The Crown Jewel Of Office Real Estate Is Coming To Retail

As retail landlords fight to stay relevant in this time of digital disruption and heightened experiential demand, a jewel of the office market is coming to retail.

“Coworking isn't just isolated to the office environment, it’s spreading really fast,” Colliers International National Director of Retail Services Anjee Solanki said.

In the case of coworking startup Spacious, a company that transforms restaurants during their off-hours into temporary workspace, this has already become a reality. The New York City company recently closed on a $9M funding round with plans to open 100 coworking locations within street-level storefronts in San Francisco and New York City.

“Traditional retail in the face of Amazon and e-commerce is going to have to figure out how to reinvent themselves. Landlords have been super-interested in what we’re doing because we represent the ability to experiment and activate the retail storefront. That’s our angle and we found that landlords are at the table,” Spacious co-founder and CEO Preston Pesek said. 

Pesek, who worked at both Fortress Investment Group and SL Green prior to founding Spacious with co-founder Chris Smothers, decided to take the traditional coffee shop model and turn it on its ear. 

“Coffee shops are not really optimized for productivity [and] it’s not a hospitable place to stick around for hours at a time. Spacious optimizes [that space] where you can linger and be productive for a full day,” he said. “We view ourselves [in direct] competition with Starbucks more than WeWork.”

Restoration For Blighted Storefronts?

As it looks to expand, Spacious’ business model resembles that of a pop-up retailer — instead of taking full-term leases, the company is securing license agreements to fill vacant space until landlords can find a long-term replacement. 

“If you think about it, there’s almost nothing worse than a completely vacant storefront. It’s not a good look and it's also not safe or secure for your building. That kind of vacancy tends to attract vagrants and vandals, so there’s a lot of benefit to having somebody operating in your space,” Pesek said. 

CBRE Senior Managing Director of Retail Services in the Americas Todd Caruso was not entirely sold on the model. Caruso said the idea of pop-up coworking locations in vacant retail sites, while an interesting nontraditional use of the space, may not be the best defensive strategy for landlords looking to revive blighted locations in the short term. Caruso did say, however, that coworking concepts within shopping centers is a viable long-term solution in this evolving retail environment. 

“I don’t see it as a defensive strategy. I don’t see it as a fix for what you and I know as blighted vacant space where the landlord is having problems backfilling space with a viable retailer. I do see retail locations as being very viable for coworking space and I think that the WeWork deal announced in October … was a big kickoff to that,” he said, referencing WeWork's purchase of Lord & Taylor’s flagship store in Manhattan where it plans to repurpose the top floors for coworking.

Solanki believes the pop-up model is just what the doctor ordered for struggling mall owners looking to backfill space. 

“Having something unique and fresh in your project is now a need and a requirement because the customer is asking for it. They want to know what’s fresh and new,” she said. “It used to be, 'We have a couple of vacant spots let’s put in a pop-up until we find a long-term tenant.' Now it’s becoming a strategy."

The Coworking In Malls Revolution Is Here

With retailers vacating shopping centers in droves, mall owners are getting creative with the vacant space. Sometimes that looks like re-tenanting with more experiential concepts, other times that looks like repurposing the space altogether, bringing in housing or hotel elements and turning the development into a mixed-use hub. 

There has been a lot of chatter surrounding coworking in the retail space these past six months, Solanki said, with more experiential tenants like fitness and wellness concepts even considering adding coworking elements to their sites in hopes of meeting more customers' needs. 

“It’s interesting because retail was never an amenity to a project, but in this nontraditional shopping center environment today it’s becoming more about the community and then the content,” she said. “If you look at some of the fundamentals of what we’re seeing now, it is the 2.0 version of Bespoke … I think what we’re going to start seeing is more of this.”

Westfield, a major leader and innovator in the retail space with a portfolio of more than 35 shopping centers in the U.S. and U.K. worth roughly $34.5B, opened Bespoke in its San Francisco shopping mall in 2015. The 37K SF concept is broken up into three sections — Bespoke Events (18K SF), Bespoke Coworking (14K SF) and Bespoke Demos (5K SF); demos is essentially a testing ground for new pop-up retail concepts looking to increase brand exposure through brick-and-mortar. Bespoke is tailored specifically for tech companies in the retail space and is on the fourth floor of Westfield San Francisco Centre surrounded by more than 200 retailers and restaurants.

“Westfield saw the entrepreneurial canvas of the San Francisco community and decided to test coworking space in the shopping center landscape as a way to help the retail market adapt to shifts in the digital world and as a unique opportunity to reach a broad retail tech audience,” Bespoke Director Judith Shahvar said via email. “It is one of the first shopping centers to open coworking space and it has been a great success.” 

Westfield declined to comment on whether the company plans to bring the Bespoke coworking concept to other malls within its portfolio, but Shahvar did say the San Francisco site has expanded over the years to meet members’ needs. It accommodates roughly 80 startups on a given day and has hosted more than 350 events and demos to date.

“Unlike independent coworking spaces, the start-ups here have to be operating in the retail tech community. We offer networking specific to retailing and attract global retailers who want to learn from the technology our members are building and the services they're launching,” Shahvar said.

WeWork’s Path To Global Domination Includes Retail

WeWork is contemplating its next move in the retail space as well. The coworking behemoth, which has a global portfolio of 14M SF across 234 locations and boasts a $20B valuation, acquired Lord & Taylor’s flagship store along Manhattan’s Fifth Avenue for $850M last year. 

The retailer purchased the 103-year-old building from Hudson’s Bay Cos. in a joint venture with private equity firm Rhone Capital with plans to update the building to accommodate coworking on the top eight floors and 150K SF of retail on the first three floors. Included in the deal were plans for WeWork to open leased locations within Saks Fifth Avenue and Hudson’s Bay stores in other markets, starting with Toronto and Vancouver in Canada and Frankfurt, Germany. 

“The trend of urbanization is something we must all recognize and understand," WeWork co-founder Adam Neumann said in a release. "There is no reason why retail space should not be part of that movement. WeWork’s role in this big trend will be to reimagine and reshape places so as to foster collaboration, innovation and creativity. Retail is changing and the role that real estate has to play in the way that we shop today must change with it."

Ideal locations for coworking space in shopping centers could include street-level storefronts in densely populated cities, enclosed malls within the urban core or open-air malls within suburban environments, Caruso said. 

“Large-scale mixed-use projects would also be a recipient of this concept,” he said. “The advantage it brings is accessibility, visibility and branding for the particular sponsor of the coworking environment. I also think the draw is all about the adjacent amenities — the coffee shop next door, the deli across the street where they can grab a sandwich, the grocery store where they can pick [up food].”

Future Growth

Spacious’ move to open 100 coworking locations in retail centers will be hyper-focused on former restaurant space — preferably fully furnished restaurant space. The workspace company will then revamp the space to align with its brand. This sometimes includes furniture, fixtures and equipment upgrades, but does not require a complete overhaul or new build-out for the location.

“We started with restaurants, fully furnished. Now we see what the customer needs is longer hours and not getting displaced at 5 p.m. when the restaurant [opens],” Pesek said. “If a restaurant tenant goes dark and vacates, they will often leave chairs and tables and things we can use. The flagship location in Midtown is about three-fourths recycled from previous tenants. [This] keeps capital down for Spacious.”

Spacious memberships, which can cost up to $129/month, give users full access to all of its locations at any time. At present the startup has more than a dozen locations throughout San Francisco and New York. Pesek said Spacious doesn’t necessarily match market rents and it does not plan to sign long-term leases just yet. 

“That’s really how we deliver the value to the customer … our numbers have to basically work for a landlord,” he said.

CORRECTION, JUNE 13, 11:50 P.M. ET: A previous version of this story incorrectly listed the location of Spacious’ headquarters. The company is based in New York City. The story has been updated.