Since the arrival of the coworking model to the Twin Cities, both large groups like WeWork, Industrious and Fueled Collective, who collectively have nearly 4,000 members, and smaller players such as The Coven and ModernWell with almost 500 members between them, have dramatically affected small suite leasing across the Minneapolis-St. Paul market.
Traditionally, during past economic upturns, small suites – usually those ranging from 500-3,000 square feet – were highly sought after and experienced very little vacancy. This was due to the fact that small suites were a hot ticket for smaller groups who were riding the wave of the economic boom by starting-up their own companies and thus needed small spaces to house their growing firms.
The onslaught of coworking groups entering the marketplace and snapping up blocks of space and then leasing them back to the very start-ups who would have previously been the top contenders for the small block spaces, has created a deluge of small block vacancies for landlords across the metro area.
The coworking trend shows no signs of slowing down. In fact, there are 25 unique coworking groups across the Twin Cities metro to date, leasing 1,210,000 square feet of space, inside spaces from office towers to retail strip malls. The coworking model has even attracted the likes of large corporations, like Target and Syngenta, who have vacated their owned or leased spaces for coworking space. Many of these companies and their start-up counterparts see coworking as a better option because terms are flexible, space is relatively cheap, amenities are plentiful, technology is advanced, location is key, and overhead is nearly non-existent.
How can landlords with small spaces even begin to compete? Some strategies brokers are recommending for landing small use tenants are capital investment, generous lease flexibility and signing bonuses.
Capital investment can take the form of common area upgrades to spec suite build outs or to adding additional amenities like fitness centers, tenant lounges or outdoor recreation areas. Bringing older buildings to more of a “move-in-ready” state has been a successful tactic for some owners with small space vacancies. Offering generous lease flexibility – signing tenants for shorter lease terms, easy expansion terms or offering adjustable TI packages – has also been a strategy that has worked for some landlords to secure tenants for their small square footages. If the aforementioned strategies for securing tenants don’t affect the vacancy change owners are looking for, the brokerage community is seeing some landlords beginning to offer signing bonuses and even showing bonuses to try to entice users to view their updated, flexible spaces.
These strategies are just a few ways that some traditional owners are finding success with small suite leasing in competition with coworking, but it is still hard to know what the future holds, because the coworking model is still so new. We do know that coworking is here to stay, but whether or not these groups will continue to expand at the rate they have been and continue to monopolize the small tenant market is yet to be seen.
However, in a recent office survey from Real Capital Markets, half of all respondents said the co-working industry was at moderate risk [of oversaturation], 37% said it was a great potential risk and showed early signs of oversaturation [with] only 4% of respondents [saying] the co-working niche showed no risk at all. It will be a welcomed challenge, oversaturation or not, to continue to guide our landlords through these evolving times as brokerage experts continually devising strategies to remain competitive as ever in the changing market landscape.