Office Landlords Faced With Rising Vacancy Are Turning To Coworking

Even as coworking operators have struggled to survive the coronavirus pandemic, landlords saddled with vacated offices have come to realize coworking space is better than empty space.

Houston's office building owners have been offering a slew of concessions, upgraded amenities and services to attract and retain tenants over the past year. And in rare cases, they're converting empty offices into coworking, hoping to secure more leases with the promise of flexibility.

Coworking is poised to gain more clout with landlords as an amenity, office experts said. Typically a flexible option for small businesses trying to get off the ground, a coworking space in an office building also has the potential to attract larger, traditional tenants that are grappling with uncertainty over future space requirements.

“It’s a situation where they can start to bring in some revenue and start to make the best of a tough situation until better times arrive,” REIS Associates principal Frank Staats said.

Soluxe International USA, the owner of 2901 Wilcrest in Houston's Westchase District, took a gamble in the early days of the pandemic. After a previous tenant with an expiring lease moved out last February, REIS Associates began conducting tours of the space to find a new tenant until the pandemic led to a local lockdown, and leasing activity in Houston came to a sharp stop.

“During that period, we weren't getting a lot of activity,” Staats said. "And we were sort of reading the forecast of what was coming ahead."

When it struggled to lease a 20K SF recently vacated space, the landlord tried something different: turning the space into its own no-frills coworking location. The previous tenant had fitted out the space in a coworking-style layout, with a large break area for community gathering, a centrally located kitchen, conference rooms and window offices with views of the area. 

The firm put in new carpet, painted and chose to repurpose most of the walls. In the end, fit-out costs were kept much lower than what landlords might encounter with a global brand like WeWork, where it can cost around $100 per square foot to convert a space into a coworking location, Staats said.

“It really didn't take a huge amount of dollars, and that's why they're able to keep their rates affordable,” Staats said. “It’s sort of the Southwest Airlines of office space.”

Soluxe Coworking Offices opened in July and to date has leased about 5K SF of the 20K SF space. The users that have already signed up are mostly in private offices, rather than using shared, open-plan space. Staats noted that in some cases, there are people who have leased an office but rarely come in, using the site primarily as a business address.

Unlike the users that gravitate toward flashier coworking locations, most of Soluxe Coworking’s clients aren’t looking for the heavily social aspect that some brands have become known for.

“They're really just looking for a good place to work, a safe place and good services, and they're happy,” Staats said.

Houston had about 2.8M SF of coworking space as of July 2020, according to Cushman & Wakefield. That figure includes traditional executive suites and other forms of flexible office. Since then, another 200K SF has been added, bringing the total to about 3M SF, accounting for 1.6% of the overall office market. 

Houston’s percentage of coworking is lower than most of the other largest U.S. cities, but the sector has been growing throughout the pandemic; by comparison, in Washington, D.C., coworking operators gave back nearly 900K SF between August 2020 and January 2021.

Demand is also expected to pick up once most office workers return to work, according to Cushman & Wakefield Executive Vice Chairman Chip Colvill. However, Colvill cautioned that office landlords opting to open a coworking space should be very strategic in how and where they do it.

“I think it takes some pretty significant capital outlay to do it,” Colvill said. "And for the most part, if you have space in your building that's undesirable, even putting a coworking operation in there may still have the space be undesirable."

Some of the larger office landlords in Houston have already opted to introduce coworking into their buildings. Hines partnered with Industrious to open The Square, a full-floor coworking space at 717 Texas in Downtown Houston, and it has plans to incorporate coworking at Texas Tower, which is still under construction. 

Granite Properties is also working on a collection of spec suites at Eldridge Place in west Houston, while Brookfield Properties, which owns several large Downtown Houston buildings, is looking into bringing coworking space into its portfolio, Colvill said.

The impact of introducing a coworking location within an office building can be significant. Colvill noted that one of Cushman & Wakefield’s managed buildings in the Galleria area recently acquired a coworking tenant. Since the location opened, the brokerage has seen a major uptick in website visits from prospective tenants, looking for information about leasing direct space in that building. 

“I think some companies on the back end of this may target buildings that have coworking in their building, if they are a type of tenant that needs the flexibility,” Colvill said. "And I think we'll see a lot of companies that will want that post-Covid."

Staats said that converting the 20K SF space at 2901 Wilcrest to coworking has already begun to generate more interest in the building. Aside from doing tours almost daily for people interested in leasing space at Soluxe Coworking, two clients who originally came in to tour the coworking space ended up signing small traditional office leases in the building.

An existing tenant at 2901 Wilcrest has also expressed interest in leasing some of the coworking space to help workers spread out as they start returning to the office, Staats said.

“The hope is that some of these [coworking] tenants, which are already growing, some of them are growing from one office to two or three offices — and then, they might grow to lease space up in the building,” Staats said. "Or we have somebody in the building who needs to downsize, and then they can go to the coworking site."

The timeline for Houston’s workers to return to the office en masse remains murky. An industry survey conducted by Bisnow in March found that more than a third of CRE professionals have re-entered the office in some capacity, while another third were confident that most people will be back in the office by Labor Day.

The vaccination rollout, coupled with Texas’ return to 100% capacity in March, has boosted brokerage inquiries and interest in physical tours for commercial real estate in Houston. That is likely to translate into more workers returning to the office and executives making real estate decisions, including where and how to work.

Staats said he hasn’t seen any official projections for Soluxe Coworking’s lease-up timeline, but said that based on the current level of leasing and interest, the firm should have another 10K SF leased within the next six months.

Colvill said that in a post-pandemic world, flexibility will be key, and a coworking presence will ultimately aid both the landlord and the tenant.

“It just gives the tenant the opportunity to kind of ebb and flow in their building, and I think that's why landlords are recognizing coworking as an amenity now, not just a lease tenant,” Colvill said.