Trends in Office Space: Co-Working

Attendees:        Eric Odum with Ken Evans, Principal at Evolution Advisors

Date:                January 9, 2012

Subject:            The Market Minute

EO:      Good afternoon and welcome to today’s Market Minute. I’m Eric Odum, principal Real Estate Broker for Net Lease Commercial Advisory. Today we have Ken Evans with us. Ken is a friend of mine now, but we originally met three years ago. Ken came to us for office space and it was the first time I had worked with somebody in his industry. Ken has been in technology for 30 years and his expertise lies in technology development and product development (software). He’s from New York originally, he has worked in Atlanta, he was part of the big Seattle Tech scene, and now he’s in Tampa. Ken was one of the first people to bring the ‘co-working‘ concept to the Tampa Bay area and that’s what we’re going to talk about today.   So, welcome Ken, appreciate your time with us.

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EO: So, you originally came to Net Lease to talk about office space and I was unaware of the issues affecting the Tech industry at the time and how technology companies were dealing with office space. I think the truth is, today, the biggest issue is that landlords do notknow how to adapt to the tech industry because they have very distinctive needs, don’t they?

KE: They do, and any small business has distinctive needs but by the very fact that technology companies are volatile, they also experience very high growth. When they catch on, they grow substantially in size. They have little need for distribution, warehousing, and manufacturing but in so far as staffing, they must expand very quickly when things do catch on. So with regards traditional office space as we know it, and projecting how big the tech company is going to be in the next few years, that scenario really doesn’t apply in the technology industry. Most of the time in the tech industry, people get together and you find a number of companies under 0ne roof until one of them spins out, which is one of the benefits of co-working. People work together in an office environment, the idea catches and the company and founders spin out and do their own thing.

EO:      So if I understand correctly, essentially what happens is; you have an individual, he has an idea, the guy in the garage, the Steve Jobs type, and he graduates. He/she graduates and then they collaborate with other people. They then go the next step and go from maybe two or three people in a small office space, to 20 people working for them in year two and to 100 people working for them in year three.

KE:      It can go that way, those cases are unusual – not everyone is going to be a Google or a Facebook, but they do grow very quickly when things catch on because the market takes over. If you don’t keep up with market demand, your competition will step in and take that share, so you do have to grow very quickly. Generally nowadays, tech companies start virtually, especially in the last couple of years, because it means you don’t have to invest in infrastructure, practically everything you need is available virtually and on line, as in on “The Cloud”. So all you really need is people. Most of the time it starts with people working remotely in their garage or in their living room.

EO:      And those are people who can’t afford to sign a three year lease, right? It’s just impossible.

KE:      No, they can’t and they don’t need to. You don’t want the fixed costs when you’re starting a new business. I’ve done a number of workshops and a lot of work with emerging tech companies and that’s the one thing you want to avoid – a lease and office space is a fixed cost. What you need to be doing is plowing any capital you have, whether it’s maxing out your credit cards or spending a little bit of seed capital from an investor,  into the development of your product and your customer.

EO:      So let’s talk a little bit about co-working because you originally introduced me to the idea. Tell me about what stage co-working is typically suited to the company development process.

KE:      We see it for all stages of the development process. We were actually doing co-working when I came to you three years ago. We were doing co-working on an ad hoc basis in coffee shops where we would get together for a mini workshop or session, and people could come and discuss what challenges they had, what they were working on and ask for help from other people in the tech community.  Co-working appeals to a broad range of people, from the individual that’s working on the idea, to the person that is actually growing the business. This doesn’t necessarily mean that a business owner is adding staff because people don’t add staff like they used to. They’re not adding full time employees; for example W-2 employees. They are adding 1099 freelancers because they have project based work. They are designing new web products, doing graphic design work, or web programming so they d0n’t need a full time hire. So, again, avoiding the fixed cost is a key component.

EO:      Let’s back up a bit here and define co-working. If you’re a landlord and you’re listening to this, how would you explain co-working to them?

KE:      Co-working is an office space where people can get together and use a desk for a day. That is probably the best way to describe it. Co-working started out in New York and the Bay Area at pretty much the same time….

EO:      San Francisco Bay Area

KE: …yes, and a creative agency, a marketing agency, or ad agency would have extra space and would work with a lot of freelancers and web developers, and they would rent them a desk. This would cover the cost of that desk, allow someone to come in and use the facility, and that agency could use their capabilities and work side by side with other people working on similar projects. That creation of critical mass, the gathering of people all doing similar things, creates a creative spark for people to work together and it’s better than working alone. Sitting at home on your couch with your cat doesn’t really do much for the creative process.

EO:      And it’s happening now at places like Panera Bread or Starbucks.

KE:      It happens at Panera around the country and at Starbucks, but those businesses have pulled back on catering for people that are keeping a seat for hours on end. Starbucks and Panera have closed off their Wi-Fi accesses during lunch – they are really trying to push people through and get traffic, so those coffee shops are not as friendly as they used to be. So people are moving to other locations where they can get together, which is why co-working has cropped up in a number of different areas.  Its been very popular in dense urban areas like New York and San Francisco, but really it’s happening all around the world.

EO:      Well what was interesting to me was the first time you introduced me to co-working, I said “that’s not going to work – it’s not viable” (for the landlord), but then my phone started ringing and everybody was asking for spaces to ‘co-work’. There were so many unemployed people, and people that had been laid off. They were all trying to get back to work instead of hanging around in their pajamas all day. And the vast majority were advertising people, marketing people, attorneys, tech people, it was amazing! You also had the landlords in the Tampa area, accustomed to getting $23/sq. ft on their space; and all of a sudden you had all these displaced workers and suddenly there’s a disconnect because the workers were let go and vacancy is increasing. The workers are still present….. Just not with the same company. You have to figure out a way to get them back into your space.  Why don’t you talk about that a little bit? If you’re a landlord, how do you handle all these 1099 workers?

KE:      The way you handle the displaced worker is, if there’s a migration – and this doesn’t apply to people looking for jobs, or people out of work – but those that have made a shift from being a W-2 worker to being a 1099 (a freelancer), when they’ve made that shift, they will need a work space, but they’re not going to step up to a lease because of the financial commitment. If a landlord can only provide a space of 5000/ sq.ft or more, it’s completely impractical for the small business owner. In fact it’s no longer practical for the Tampa Bay Area, because we don’t really have employers of that size any more (moving to the area), so it’s just not practical for a workforce that has moved from predominantly being W-2’s to being 1099’s. Freelancers are going to want very flexible terms; and flexible office space. Co-working is one of the things you can do to achieve that, Executive Suites is another, and then there’s a middle ground between executive suites, which costs $800 to $1,000 per month, and an office space with open areas, so essentially, the work force is driving a new type of office adoption. So it’s really not about the landlords adjusting to the number of people, but rather to new businesses, the solo entrepreneurs/two person shops that don’t require a traditional lease.

EO:      It’s interesting you bring this up, I think it’s something that really should have started happening in 2000. It’s not an issue of a bad economy, it goes much deeper than that. Technology now allows people to work from home or out of the traditional office environment, and to say “Ok, I don’t need employees in my office 24/7/365.” I can use a freelancer and communicate with them just as effectively. So there is definitely a changing work force and technology has allowed that to happen (with Skype, email, etc.).  So it really comes down to one issue [from a landlord’s perspective] – they need to figure out how to adapt to this change. It’s not going to go back to the way it was in 1985.

KE:      That’s right.  And this has been coming for a long time. In 1994 Compaq got rid of a lot of their sales force and said ‘you go work from home, you should be outbound x number of days per week.’ So they got all their sales people together and said ‘we’re going to build you home offices, and we expect you to be on the road.’ A couple years after that, IBM followed suit, they did what was called “Hoteling.” They had an office where people could have a desk for a day, but the sales team didn’t need to go in to the office every day, so IBM offices shrunk dramatically. That was then followed by the ‘telecommuting‘ idea in the commercial sector. I think the Government is trying to encourage this practice – it has done a significant number of studies and put programs in place for their employees to telecommute. They don’t want people in the office and they don’t want people on the roads.

EO:      You see law firms here too…

KE:      Absolutely.

EO:      …where associates are sharing office space and the lawyers only go in when they need to meet with a client. At Net Lease, I get those types of requests all the time. It’s really remarkable seeing the pressure on the downtown Tampa market because these law firms have shrunk in terms of space requirement. Law firms used to be enormous consumers of space because of the paper work they had to store and the amount of associates they had to accommodate. They are now finding ways to economize. So it’s even happening in law firms as well. The Tech industry has always been a little bit more on the edge, but you’re seeing the more traditional types of business follow suit.

KE:      The footprint has shrunk across all industries. Tech has done it, law offices, accounting offices, they’ve all done it; they just don’t need to have a lease or a formal office.  You can start in your living room. At some point you’re going to want to work with other people and that’s where co-working and executive office suites come in. Tech companies are not going to consume the same amount of office space they traditionally did.

EO:      We are actually sitting in a co-working space today. Do you want to talk about that a little bit?

KE:      We are sitting in Tampa’s newest co-working space, a space started by Tampa Web Ventures, or Tampa Bay WaVE. They have approximately 40 small tech companies that are all members of this organization. It’s a peer group, a support group of people that are all building web ventures together. They meet on a monthly basis and support each other and share ideas, war stories and their advice on how to do certain things. They were able find a landlord willing to give them some space to take their companies to the next level. So as part of that, there would have been some co-working involved. The organization is not just made up of companies, there are individuals as well: web designers, web developers, freelancers etc., that will be using this space to come in, rent a desk for a day, sit on a couch to enjoy free Wi-Fi and some coffee and just add to the critical mass that this type of space caters for, without having to go to a Panera or somewhere like that. And it’s not just about a place to sit, it’s about sharing ideas and collaborating and, as we’ve seen with co-working, a lot of good ideas, products and companies have spawned from that creative critical mass.

EO:      So essentially, just to summarize, for those landlords out there wondering what to do with their space, not every space is going to be ideally suited for co-working, but co-working definitely suits that type of creative 1099 individual that needs to collaborate with somebody. It could be a win-win situation for both landlords and the individual entrepreneur alike. So if I’m hearing you properly, that’s the direction things are headed in.

KE:      Well the market has adjusted down, so really, if the market is a lot of solo entrepreneurs, whether they are tech employees or attorneys, the market has shifted regardless. This has happened across the country and around the world. It has certainly happened in Tampa, where we are heavily dependent on the service industry, tourism, and construction – that market has shifted significantly, so a lot of those people working for big companies, or for medium size companies are very different to solo entrepreneurs because entrepreneurs are not going to be looking for traditional office space, leases, and the traditional footprint. So really my advice to your clients is to adjust down to the market because that is the growth curve going forward.

EO:      Ken, appreciate having you today, appreciate your input. I know you’re out there every day trying to help the cause of the entrepreneur and we appreciate your time today.

KE:      Happy to be here. Thanks.

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