physical space or the financial stress of a long-term lease. Some coworking concepts are taking a step further by introducing communal and chamber of commerce like activities in addition to many of the services captured from the incubators. Think of summer camp for small business. In many regards, coworking is still an experiment, but it is forcing traditional landlords to take notice. It became evident to me that coworking was not to be dismissed when I learned coworking was attracting more than just startups and short-term corporate office users, but also established businesses vacating their existing spaces and signing multi-year agreements with coworking providers. Correct me if I am wrong, but that sounds like a traditional lease to me. With Houston’s soft office market, the city has become a breeding ground for this new model, and they are popping up like mushrooms. For this reason, commercial property owners need to take a long hard look at how coworking is disrupting the traditional leasing market. Some landlords have already embraced the model and are converting vacant square footage into their own coworking spaces in attempt to attract tenants. Others are not viewing coworking as the competition, but rather as a potential customer, and are quick to strike deals.
The mushroom effect is largely a result of an infusion of investor capital hoping to capitalize on this trend. However, growth and expansion should not be mistaken as profit. The newness of the industry, and the ever-evolving business models is pushing out the ability to see if this new real estate concept is sustainable. Regardless, my crystal ball is telling me coworking is here to stay, at least for a little while, even if it remains a niche market. Therefore, I would recommend both tenants and landlords look at coworking as another product offering in the commercial real estate landscape.