In coworking era, pricey urban real estate does double duty

An empty former TGI Fridays overlooking Manhattan’s Union Square Park may be an unlikely symbol of today’s shifting real estate market.

But Preston Pesek, CEO and co-founder of Spacious, the coworking startup that made a deal for the 8,500-square-foot restaurant space in late November, believes this former dining room—sans flair—represents a new chapter in the growth of his company and, perhaps, the industry at large.

Spacious launched in 2016 with a quirky value proposition: By transforming high-end restaurants into daytime coworking spaces, the startup would offer discounted workspace to freelancers while giving restaurant owners a new source of income. In other words, the restaurant would have a side hustle.

Now encompassing more than a dozen spaces across New York City, Spacious’s star rose in tandem with increasing commercial rents and the rapid expansion of the freelance workforce.

The company’s takeover of a former chain restaurant is actually temporary—it’s a license, not a lease—but that’s the plan’s genius, according to Pesek. As the landlord searches for a long-term tenant, Spacious will turn the space into an “evergreen pop-up,” generating rent and activating the space between permanent owners.

“We’re offering landlords a deal; we can make this [a] productive space with the least amount of friction possible,” says Pesek. “With the growing vacancy rate of street-level retail in New York City, populating these dark storefronts is the game plan for us in 2019.”

Courtesy of Spacious

Flexible space is an industry shift

Pesek and Spacious represent just one example of how new business realities—and the business models they inspire—are finding novel ways to make real estate more flexible, reactive, and productive. Coworking, and the phenomenal growth of WeWork, recently rebranded as the We Company, may be the canary in the coal mine. The shift toward a mobile, distributed workforce—according to latest annual study by Upwork and the Freelance Union, 1 in 3 Americans is part of the rapidly expanding freelance workforce—means workers can be productive anywhere there’s a good Wi-Fi connection. Add rising commercial rents and vacancies in big cities, and companies like Spacious see opportunity in turning just about any underused space into one for coworking.

“Our research, and our conversations with our corporate clients across the globe, indicate that the flexible work is not just a passing trend; it is part of the very fabric of the future of work,” according to Doug Sharp, president for corporate solutions for JLL, the commercial real estate firm.

But it goes further than setting up shared desks in an empty room: New business models in food, retail, and warehousing also seek to apply the shared-economy business model to fixed real estate assets. “In the wake of how [the] digital world is reprogramming everything, all commercial space needs to be reprogrammed,” says Pesek.

Mark Kennedy, who runs Cowork at the Mall, a company converting traditional retail assets into coworking and flexible-retail spaces, says that in a post-WeWork era, traditional leases and longer rental periods may not work.

“WeWork has shown property owners that if you’re just a rent collector, and don’t have an angle, or add energy to your space, you’ll be out of business,” he says. “Providing four walls and an office doesn’t work today. The next generation wants mobility, with flexible lease terms and arrangements.”

The long shadow of WeWork

WeWork launched in 2010, and now lays claim to a $47 billion-dollar valuation and bragging rights as New York City’s largest commercial tenant. The company’s growth has helped define and create the coworking market, and created an opening for more affordable options.

WeWork’s business model includes a mix of strategies including leasing, managing, and in some cases, owning the space they rent out. Big expansion plans, and investments, have led WeWork company to court big business: As of last June, a quarter of WeWork customers are enterprise clients, with 30 percent of its business coming from companies with more than 1,000 employees.

“Traditional coworking spaces started by servicing startups, freelancers, and small businesses,” says Andrew Levy, co-founder of KettleSpace, another firm that turns restaurants into coworking spaces. “Now they’re going upmarket. Their bread-and-butter are the same large, mature companies that the old guard of commercial leasing firms catered to, since it’s the only way they can make their model work.”

At the same time WeWork was changing, Levy says his colleagues recognized that hospitality space across the city was underutilized, and made that central to his pitch. Restaurants just need to open up their dining rooms to KettleSpace, which runs a temporary coworking operation, providing coffee, dedicated Wi-Fi networks, and membership coordinators to oversee operations.

Restaurants benefit from a percentage of membership revenue (based on occupation), incremental food and beverage sales (many places add lunch menus for freelancers), as well as the harder-to-quantify benefits of exposing new potential customers to the space. An average-sized restaurant in New York City can add the equivalent of $1 million to $2 million in incremental food & beverage revenue each year, says Levy.

It’s also a benefit for workers. At a time when it’s never been easier to be a remote worker, or for small startups to run a business, WeWork was charging $500 a month in New York City for Hot Desk access at a single location (use of any open seat in the common area). KettleSpace charges $99 for unlimited access to its network of 10 spaces in Brooklyn and Manhattan.

Coworking on every corner

While these startups face the constraints and challenges of their models—hard stop times when dinner service begins; managing expectations; and protecting a restaurant’s brand—both have seen sign-ups grow and requests roll in for new partnerships. Both KettleSpace and Spacious, which also operates in San Francisco, plan to expand into new cities in 2019. This dual-use concept still has room to grow.

“There is a lot more experimentation in the micro or boutique market, what I call coworking plus,” says Matt Weaver, co-founder of WEach, which has built a similar network of daytime coworking spaces in bars and restaurants in Philadelphia. “There’s coworking plus daycare, or coworking plus gym. You see it anywhere someone can say, ‘We have extra space and can package it up.’”

There are, of course, limits. COVO, another boutique coworking business with locations in San Francisco and St. Louis, Missouri, once discussed turning churches and synagogues into pop-up coworking spaces during the day. The risk to religious institutions’ tax-free status quickly ended that line of inquiry.

Courtesy of Kettlespace

But the demand for dynamic shared spaces isn’t going anywhere. COVO instead focused on adding hospitality to the mix, according to co-founder Daniel Brian. Instead of merely offering free coffee and beer, COVO locations include full-fledged coffee shops and bars. The idea is to offer members spaces to mingle, meet, and network. While in some ways it comes full circle—from coffee shop to coworking to coffee shop again—it also offers another example of building flexibility into the business model.

“By running a combination coffee shop, bar, restaurant, event space, and space-rental business, we’ve had a much more diverse revenue stream,” Brian says. “We may lose a bunch of members, which would be devastating to a coworking space, but a few event rentals and we’re fine. Diversification can help us maintain positive momentum month to month.”

Incorporating varied income streams is also a lifesaver in San Francisco, where restaurants not only struggle to find workers they can afford to pay, but in many cases, have re-designed spaces to encourage cafeteria-style dining to reduce labor costs. It’s no surprise these types of startups are coming out of New York and San Francisco, two of the most expensive real estate markets in the country.

“The economy [is] forcing these functions,” says KettleSpace’s Levy. “As recently as a few years ago, as a new restaurant and hotel concept, if you nailed the location and concept, and stayed on-point with operations expense, you were good. That’s not the case anymore. Many businesses are being forced to think more creatively to make the numbers work.”

It’s not workspace. It’s a platform

While restaurants face a challenging real estate environment, retail and malls are struggling to maintain relevance in the e-commerce era. Many have also turned to coworking—and even coliving—in a search for innovative ways to generate income.

Kennedy’s Cowork at the Mall will operate its first space in Los Angeles, and the second in Chicago at a venue in the city’s Michigan Avenue retail district. Coworking and pop-up retail will be a core part of both locations.

Kennedy calls the fusion of commerce, crowds, and customer analysis “Silicon Valley meets Main Street.” The idea is to tap into the blended commerce model being popularized by digitally native companies such as Everlane and Warby Parker. Opening flexible retail spaces helps advertise to potential customers, who will likely purchase online. In that way, the new mall experience leverages coworking as a way to draw a younger crowd and get eyeballs on products.

“Fixed spaces with fixed tenants and fixed experiences won’t work,” he says. “There’s a [hunger for places] where people gather and discover.”

Kennedy is far from the first mall operator or owner to embark on a similar experiment in the name of keeping a shopping center relevant and profitable. At the Mall of America, a startup called FOURPOST hosts pop-up stores that push local businesses. Another coworking startup, Industrious, is teaming up with Macerich, a large mall owner, to bring more coworking into more empty retail space. Pop-ups have made way for more sophisticated flexible retail models, such as b8ta, an electronics retailer with a rotating selection of crowdfunded merchandise.

Shared-space concepts are also taking shape in other industries. FLEXE provides on-demand warehouse space for expanding and established companies; Walmart, for example, used the company to meet the recent holiday rush. Startups like the Food Corridor, which allows food entrepreneurs to share commercial kitchen space in a network of more than 100 locations in the U.S. and Canada, have helped thousands of small businesses take root without the expense of owning and outfitting their own spaces.

Ashley Colpaart, who founded Food Corridor, sees all these companies as creating a web of support for entrepreneurs.

“These platforms are enabling entrepreneurship,” she says. “Flex space is one of the big trends that will change the food industry this year.”

If an office can be anywhere, why not an entire business? With the advent of cloud computing, online services, and flexible spaces, an entire business cycle is becoming instant and on-demand. These new, more adaptable models for space rental and ownership suggest a more dynamic future for real estate. That’s why Spacious believes it can bring a mothballed chain restaurant back to life.

“I think we can offer spaces, and cities, a viable way to reactivate the street,” says Pesek. “Something is usually better than nothing, and we can help tap into a vibrant community. We’ll be one of a bunch of solutions to this problem.”