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Are co-working spaces disrupting real estate? – Minneapolis Star Tribune




The most basic question about a real estate project — its size in square feet — was one that two staff members of the co-working upstart WeWork Cos. couldn’t answer and still stay on message. But they helpfully pointed to another source.

Nothing good happens for the brand when they use conventional-sounding terms.

As for what WeWork does, “we turn buildings into dynamic environments for creativity, focus and connection,” explained Megan Dodds, WeWork’s community director for the Midwest. “And really more than just a great place to work, what this is … is a movement toward revolutionizing work.”

It’s admirable, really, that the company can sustain this kind of Big Idea positioning in the market when it’s still undeniably in the real estate business.

For those new to the term, a co-working site is a shared workplace for people of different organizations who also hope to get big-company amenities like fully equipped conference rooms and fast internet service. Maybe fans can be forgiven for their enthusiasm, because working out of an inviting place like the one local firm CoCo created at the Minneapolis Grain Exchange building is pleasant and often fun.

It’s also seen as a sign of a healthy culture of entrepreneurship to have lots of busy co-working places nearby, which is why Twin Cities technology entrepreneur Casey Allen informally tracks them. By his count there are now 33 in the state. He called this kind of place a “force multiplier,” good for anyone new to the idea of starting their own business, new to working in technology or even new to the region.

Some sort of shakeout seems likely, he added, as “the economics of a co-working space are pretty brutal and the competition just went from mildly difficult to crushing in the last 12 months.”

Among the newer competitors is WeWork, a very hot company reportedly worth more than $20 billion. It’s from New York, but it’s pure Silicon Valley in its aggressiveness. Its first Minnesota location opened last fall in the Capella Tower in Minneapolis, and on a quick tour, the most surprising thing was how little the facility resembled the open floor of desks most people probably expect to see in a co-working location.

Much of its three floors are glass private spaces of various sizes, making a tour feel a little like a trip through a rabbit warren of glass. Imagine a regular office building where the landlord ripped out the drywall between tenants and installed sheets of glass instead, so graphic designers in Suite 800 and software coders in Suite 850 can now watch each other all day.

Is it revolutionary, or as is commonly said in startup circles, “disruptive?” Trying to figure that out recalls a little tempest a couple of years ago, after the author of the concept of disruptive innovation wrote about another wildly popular startup company, the ride service Uber.

Disruption is an almost comically overused word, but as developed by Clayton Christensen of the Harvard Business School, the theory was a wonderful way to describe how upstarts can someday knock out the one-time market leaders.

A company that later proves disruptive usually gets a toehold at the low end of a market, left alone by more established providers that are too busy making money from their far more demanding — and profitable — upmarket customers. The upstart’s product or service isn’t better, it’s actually worse. But it’s also much cheaper than anything the market leaders sell.

From this early success with customers who want simple and cheap, the disruptive company gradually moves up the market and carves enough share out from under the old market leaders that they collapse.

Christensen and a co-author wrote that Uber — then at the height of its arrogance — seemed to offer an incremental improvement on taxi services and wasn’t all that disruptive. Had taxi owners not been so tightly regulated, they may have come up with something clever of their own.

Some corners of startup culture reacted with outrage, but Christensen wasn’t questioning the wisdom of investing in Uber. He wanted to remind managers that not all cool new products are disruptive, and often little companies nibbling away at the low end of the market really can be safely ignored.

The co-working providers are a little like Uber, in that their services aren’t particularly cheap or lousy. Tenants get nice new furnishings in downtown office towers or newly renovated older buildings. The key innovation of co-working is efficiently providing lots of flexibility.

Having options certainly would appeal to entrepreneurs, who won’t balk at the cost of an office so much as the long commitment it takes to secure a spot. Regular landlords charge rent for the space but also must get paid back for the walls, doors, air-conditioning ductwork and other so-called “build out” costs they pay for up front. That’s why they demand at least a five-year lease.

What’s worse, with a big chunk of the monthly rent really just repaying the money sunk into the build-out, entrepreneurs without much credit history will probably have to personally guarantee the lease, too.

A co-working provider has a different approach, selling different sizes of pretty much a standard product and with much more flexibility on business terms. It can shrug off one user leaving since another can quickly be found to move in, and one big reason for those glass walls is that they don’t need repainting.

For the entrepreneur, it’s like renting an apartment rather than buying a house. If he or she gets married and needs a bigger place, can’t afford the rent or doesn’t like the neighborhood, it’s easy enough to move.

None of this seems too difficult for conventional landlords to figure out. The customer service required to sell the space and handle the coming and going of lots of members isn’t what most property managers know how to do, but people with those skills can be hired.

And if it’s easy for the established players to join the revolution, it wasn’t really much of a revolution.

lee.schafer@startribune.com 612-673-4302


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