ADAPTIVE OFFICE RESOURCESThe commercial real estate industry is entering a period of transformation that will reach critical mass in the coming decade. Few will be spared as the entire office space supply-side and demand-side marketplace is affected. AOR's thought leadership and services enable our clients to mitigate risk and take strategic control.
In September of 2015, the Kaufman Organization closed on a “dilapidated” office building at 155 W 23rd St in New York City. In the construction process, one of the first orders of business was, of course, installing a roof top deck.
The Kaufman Organization owned of 6 million square feet of commercial office property at the time. One of their properties had installed at rooftop garden/deck that they had called “an oasis in the sky.” Their tenants love the idea, and soon, Vornado Realty Trust installed a rooftop deck in the asset right next door. A passing trend, or a new standard?
The Tech Industry, especially around Silicon Valley, made popular the use of innovative materials and creative use of typically dead spaces inside their office buildings all with the intent to engage and inspire their community. In 2015, the rooftop deck specifically exploded as a marquee amenity for office buildings in many of the gateway cities like Manhattan. Gyms, shared conference facilities, tenant lounges and bike racks were all popular, but the rooftop deck was about to become vogue.
Flash forward to 2017, and it is almost rare to hear about a new Class A office or mixed use development coming online without a rooftop deck. In fact, the new trend is about how amazing you can make your rooftop deck. There is perhaps no better office market case study than Durham, NC. According to CoStar, Durham’s existing office product is 99% occupied, and three major new developments loom large as the best crop of the new supply. They include, One City Center, 555 Magnum Street and the Durham Innovation District’s (DID) Southern Gateway building.
The 555 Magnum rooftop deck hangs over the right field fence in the Durham Bulls baseball stadium. You can finish a hard day’s work and then go up to enjoy a cocktail while taking in a minor-league baseball game. The leasing team has built a rendering video to show prospective tenants what it will look like: http://www.555mangumst.com/ .
The DID Southern Gateway building is bringing in a local/restaurant and bar concept to enhance their rooftop deck experience. One City Center in the heart of downtown is trying to take the rooftop deck challenge and one-up the competition by allowing select tenants to have their very own deck space overlooking Main Street.
The inclusion of rooftop decks in new buildings is also attracting the office sector’s latest player and king creator of amenities in an office environment – coworking. The Kaufman Foundation building that put a roof deck up during their remodel in 2015 was able to lease 36,000 SF to New York coworking operator Alley NYC. All three of the new buildings with roof decks in Durham, NC are also in discussions with large coworking operators WeWork, Industrious and Spaces.
The question is now, are spaces like rooftop decks and coworking spaces attracting tenants? Large office owner’s Relate Companies and GAIA seem to think so; they have both been putting shared spaces in their lobbies and seeing a competitive advantage over other buildings. But maybe coworking can be more than another “hot amenity” spurring Landlord’s to race to have the best and most “sellable” space… perhaps it’s a catalyst towards a building becoming more than an address but a true place and a viable community outside the suite walls.
Just a few years ago the problems facing corporate executives differed from what we see today. With the emergence of end-to-end platforms like Uber and Airbnb that have the potential to disrupt entire industries, the problems started to change. Most executives today are, above all else, concerned with responsiveness to the accelerated rate of change.
In a recent McKinsey study on growth and Innovation, 80% of CEO respondents thought their core business models were at risk from outside disruption. A similar KPMG study in 2016 found that 74% of executives are concerned with new entrants disrupting their business models.
The fear of these changes is propelling corporations to work to reinvent themselves rapidly. In the same KPMG study, 72% of executives reported believing that the next three years will be more critical to their industry than the previous fifty years.
During the next three years, as many as four-in-ten CEOs say they are “pinning their prospects on significantly changing their operating model.”
For major Office Landlords, this needs to be a wake-up call. Their most significant credit tenants are talking about making substantial (and often higher-risk) organizational changes with a three-year planning horizon, not the typical 5, 10 and 15-year outlook. In this time window, innovation is their top strategic priority and with innovation comes failure. Amazon CEO Jeff Bezos famously describes invention and failure as “inseparable twins.” In this time of invention and failure, there will be a critical need for corporations to have real flexibility within their real estate footprint. New initiatives will either succeed or fail, and employee growth and movement will be significantly more variable than it has ever been before.
How can these corporations be asked to sign ten to fifteen-year leases when they are concerned with reinventing their businesses in a three-year time window? The best conclusion one can draw here is that the long-term lease model is out of alignment and growing at an accelerated pace with the needs of even their biggest tenants.
It’s important to keep in mind that when a business model is out of alignment with the needs of the market, it’s ripe for disruption.
Reuters News | 28-Mar-2017 11:00:00 AM
By Herbert Lash
NEW YORK, March 28 (Reuters) - Industrious, the second-biggest U.S. coworking firm by number of locations, said on Tuesday it acquired a search website for spare office space and raised $25 million in fresh funds as investors bet the shared-office industry grows and goes mainstream.
The announcement comes a week after industry leader WeWork Cos Inc raised $300 million from Japan's SoftBank Group Corp 9984.T , pushing money raised by the coworking behemoth to about $2 billion. The SoftBank funds are the first installment of what media reports suggest will be a multi-billion dollar funding round. ( Full Story )
Demand for coworking sites is on the rise and investors are taking notice as the pace of capital raising in the shared work space sector quickens, said Jamie Hodari, co-founder and chief executive of Industrious, based in Brooklyn, New York.
The firm raised $37 million in September, and is likely to raise more capital in October, Hodari said in an interview.
Private equity firm Riverwood Capital led this round and the previous round of investments.
Terms of Industrious' acquisition of PivotDesk, which allows companies to advertise their excess space, were not disclosed.
A year ago it was hard to get a meeting with investors but now someone from private equity or venture capital reaches out almost daily to inquire about the industry, Hodari said.
"Every company in this space is either finishing a round or in the beginning stages of another round" of fundraising, he said. "We're on the cusp of the dollar amounts getting much larger in our industry."
Hodari is aware of eight companies, which he declined to name, that are seeking to raise between $20 million to $40 million each.
Industrious operates 12 locations across 11 U.S. cities and expects to increase its footprint to 33 sites in 25 cities by year's end, he said.
Technology, cultural changes and connectivity have combined to unlock the workplace from the traditional office, according to Adaptive Office Resources (AOR) in Rancho Santa Fe, California.
The ease of working off-site will reduce in the next decade the need for a traditional office to about 55 percent of space dedicated to office usage from more than 95 percent in the 2000s, the commercial real estate consultancy predicts.
Driving this change is demand for offices that can grow or shrink as corporate needs evolve.
"You have a supply side that continues to try to promote a product that for the most part is becoming more archaic and obsolete," said Jeffrey Langdon, managing director of AOR.
"Commercial real estate has been slow to innovate and is in denial of an industry-wide shift in a generational turnover in the office that few outside of coworking have addressed," Langdon said.
(Reporting by Herbert Lash; Editing by Bernard Orr)