Co-working Firms Offer Landlords a way to Boost Tenancy and Footfall

When WeWork, a provider of co-working office spaces, paid $850 million last October to buy Lord & Taylor’s New York City flagship building for use as a corporate headquarters, word spread swiftly through the retail and office markets alike. The implications of this deal with Lord & Taylor owner Hudson’s Bay Co. went beyond merely redeveloping that Fifth Avenue store, because it included an arrangement for WeWork to lease space in three other Lord & Taylor stores.

Shopping center owners in particular have come to see such deals with co-working space providers as an efficient way to boost both occupancy and foot traffic in one stroke. Studies predict that there could be more than 26,000 co-working sites globally by 2020 — providing space for nearly 4 million clients — up from a mere 600 co-working locations in 2010. WeWork, for its part, has grown from a single location in New York City’s SoHo district in 2010 to roughly 160 today, and it has achieved a $20 billion valuation as a company, to boot. Moreover, WeWork continues to roll out about 10 new office sites each month.

“This highlights that it is very possible that the highest and best use for some of these urban retail buildings may be creative office,” said Jed Reagan, a senior analyst at Green Street Advisors. “This works for WeWork in other places. If they can get well-located urban-centric spaces, that works well for their business model. Could we see more of these types of situations where WeWork or other co-workers take space in a traditional retail building or retail center? Absolutely.”

Notwithstanding all the attention WeWork got for the Lord & Taylor transaction, the company is now in the midst of planning an IPO, and so management is releasing no specifics about future retail real estate strategy, beyond what WeWork CEO Adam Neumann said when the deal was announced. “As a business with an emphasis on human connections in physical spaces, we will continue to create jobs within this city while simultaneously re-energizing the traditional retail experience,” Neumann said at the time, in a prepared statement.

Industry observers, however, have insights of their own into the possible impact on retail space of the coworking movement. “The co-working concept is growing, and the traditional department store will change, as well as shopping centers that have lots of space to fill and are now presenting themselves as community centers that sell experiences,” said Faith Hope Consolo, chairman of retail leasing at New York City–based Douglas Elliman Real Estate. “WeWork’s purchase of the Lord & Taylor building could be a good indication for the growth of the urban economy, since work, hand-in-hand with shopping, is the recipe for urban productivity and development. The idea is to bring in traffic and reposition the building into a viable and productive asset, and there is no doubt this acquisition will do just that.”

The co-working trend is already making a significant impact on retail spaces in a number of ways, says Liz Gillespie, a partner and the vice president of marketing at North American Properties. “Traditionally, employers plan for about 175 square feet per employee, while co-working spaces plan for about 50 square feet per person,” she said. “From the landlord’s point of view, this means triple the number of people contributing foot traffic to our retail spaces.”

North American Properties is redeveloping the mixed-use Colony Square project, in midtown Atlanta, and signed WeWork to a 41,000-squarefoot lease in July 2016. “A project that offers a balanced mix of uses creates an energy curve that supports retailers and restaurants 18 hours a day, seven days a week,” said Gillespie. “When you get the street-level experience right, you improve the marketability for everything above the street. In return, everything above the street, which includes office workers and residents, creates value for the street-level retail.”

Westfield Corp., too, is exploring the integration of co-working space in its centers. A good example is Bespoke, at Westfield San Francisco Centre, encompassing 37,000 square feet dedicated to co-working and event spaces, including 14,000 square feet of offices, desks and conference rooms. “More and more, Westfield is seeing a significant increase in demand for space from non-traditional tenants,” said Peter Huddle, senior executive vice president of development at Westfield. “Co-working and commercial office space, as well as residential, can add core, consistent customers to support a center’s retailers.”

Most recently, Westfield UTC, in San Diego, opened state-of-the-art commercial space for CBRE, which has moved its central San Diego headquarters to the shopping center. Moving forward, Westfield also envisions the incorporation of new office space into its Promenade 2035 development, in the San Fernando Valley, north of Los Angeles.

“Pretty much any shopping center owner right now that is thinking about longevity is thinking about live, work and play and turning their center into a 24-7 vibrant location,” said James Cook, director of retail research at JLL. “Today the work component is about having interesting, creative office options and co-working options. Not only do people want to work there and live there, but also the retailers know they have these shoppers who are going to be there every day.”

In a report titled “A New Mall Rises,” Cook asserts that since 2014, office use has been a significant addition to regional and superregional malls.

Like Westfield, Simon is actively integrating co-working sites within its retail developments to help create a mix of uses. “We have certainly been ramping up efforts to add other uses to our centers,” said Patrick Peterman, senior vice president of development and asset intensification. Specifically, Simon completed a deal with WeWork to take 47,000 square feet of space in The Shops at Clearfork, a 500,000-square-foot, mixed-use, open-air center that opened last September in Fort Worth, Texas. In addition to the retail component, the center, developed as a joint venture between Simon and Cassco Development, also includes two office buildings, totaling 120,000 square feet built directly above ground-floor retail space. WeWork’s site there is its first in the Fort Worth market. “Really, what attracted WeWork was [that] you have all the shopping, dining and entertainment amenities that their customers enjoy, and you have walkability,” said Peterman.

Attracting co-working tenants is also part of The Integral Group’s leasing strategy as it redevelops a former General Motors plant into the 145-acre Doraville Assembly mixed-use project, in Doraville, Ga., north of Atlanta. “Employees don’t want to work in an office building on an island; they want an experience and flexibility,” said Matt Samuelson, COO of Integral Group’s commercial real estate division. “We’re creating an urban environment filled with retail and restaurants that are attractive to employers, with the ultimate goal of helping them retain talent.”

Samuelson cautions center owners to consider all aspects of the office-retail dynamic in their plans. “In securing office tenants for retail centers,” he said, “developers and leasing teams need to consider all of the components that go into a future-proof development and design these centers with both the employee and the visitor in mind, which means that necessity and impulse must be able to collide on-site.”

Meanwhile, the co-working phenomenon is making inroads into secondary markets as well. In Birmingham, Ala., Bayer Properties recently redeveloped a 1920s-vintage, downtown department store called The Pizitz into a mixed-use building that houses a food hall, a Warby Parker, apartments and the city’s first major co-working space, called Forge. “The co-working concept has already had a dramatic impact on our retail and food-hall sales,” said Libby Lassiter, Bayer’s executive vice president of retail and development. “Retail-only centers are quickly becoming a thing of the past.”

The above article is reprinted by permission of Shopping Centers Today, a publication of the International Council of Shopping Centers.

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