Originally published in NAIOP

By Ariel Maidansky

The meteoric rise of the coworking industry has been fueled by its simple value proposition for individuals and small businesses: Coworking spaces provide clients with a one-stop solution for their office needs, dramatically simplifying what would otherwise be a complex process involving the lease of a space, design of the office, purchase of furniture, logistics of setting it up, and so on.

This has fueled growth of about 26 percent a year in the coworking industry since 2010, according to CBRE, which expects another 36 percent jump this year. The overall serviced office leasing industry in the U.S. is worth $2.4 billion and has grown at an annual 6.3 percent from 2014-2019, according to IBISWorld.

The Growth and Limits of the Coworking Model

The coworking concept has become the new office standard for entrepreneurs and small businesses, which benefit from the flexibility and low up-front costs compared to the traditional model of multiyear leases for commercial real estate.

A number of coworking start-ups like Knotel and Industrious have sprouted to focus on providing turnkey shared space for companies. But what happens when businesses outgrow coworking spaces and need their own dedicated office to accommodate more staff and privacy?

This is where commercial real estate owners have an opportunity to seize on the trend and attract the growing ranks of coworking “graduates.”

Coworking Perks with Traditional Real Estate Packaging

Companies in the property leasing space are usually separate entities from those in the office equipping space. A prospective corporate tenant usually would have to agree to a lease and then have the financing to design and furnish the space according to their needs.

That entails hefty up-front costs that can be difficult for start-ups to afford, particularly if they have to pay higher interest rates than more-established companies.

Innovative real estate owners have a chance to create a win-win situation for themselves and for tenants. And the concept works because it borrows from the coworking concept. In 2020, forward-thinking property owners have the chance to provide a comprehensive solution with low up-front costs for business tenants, and bundle the entire package into the monthly rent invoice.

By vertically-integrating the service of providing four walls in addition to the items within them, a real estate owner grows their revenue, diversifies their revenue streams and increases retention.

The Math Behind Real Estate and Furnishing Integration

Backed by their real-estate assets, property owners access significantly better financing terms than start-ups to cover the costs of furnishings and other equipment needed to get an office up and running. And there are advantages for them as well.

The owner should be able to secure a 2- to 3-year loan at a sub-10 percent rate, compared to the 13-18 percent capital cost that a young company might be facing.

That difference represents savings of between $9,000 and $24,000 over a three-year period on a $100,000 loan. In addition, large real estate owners should be able to access a better deal on furnishings and other office supplies and services than individual companies. The owner can then build these up-front costs into the lease, adding them to the rental cost per square foot.

For owners, this model offers the opportunity to increase their attractiveness to prospective tenants and to charge a premium per square foot for their space. It can also reduce their vacancy rates since a tenant contemplating moving out will likely face the prospect of moving into an empty office that needs furnishing — a financial burden that may be too expensive to stomach.

The wins of the integrated model are also shared with the lessee. Tenants benefit from lower up-front costs and a simplified experience that allows them to use a space they love without all the hassles of setting it up. The friction of moving in disappears.

Opportunity to Address a Growing Need

Commercial real estate owners who can provide this type of turn-key service and create savings through lower capital costs will be in a good position to attract high-quality tenants.

In a way, it’s a recognition of how the coworking boom has transformed the world of work and expectations around it. Companies increasingly want and expect their offices to be fully furnished and ready for business from day one.

After years of watching the coworking revolution spread, commercial property owners now have a clear opportunity to capitalize on rising demand for this kind of leasing product.