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March 2021 — Office & Industrial Quarterly — Page 15 www.crej.com ...and much more! CAM Services is Proud to Offer the Following Quality Services Multiple Service Discounts Available Power Sweeping Parking Lot Sweeping Snow Removal Day Porter Services Tenant Finish/Improvements Interior/Exterior Building Maintenance Power Washing Power Scrubbing Fence Repair Stormwater & Erosion Control Signage Repair Curb & Sidewalk Repair Parking Blocks Construction Clean-up Water Damage Clean-up Property Security Temporary Fencing Barricades Rubber Removal Airport Services Event Services Silt Fence Fully Bonded Phone: 303.295.2424 • Fax: 303.295.2436 www.camcolorado.com 24 Hours/Day, 7 Days/Week State-of-the-art equipment, with GPS tracking for your convenience OFFICE — TRENDS O nce the fastest-growing dis- ruptor in commercial real estate, coworking now fights for its life as the global pandemic continues the stress test on this modern concept. In Denver, like many cities, cowork- ing was fueled by startups chasing rapid growth and needing flexibility along the way. The concept provided a great solution for customers by offering leases with flexible terms and sizes. “Need space for three more people? Just sign here.” “Want to keep your office another three, six or 12 months? No problem, happy to have you.” Unfortunately, there were multiple problems with this business model and the global pandemic wasted no time revealing the Achilles’ heel in the system. Does this mean cowork- ing is dead and will leave empty blocks of space around Denver to become a scar on our rent roll? In short, the answer is “no” – if the con- cept pivots. Just one year into the pandemic, the majority of coworking subten- ants likely have seen their lease or membership expiration come up and, in many cases, have opted not to renew due to COVID-19 concerns and governments asking people to work from home. Now, industry leading coworking companies such as Industrious, Knotel and others are grabbing at lifelines by selling to traditional brokerage firms such as CBRE and Newmark. In addition, WeWork is rumored to be entertain- ing a SPAC merger amid its efforts to close four locations in Denver, a move reflective of its push to abandon leases worldwide. Here, more than 1 mil- lion square feet of coworking space currently is leased from a traditional landlord, with the plan to sublease to numerous smaller subtenants and turn a profit. Therein lies the issue; coworking in its first-generation form sought to lease space long term from traditional landlords at market rates, attempting to beat the market consistently on short-term deals with subtenants who often lacked credit history. The pitfalls of this first-generation model now have been fully illuminated, but the entire model is not necessarily flawed, just inefficient. As we already have established, the coworking customer has been a happy customer. When we ask these customers why they are satisfied with their experiences, the lists include reasons such as high-quality office space, modern fixtures, an array of amenities, flex- ible deals, concierge-level service, interaction with other companies in the workspace and convenience of the transaction process. Keep in mind, many of these users do not have full accounting departments or administration personnel. Often, the entrepreneur writing the code also is cutting the checks, and checks seem antiquated to these bright minds. Coworking platforms have long understood how to attract users and continued accommodating happy customers by accepting credit cards, removing complex language from their transactions and providing friendly faces to answer questions or show visitors to their destinations. With these positive attributes, Denver’s central business district will have an exciting opportunity to tweak the failed first-generation coworking models and lead the way toward downtown’s rise in the next real estate cycle. With record high levels of sublease space in the mar- ket and coworking as downtown’s largest tenant, the path to recovery for downtown office seems long and arduous. However, if we consider the successful aspects of the first-gener- ation coworking model, we quickly see there is nothing stopping a tra- ditional landlord from implementing these characteristics into their own properties. Collaboration between landlords, property managers and real estate agents could lead to the production of buildings that incorpo- rate all of the positive characteristics that coworking operators would be sure to include, while eliminating the negatives of the first-generation coworking model. Additionally, this provides a means for landlords to further diversify their rent roll and strengthen the value of their asset. Yes, you take on the volatility of the rent roll specific to the coworking space, but when right-sized within the building’s rent roll, that volatil- ity starts to mimic an asset’s market vacancy with upside. Imagine if landlords pivoted to this second-generation coworking con- cept coming out of the global pan- demic. As tenants abandoned leases, they quickly became fatigued by the work-from-home environment and currently are showing a desire to reenter the workplace. Utilizing a landlord agency operated cowork- ing model could allow smaller ten- ants, as well as tenants relocating from other markets, to ease into the Denver office market through flex- ible deals in the adjusted cowork- ing model. The landlord would then have better clarity concerning the coworking users in their building (previously a heavily guarded secret by coworking companies) and would be able to address their needs at the property more effectively. As these users grow and look to graduate from the coworking location and establish a private office location, the same landlord would have the opportunity to address those needs within their asset. This structure enables landlords to have stronger relationships with their customers, further diversify the size and term lengths on their rent roll, mitigate volatility, participate in the upside of successful coworking revenues and reduce turnover cost of small traditional office spaces. If properly executed, forward-thinking land- lords could attempt to give cowork- ing a second chance at life and gain the advantage over competitors who might be seeking to design-build or speculatively build small- to mid- sized traditional office spaces. s reid.freeman@streamrealty.com Tweaking coworking models for the next generation Reid Freeman Vice president, Stream Realty Partners