When co-working office provider WeWork first launched, it served as a reliable customer to landlords as it leased unused space to small businesses. However, once WeWork began to make deals with bigger companies, landlords realized their core business was being threatened and knew they had to act. That’s when companies like Hines Interests LP started to launch their own co-working businesses and compete with WeWork directly, The Wall Street Journal reports.
Hines Squared CEO Jeffrey Hines noticed co-working companies starting to speak with potential clients, he recognized his traditional firm had to change with the times. The company worked with venture capital firm Fifth Wall that specializes in proptech and then decided to partner with existing co-working companies rather than build one from scratch in the interest of time. Hines opted not include WeWork in the process, as the Fifth Wall team believed other co-working companies would be more open to working with landlords.
The company chose co-working companies Industrious and Convene to partner with Hines Squared. Hines contributed the office space and the co-working firms would operate. The company’s first four locations are located in Houston, Atlanta, Salt Lake City and Calgary, Alberta. The locations are known as “The Square” and offer food and beverage services as well as meeting and event areas.
Other landlords like Boston Properties and British Land PLC have since followed Hines Squared’s lead. Tishman Speyer’s co-working brand, Studio currently has six locations open and another half dozen under construction.
Landlords creating their own co-working companies bring two questions to the real estate industry, according to The Wall Street Journal. First can large CRE owners fend off their business being undermined? Second, can the co-working start up companies compete with a well-funded counterattack?
Amol Sarva CEO of Knotel, a WeWork-like flexible space startup, doesn’t view landlords creating their own co-working companies as a threat because they’re typically slow to embrace new technology.
“This movie has played many times before,” Sarva told The Wall Street Journal. “Life will be hard for incumbent businesses that try to compete with the newcomers.”
Meanwhile, there are some co-working companies that would like to partner with landlords and share the expenses—and profits. WeWork announced a partnership with landlord RXR Realty LLC in May to operate 90,000 square feet at 75 Rockefeller Plaza in New York, according to The Wall Street Journal.
“We do want to align with the landlord,” WeWork Chief Real Estate Development Officer Granit Gjonbalaj said.
However, some landlords don’t believe it and won’t lease space to WeWork.
“Why would a landlord fund someone who is trying to disrupt their entire business,” Empire State Realty Trust CEO Anthony Malkin said. “I think it has been shortsighted, lazy and unintelligent.”
A company like WeWork disrupting the real estate industry was almost inevitable. A lot of landlords still sign tenants to 10 to 15 year lease agreements that don’t have much flexibility. When WeWork launched in 2010, it gave tenants a less rigid and more cost effective alternative. According to CRE services provider Jones Lang LaSalle Inc., co-working’s share of office space has increased approximately 23% annually and could make up 30% of the market by 2030.
“(Co-working) may be the biggest disruption to real estate since the invention of the elevator,” Tishman Speyer CEO Rob Speyer told The Wall Street Journal.
According to The Wall Street Journal, a co-working firm could charge a tenant $100 per square foot per year for space a traditional landlord would lease directly to the tenant for $50. However, John Vazquez, Head of Real Estate at Verizon Communications, noted the costs are about the same because flexible space is more efficient and the co-working company spends money to outfit and design the space rather than the tenant.
”If I can use someone else’s capital and shorten my time commitment and my financial commitments, how is that not a win for me?” Vazquez said.
Co-working company executives believe the traditional landlords are still at a disadvantage, however. Landlords do not yet have the analytics that co-working companies do to track employees and visitor as move from office to office and use desks, conference rooms and other spaces. Plus, co-working firms have more offerings in numerous buildings all over the world.
Landlords are working to offset the advantage by being open with other. An “Owners Council” that comprises Hines, Brookfield Asset Management, Blackstone LP, RXR and British Land meets to discuss technological changes and how they can work together to handle it, according to people familiar with the matter.
“We’re all trying to explore this brave new world together,” Hines executive Charlie Kuntz told The Wall Street Journal.