When coworking companies came onto the scene, they quickly became a tool for commercial real estate brokers to help young and small business owners find a temporary space. However, this symbiotic relationship may be in jeopardy with the announcement of WeWork’s tenant representation services as brokers will be far less likely to bring their clients to a competitor. The coworking business’ move to diversify their service offerings may cause harm to their referral partners’ business and therefore, maybe also their own.
It is a common practice for tenant representative brokers to bring small business owners to coworking spaces while these entrepreneurs grow their company, as a coworking lease is a great short-term solution. Once the business grows to a certain level, the owner will want to find a permanent spot with their own branding and more privacy. However, instead of contacting the broker who brought them to WeWork, this entrepreneur may now decide to use a WeWork tenant representative.
Because of this conflict of interest, brokers will no longer be inclined to bring tenants to WeWork, as they will be consistently working against their industry referral partners to grab the business of these growing entrepreneurs. Unfortunately for WeWork, this could also contribute to a loss in business — one that would only add to the $900 million loss already reported in 2017.
Recently, Moody’s dropped its rating of WeWork from the lowest possible credit rating to six grades below its junk credit rating. The reason for its harsh assessment is due to WeWork’s $702 million of unsecured debt and negative free-cash flow, despite its growth from raising capital. According to Tenant Advisory Group founder and CEO Bill Himmelstein, the strategy to open up a new line of service is likely in response to its disadvantageous earnings and credit rating that hurt the company’s chance at securing a new round of funding.
WeWork’s idea for a new service line may make sense as a short-term strategy, but it overlooks long-term consequences that could have a catastrophic impact.
All eyes are on vacancies as we head into the new year, as these rates are predicted to continue their increase through 2018. There are a number of factors contributing to this trend, including the emergence of several new properties downtown as well as a few new neighborhoods being developed. Here is a look at some of the trendy topics to pay attention to in the next year.
Rising Interest Rates
The commercial real estate industry will continue to experience an uptick in interest rates, which will make property purchases more expensive. As a result of the higher interest rates, combined with a high volume of buildings trading hands in 2016 & 2017, we can expect to see a decrease of building investment sales and purchases. The rush of corporations moving to downtown Chicago has driven vacancy rates down in recent years. However, we are starting to see the trend towards increased vacancy due to several large new developments coming online.
Chicago’s reputation as a place to relocate to is growing with the impressive list of large corporations that have already moved downtown and the many more that are in the process of relocating to the city. We are expecting River North and River West to remain in the spotlight. Since there are so many big name businesses located there, many companies want to be in the same area, despite the inflated prices in the hot areas. In 2018, more and more businesses will turn their attention to the budding neighborhoods along the Chicago River, such as Goose Island and the Clybourn Corridor, thanks to several large developments planned by R2 Companies, Riverside Investment & Development and Sterling Bay.
The famously popular trend of an open office with bench-style seating will continue to grow in 2018. However, companies already using this layout have begun to realize its shortcomings. While this office design does increase collaboration, it fails to offer workers a space to concentrate or enjoy privacy which lowers productivity and workplace satisfaction. Employees need offices to concentrate and breakout rooms for privacy to focus on their work.
More and more companies are offering an option to work remotely or with flex hours, as this lowers the number of staff in the office. When fewer employees work in a physical office, the business can reduce square footage and positively impact their bottom line. However, similar to the open-office design, employers are discovering that this rising trend of remote workers and flex hours reduces productivity, lowers collaboration and erodes company culture. Eventually, corporations are reaching the conclusion that having their employees present in a well-designed office space is the most ideal option.
There are a few predictions we can expect to see in 2018: as interest rates rise, the number of investment purchases will fall; a more tenant-friendly market will emerge due to rising vacancy rates; and office trends will continue to change and adapt as companies find the formula with the best results. At a glance, 2018 has a healthy outlook for Chicago’s commercial real estate market, and as always, it should have its fair share of surprises.
Last week TAG had the privilege of attending the Office Max Roundtable event for business owners. Senior Vice President Steve Sunderland and Executive Vice President Kim Feil facilitated the panel discussion of what it’s like to run a business and how a large corporation such as theirs could connect with us. From there we were broken into smaller groups with managers from OfficeMax stores all across the country.
We found that there were a huge variety of businesses, but the commonality we all shared was our desire to build relationships. For businesses and especially small businesses building lasting relationships is key. The strength that businesses have over huge corporations is our ability to make altruistic gestures and more importantly work together. The layman might say, “You’re just a wolf in sheep’ clothing; there’s no such thing as a free lunch”. In business we know that you make one person’ day and it comes back ten-fold.
Having relationships with your competitors is a positive, not a negative. This was one of the hot topics: Do new businesses need to scope out their competition? Not necessarily. As a general rule, it’s always a good idea to be aware of your surroundings. However, it is a waste of energy worrying what the competition is up to. There is enough business out there for everyone.
There was a consensus amongst business owners that retaining and acquiring clients is based on the quality of your work. If your customers can count on your expertise to complete the job, it’s highly unlikely that they will be looking elsewhere for a “deal”. One of the business owners I had the pleasure of meeting mentioned that he charges just a little bit more than the status quo, but continues to have a healthy flow of clients. When they come to him they know exactly what they are getting and are assured of his superior work. Additionally, he donates that little bit extra to several nonprofits.
From this roundtable discussion we reiterated:
1. Relationship building is key.
2. Retaining and acquiring clients is based on the quality of your work not the price as compared to the competition.
3. Big corporations are finally listening and even asking advice.
I’ve had countless people ask me that question, and I’m glad they did.
What I’ve noticed most during these conversations is the assumption that a bad economy equals a bad real estate market.
My answer is that it doesn’t have to be that way. And it isn’t for TAG.
In the real estate market, a bad economy may be bad for the landlord, but it is good for the tenant, which is good for our clients.
During a bad economy, there tends to be a high supply of space available and a low demand for it. Businesses need less space because they are reducing their company size and make their existing spaces smaller. As a result, there is more supply available in the market than demand, and hence, the price of space goes down. Because of this, tenants are able to get better deals for a space of their choice at the lowest negotiable price.
In addition, when the economy is down, competitors at other real estate firms are discouraged to stay in the market, and so unintentionally hurt themselves by giving their potential clients to the remaining real estate brokers in the market. We have seen a large uptick in clients during every downturn.
When the economy is strong, landlords tend to make more money because businesses are growing and hiring more people, and so, are growing out of their existing space and needing more. This creates an increase in demand and thus, an increase in the price of space.
Accordingly, competitors have the incentive to come back into the market when its doing well, which creates more competition for other real estate brokers. But competition is of no threat when you continue to create value in finding the best and most affordable space for your clients. In other words, one will always have a strong business if they provide value to their clients at all times, strong and weak markets.
No one likes when the economy is in decline but Tenant Advisory Group tries to perform in a way that doesn’t depend or reflect on the economy for its success.
To TAG, client and team are the two most important factors that affect our “real estate market”. According to our criteria, if the client’ needs are being met, we are doing our job.
Therefore, one can control how you will do based on how you are running your business, working with your team, and meeting your clients’ needs. The economy does not have to be the scapegoat.