Why co-working space is increasingly attractive to today’s office tenants

By Carl Condon (Austin, TX)

It’s no secret that co-working is one of today’s hottest trends. To help put the dynamic growth in perspective: Only a handful of executive-suite providers existed in Austin, TX five-plus years ago, whereas today there are more than 20 such businesses in the city leasing out as much as 400,000 square feet (sf) of space.  According to Jason Saltzman, CEO of collaborative workspace provider Alley and guest writer for Entrepreneur magazine, some 70,000 co-working spaces are used globally, and Deskmag – a magazine devoted to co-working – predicts that 1 million people will conduct business out of shared space by 2018.

According to multiple reports, the most common advantages of the co-working phenomenon are: Community, connectedness, collaboration, networking, and peer-to-peer learning. While all of these benefits are true, there are four other business and/or real estate reasons why today’s tenants find co-working environments so attractive.

1. Low capex requirement

Young and/or growth-oriented companies that are focused on building their management teams and initial products may have raised early rounds of funding, but cash remains king. In a tight marketplace like Austin, where attractive traditional lease options are limited, tenants frequently sink significant dollars into such capital expenditures (capex) as design, construction, new furniture, telephone/cabling and so forth. On the other hand, co-working space providers have already invested upfront capital into their locations. While a co-working tenant may cover these costs over the term of a lease, the saving of a large upfront cost allows a younger company to use its capital on the business, whether it be for hiring new employees or building its product.

2. Scalability

Five-plus years ago, the traditional executive-suite model leased out individual enclosed-office spaces. Enclosed-office configurations made sense for both young and mature companies looking to expand their presence in a particular market, but the economics and functionality of the spaces became obsolete once the business grew beyond five or 10 people. Today’s co-working spaces are designed much more effectively, allowing for team rooms and glass walls that bring in natural light within all portions of the space. Such attention to design easily enables companies to scale upwards of 30-50 people within the same building or space, keeping relocation costs to a minimum and productivity high.

3. Flexible lease terms

In a supply-constrained market that includes older and outdated spaces alongside newly constructed product, a tenant is often required to accept a longer lease term – of up to seven years or more – for traditional space. A long-term lease is not always a good fit for a company that does not have a clear vision of where its business will be in two years. Five or seven years can feel like an eternity for technology companies undergoing constant change. However, co-working space providers are more than happy to sign three-to-12-month leases or even go month to month. That’s a significant difference.

4. Proximity to amenities

To attract and retain the best talent today, companies must offer employees more in the way of amenities, such as workout facilities, showers, and restaurants/bars within walking distance of their workplaces. Co-working spaces typically locate close to amenity-rich environments, building upon the importance of community and connectedness.

In the past, these environments mostly attracted early-stage startups and freelancers. Now, even large corporate users are getting the message. IBM recently leased an entire 10-story, 86,000-sf building from co-working space provider WeWork in New York to accommodate up to 600 employees. In terms of the space size, this deal represents a landmark co-working lease transaction. But David Fano, WeWork’s chief product officer told The Real Deal New York that major companies have exclusively taken 30 full floors in WeWork buildings. Furthermore, large companies with more than 500 employees account for 20% of WeWork’s membership.

Co-working space is not for everyone. Disadvantages include distractions, noise, potential employee poaching and the lack of a stand-alone company identity and culture. However, the aforementioned benefits are real – and hard for a business to ignore.

It is expected that more and more companies – both small and large – will consider co-working space as a potential option for their businesses.

(Carl Condon is a Principal of Avison Young based in the firm’s Austin, TX office. He specializes in office tenant representation, acting for leading corporations and local organizations alike.)

At the forefront of Downtown Toronto’s latest development

By Bill Argeropoulos (Toronto)

In 2012, Avison Young became the first – and only – commercial real estate brokerage firm to relocate its offices to Toronto’s burgeoning Downtown South node.

Since then, from front-row seats, our global headquarters employees have watched an unprecedented period of development unfold.  Of the 10-million-plus square feet of office space that has been delivered in Downtown Toronto since 2009, and continues to be built, nearly half is located south of the railway tracks.

I witnessed the launch of this story’s next chapter on the morning of May 17, when members of Cadillac Fairview (CF) and Ontario Pension Board (OPB) officially broke ground on their latest project, 16 York Street. (Avison Young’s headquarters is located across the street in PwC Tower, part of the Southcore Financial Centre.) With 32 storeys and 879,000 square feet, 16 York will complete the final corner at the intersection of York Street and Bremner Boulevard – culminating the redevelopment of four sites that, only a decade ago, were gravel parking lots.

I’ve seen a few development cycles in my 29 years of following the Toronto commercial real estate market, but nothing like the one that started in Downtown South in 2006 with the announcement of a new tower to be built for Telus by Menkes Developments. Ever since, I have seen an ongoing roster of organizations make the move to Downtown South – including many so-called traditional firms previously housed only in the confines of the Financial Core, such as PwC, CI Investments, RBC, RSA, Marsh & McLennan and, more recently, Sun Life and HOOPP. These organizations are now rubbing shoulders with tech giants such as Amazon, Apple, Cisco Systems and Salesforce, with others expected to follow suit.

The 16 York project demonstrates the faith that the Downtown South market (increasingly referred to as the South Core) has generated among developers. Both CF and OPB elected to commence construction before securing a lead tenant, giving the node a strong vote of confidence.

From our Avison Young headquarters vantage point, we can also watch the construction of Ivanhoé Cambridge and Hines’ massive 2.9-million-square-foot Bay Park Centre development, which is following on the heels of 16 York. Home to CIBC’s new headquarters of up to 1.75 million square feet, Bay Park Centre will straddle the railway tracks, bridging the Financial Core and Downtown South office nodes.

Given all of this activity, only a handful of remaining sites can accommodate future downtown office development, which the market will be watching closely as we work our way through this cycle. Once these sites are fully utilized, the natural progression will be to push development eastward along the waterfront. Stay tuned for further updates and announcements as the ongoing development wave carries us into the next decade.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)

Single-digit vacancy rates define rapidly evolving North America and U.K. industrial sectors

By Mark E. Rose (Toronto)

The industrial property sector continues to be characterized by sound fundamentals, irrespective of geography and geopolitical and economic conditions. Record-low or near-record-low vacancy rates, owing to robust demand, are placing upward pressure on rental rates. Development costs are also on the rise, due to dwindling land supply in some markets. Meanwhile, developers strive to deliver modern product to meet evolving tenant demand – increasingly driven by the retail sector and its goal to feed today’s insatiable consumer appetite. 

These are some of the key trends noted in Avison Young’s Spring 2017 North America and U.K. Industrial Market Report, which covers the industrial markets in 55 North American and U.K. metropolitan regions: https://avisonyoung.uberflip.com/i/822225-ayspring17namericaukindustrialreportmay11-17final

The industrial property sector’s metrics continue to impress the market as occupiers and investors alike are drawn to the sector’s stability. Though traditional manufacturing operations remain part of the industrial fabric, surging demand for online shopping – while causing disruption in traditional brick-and-mortar retail properties – has provided immense opportunities in industrial plant, distribution and warehouse assets as supply chains become increasingly complex and seek efficiencies. An increasing urban population base also means feeding the unquenchable demand of a fickle and growing consumer market that demands cost-effective, same-day delivery options.

There is one recurring statistic in virtually every market and country under our coverage – low vacancy rates. All but two markets posted single-digit vacancy at the conclusion of the first quarter of 2017. Keeping pace with demand, the development community delivered more than 218 million square feet (msf) over the past 12 months and had more than 205 msf under construction at the end of the first quarter. In increasingly land-constrained markets, developers are being forced to think outside the traditional warehouse footprint and are even contemplating multi-storey warehouses.

Of the 55 industrial markets tracked by Avison Young across North America and the U.K., which comprise almost 14 billion square feet, vacancy declined in 40 markets, remained unchanged in two and increased in only 13 during the 12-month period ending March 31, 2017.

The analysis revealed lower year-over-year industrial vacancy rates in 30 of 41 U.S. markets and seven of 11 Canadian markets. Logistics-driven demand cut Mexico City’s industrial vacancy rate by half to 3.2%, while in the U.K., the Coventry and London markets reported vacancy rates of 5.8% and 2.7%, respectively.

Top 10 tips to achieve a smooth leasing transaction

By Eric Horne (Calgary)

Signing a commercial lease for your business can be one of the largest financial commitments that you make. It affects the image that you project, the ease of access to your clients and the happiness of your employees. In my 10 years in the commercial real estate industry, I have seen numerous businesses make the deal process significantly harder than it has to be – or struggle needlessly – because they didn’t have an effective strategy. Below are the 10 most critical things to do in order to achieve a smooth leasing process.

Top 10 tips for tenants in commercial real estate leasing transactions

1. Understand your rights and liabilities in your existing lease.
2. Use a qualified agent, broker or advisor to provide value and help educate final decision-makers
3.  Understand the market and what leverage you have.
4.  Clearly understand your space requirements for today and for the future.
5. Act in a timely manner during the decision-making process.
6. Develop a strategy at the beginning of the process.
7. Finalize your internal and external team members for this process.
8. Give yourself adequate time to complete a deal comfortably.
9. Consider factors beyond the financial costs and what terms are open for negotiation
10. Make your decision with confidence.

Planning ahead and engaging the right support team are the best things that you can do for yourself and your business. I encourage any company that currently leases commercial space to review its lease. If it is within a year of expiring, start the conversations now. If you are looking to lease for the first time, my advice for you is to do your homework, get some good assistance and make a plan.

A licensed broker can help you understand the current market conditions and grow your business –without experiencing needless headaches.

(Eric Horne is a Vice-President of Downtown Office Leasing in Avison Young’s Calgary office.)