Approaching flex space as a property manager

Technology and coworking companies continue to dominate leasing activity.

Paul Schloff
Regional manager, property management, JLL

It’s clear that flexible space is playing an increasing role in the evolution of real estate and won’t be going away anytime soon. Our research predicts that while flexible space currently accounts for less than 5% of U.S. office stock, by 2030, 30% of office space will include some type of flexible space.

Coworking, the fastest-growing sector of the broader flexible space movement, is on pace to become the top source of office leasing in the U.S. In the first half of 2019, coworking  accounted for more than 10.1 million square feet of leased space, according to JLL research. That’s more space than was leased by finance and insurance companies, which historically have been significant consumers of space, just behind technology companies.

While the growth in coworking will affect players in all parts of the real estate process, there are opportunities and implications for property managers that are significant and need to be considered proactively.

Property managers will need to understand if and how flexible space makes sense for their asset, whether that’s leasing space to a coworking operator, creating their own coworking space or managing tenant amenity space within their asset.

For some assets, adding a coworking operator to your building can be advantageous and support your wider asset strategy. Leasing velocity can be gained by adding the fastest-growing use of office space to your tenant roster. Also, coworking spaces can act as incubators for what could become your next direct tenant. That one-person company relying on coworking space soon could become large enough to rent directly in the building.

There are other benefits, too. There’s added energy in buildings with coworking spaces as more millennial-focused businesses draw in new demographics and bring new ideas to traditional office spaces.

But because of the newness and nuanced approach of coworking, having those spaces in your building can present a new set of challenges for owners and property managers. For instance, flexible-space operators can increase density in buildings that weren’t necessarily built to handle it. As property managers, we have to ask ourselves questions such as: How are we going to account for all that new elevator traffic now that we have potentially hundreds of members coming and going?

Communicate early and often. One of the most important considerations when leasing to a coworking tenant is how it will use the space and how that may affect the other tenants in the building. Defining and memorializing rules and regulations, a construction timeline and other policies in the lease agreement is critical to avoid any confusion and potentially awkward conversations later on. It’s critical to have people with different areas of expertise involved in the beginning of the lease negotiation process to address these issues before the agreement is cemented.

Another potential implication to weigh is that the startup-like culture fostered in a flexible space might impact other tenants. For example, you may have a law firm or bank that is more traditional and buttoned up on a floor adjacent to a coworking space. Property managers must think about how to create common spaces that are welcoming across business cultures and have enforceable policies around them.

One example is having dogs on the property. Having pets in the workplace might not be typical for more traditional office tenants, but many coworking subscribers consider it a must-have perk. I chatted with Deborah Loewenstein, JLL Group manager, who shared how she worked through this issue at the asset she manages.

“We worked with the lease negotiating team to ensure we had policies that addressed this desire for the coworking tenants while also ensuring there was no outsize impact on existing tenants,” Loewenstein told me. “Logistically, we had to think outside the box about where we could put a pet relief area and how best to get the dogs in and out of the building.”

Many coworking tenants also expect to have members signing up and using space very quickly, so their build-out must move fast. To avoid delays, it is important to involve a general contractor who understands local rules and regulations in the lease negotiation process and to have building managers weigh in on the space’s usage. This way, experts can advise how to best fast-track the build-out and address unique considerations like designing and installing heating, ventilation and air-conditioning systems for high-density occupancy and installing proper signage from the beginning.

As office space looks to adapt, so do property managers. Whether looking at elevator traffic, parking usage, pet policies or security access, property managers can preempt many potential issues through communication, preparation and strategic policies. As we see coworking proliferate, learning how to adapt to these new tenant needs is a must.

Ultimately, coworking reflects the desires of changing demographics and the trend toward office amenitization that has changed how we work. Whether working with a coworking operator or not, property managers need to be ready to adapt the way they operate their buildings and optimize tenants’ experience to accommodate their need for flexibility.

Featured in CREJ’s October 2019 Property Management Quarterly

Edited by the Colorado Real Estate Journal staff.