Office Space Evolving

March 13, 2018 • This month we explore the intersection of corporate real estate and the co-working revolution that is transforming office use globally. This was the topic of conversation at a recent meeting of Fortune 100 company real estate executives, as related to me by Ed LaGrassa, President of Chilton Real Estate International, who chaired the meeting.

Much of the give and take at this meeting focused on the benefits and challenges of adapting co-working environments most commonly associated with start-ups and small companies to the real estate needs of large organizations.  

Enterprise Space: The Next Step     

This hybrid concept is often referred to as enterprise space, a term coined by WeWork, the purveyor of 12M+/- square feet of co-working and enterprise space in 15 countries around the world. The essential difference between enterprise and co-working spaces is that enterprise space is solely occupied by one company.  

For the corporate executives at the meeting, the primary allure of replacing traditional offices with enterprise space can be summed up in one word: flexibility. Ideally, long lead times, tedious lease negotiations, up-front capital-intensive tenant improvement costs, and lengthy, set-in-stone occupancy periods would be eliminated.  

But beware, the executives warned each other. Before committing to an enterprise location, it's critical to consider how the densely occupied, often noisy co-working model that enterprise locations are based on, may need to be modified to accommodate a particularly large organization. 

Understanding the Economics   

One topic that the executives were not able to pin down is the economics of occupying enterprise space. While the capital-intensive, up-front investment in tenant improvements is eliminated in co-working transactions, the up-front price tag is not likely to be eliminated when it comes to enterprise space that is designed and built to suit the specific needs of its sole corporate occupant.

Co-working space bears a premium that is hard to translate to enterprise space. A sampling of co-working office pricing across the U.S. by JLL in 2017 revealed a per square foot price of $139, compared to an average downtown Class A rental rate of $49.59: a 181% premium. Factor into this pricing an average co-working density of 52+/- square feet per person and adjust that for the lower density rates that, according to these corporate executives, would be more suitable to enterprise space, and the pricing becomes uncertain and potentially more extreme. 

 Stay Tuned 

In spite of these challenges, corporate occupants, including Microsoft, Facebook, Bank of America, Starbucks, and HSBC, have signed on for the enterprise experience. These early indications are positive, but it remains to be seen whether the enterprise product will enjoy long-term, meaningful success.