Co-Working Wars
The Coven co-working space in the North Loop. ( Photo by : Bethany Birnie)

Co-Working Wars

Welcome to the boomtown for shared office space.

Co-working spaces often appear as an oasis to those burned out on the corporate rat race. Most don’t look like offices at all. There are no soul-sapping cubicles in sight. Open floor plans are a hallmark. Some elements echo hotels: a staffed front desk, a comfortable, casual vibe, a big kitchen/break room, and a pronounced flair for design, with modern and funky touches. Co-working spaces are designed so they don’t feel like regular offices; they’re meant to be places where people actually want to spend eight hours a day. As designed, they are meant to encourage collaboration and connections with like-minded professionals.

The co-working industry emerged over the last decade and has seen booming growth in the last two years. At the end of September, commercial real estate services firm Cushman & Wakefield Minneapolis-St. Paul tallied 40 different shared-office-space operators, several with multiple locations, across the Twin Cities, with approximately 1.2 million square feet of office space—triple the amount in 2014. Roughly 60 percent of the metro’s co-working space is in downtown Minneapolis. For context, 1.2 million square feet is equivalent to a 57-story office tower in downtown Minneapolis.

Co-working is no longer seen as a flash-in-the-pan trend. Veteran commercial real estate office brokers say it’s here to stay and is changing the industry.

“I don’t think we’ve topped it out,” says Mark Evenson, principal and managing director for the Minneapolis office of Toronto–based commercial real estate firm Avison Young. “I think it will continue to evolve. It’s certainly not going to go away. I think what it’s really done is help the small office tenant have a place to go that really supports their business.”

The Long Shadow of WeWork

New York–based WeWork has become the industry behemoth in the co-working industry.

WeWork opened its first Twin Cities location in 2017 with three upper floors at the Class A Capella Tower in downtown Minneapolis. After adding locations in Uptown and the North Loop, the company is now the single largest provider of co-working space in the Twin Cities. Cushman & Wakefield reports that WeWork has approximately 238,000 square feet of space locally, nearly 20 percent of all co-working space in the market. WeWork just moved into its Uptown and North Loop locations this year.

WeWork has not sought out funky, down-on-their-luck spaces in old brick-and-timber buildings. The Capella Tower ranks among the most expensive space to lease in downtown Minneapolis. In both Uptown and North Loop, WeWork moved into brand-new buildings. New buildings typically charge top-of-market rents.

Its most recent financing round in January valued the company at a staggering $47 billion. Japan–based SoftBank, WeWork’s largest backer, has invested more than $10 billion in the co-working company. Although it was founded in 2010, WeWork has yet to make a nickel. Its operations have come under intense scrutiny as its parent, The We Co., filed for an initial public offering in August.

WeWork has posted strong revenue growth, but the bigger it gets, the more money it loses. For 2018, the company reported $1.8 billion in revenue, but a net loss of $1.6 billion from operations. For the first six months of 2019, WeWork lost $690 million on revenue of $1.5 billion.

Since filing for an IPO, valuation dropped sharply to an estimated $10 billion to $12 billion and the company cancelled its public offering. Co-founder and CEO Adam Neumann was forced to step down in September and was replaced by two co-CEOs. The next chapter remains uncertain for WeWork; extensive job cuts are likely.

A WeWork spokesman declined to talk to Twin Cities Business, citing the company’s pre-IPO “quiet period.”

Co-working operators sign direct leases with building landlords. From the landlord’s perspective, that space is fully leased. Co-working is essentially a membership or subscriber business. The co-working company then tries to “sublease” its space to members who pay a monthly fee. Prices vary depending on the type of space you need and how often you need to be there. Memberships usually include a mix of options: a pass to plug in anywhere you can find an open lounge area, a dedicated desk, or private offices. The operator’s goal is to sell enough memberships to cover their own rent and operating costs and generate a profit. The advantage for tenants is having access to space that is less expensive than a standard lease with much more flexibility; users can often be on month-to-month arrangements.

How Much Does It Cost?

WeWork, Capella Tower “Hot desks” in common areas start at $200/month. Private offices start at $470/month.

Life Time Work, St. Louis Park Memberships range from $450–$650 per month and include “Diamond” memberships at Life Time fitness clubs.

Fueled Collective, Grain Exchange Dedicated desks start at $400/month, “campsites” for teams start at $900/month, private suites start at $1,060/month.

Read more from this issue

The stereotypical co-working denizen was once a young, highly caffeinated techie who was working on a plan for his or her startup. But outposts like Life Time’s new Life Time Work location in St. Louis Park, which opened in May, are a clear signal that the business is changing.

“We think the category has been overinvested in, from venture investors mostly,” says James O’Reilly, president of the Life Time Work division. “We think that there’s a large underserved market who are not looking for a WeWork or another [similar] type of location, they’re looking for something more elevated that reflects their ambitions and their personal identity more than a sort of a younger, keg in the corner, foosball table kind of thing.”

The space is dominated by private offices rather than wide-open lounge spaces with long tables. It’s not in a repurposed historic property, but on the ninth floor of a suburban office building.

Though on its face this sounds similar to the old “executive suite” model, Life Time’s not offering warrens of private spaces with a centralized copier and receptionist, but a space that is more transparent and communal with a distinctly contemporary ambience.

Industry purists don’t consider executive suites, pioneered by Regus and others in the 1980s, to be co-working. “I would say culturally it’s a different business,” says local co-working pioneer Don Ball of executive suites.

Life Time Work is catering to what O’Reilly calls “established professionals” and companies of all shapes and sizes. One such entity is the TwinWest Chamber of Commerce. Shannon Full, TwinWest’s president and CEO, says that the chamber had been leasing 3,000 square feet in a “regular office building” in Plymouth. TwinWest’s eight employees now work out of three adjacent glass offices at Life Time Work.

“It actually saved us a tremendous amount of money,” Full says. The move also allows the chamber to offer a big perk to employees: “Diamond” memberships to Life Time clubs, which are part of the package for Life Time Work members. “It really has exceeded my expectations.”

Life Time Work opened its first location in the Philadelphia metro in 2018; its fourth location opens at the Southdale mall in Edina by the end of the year. O’Reilly says plans call for six to 10 openings in 2020, with a goal of 50 locations in five years.

O’Reilly says business is good. “We’re 87 percent sold after four and a half months.”

Why is a fitness chain getting into the co-working business? Life Time sees it as an extension of its wellness mission. And co-working’s business model is not vastly different than the monthly membership business Life Time has operated for more than 25 years.

“A core part of our purpose as a company is to help more people lead healthier lives,” O’Reilly says. “And there’s arguably no other place outside of the office that we could have a bigger impact. This is an environment where people are spending a third of their adult life.”

There’s also the fact that the working world is changing. O’Reilly says that shared office space is now drawing companies and professionals who don’t want to sit in a space that feels like a college dorm. Life Time’s St. Louis Park space feels more buttoned-down.

“Since 2008, there’s been some structural changes in the employment market,” says O’Reilly, pointing to the gig economy and rise in the number of contract workers. “The companies that are coming to us, many of whom come from a direct lease with a landlord, they’re not necessarily looking for co-working space. And that’s kind of a fundamental shift.”

Going to a CoCo

You could call Don Ball the godfather of co-working in the Twin Cities. When Ball and Kyle Coolbroth started CoCo in Lowertown St. Paul in 2010, there was nothing else like it in the metro. Before CoCo, Ball says he was “helping corporations fix bad websites.” But he had a gut instinct that other contractors and freelancers would like the energy and connections made possible by working alongside other like-minded people.

“I knew there were a lot more people like me who worked from home and went stir-crazy occasionally,” Ball recalls. “I never imagined it would become an industry. It was really an unproven thing.”

By 2015, CoCo was the definition of co-working for many locals. They were up to 80,000 square feet in four locations, with three locations in Minneapolis: Uptown, Northeast, and downtown, where CoCo set up shop in the iconic Minneapolis Grain Exchange building.

But then big, national players started showing up. New York-based Industrious opened in RBC Plaza in downtown Minneapolis in 2015. Ball says that had little effect on CoCo’s business at the time. But Industrious was the first of many large, venture-capital-backed co-workers that would land here, largely in and around downtown Minneapolis.

Industrious has a big footprint in the co-working world. The company has raised $222 million in venture capital financing so far, according to CrunchBase, a website that tracks startup investments. Industrious has 85 locations in 45 cities. It opened a second Minneapolis location in 2017 in the T3 building in the North Loop.

Industry giant WeWork arrived in fall 2017, taking three floors of space at Capella Tower. “That was noticeable because they came in with aggressive deals on pricing—giving it away, basically,” Ball says. “They’re a powerhouse.”

As Ball and Coolbroth weighed options for growth, CoCo struck a deal to become shareholders in a new franchise venture with Cincinnati–based St. Gregory Development Group, a franchise development firm, and Rameet Chawla, who opened the first Fueled Collective co-working location in New York in 2012. Ball and Coolbroth remain the owners of their local operations, but all locations have been rebranded Fueled Collective. Ball says that the Cincinnati location has a stronger hospitality focus and will be a model for future openings.

Back in the Twin Cities, in March, WeWork opened a new 102,000-square-foot space in Uptown’s new MoZaic East building, one block from where Fueled Collective had been operating since 2013.

“That was tough,” Ball says. Many Fueled Collective members made the move to WeWork. Some folks shared details of WeWork’s offers with Ball and Coolbroth. Ball says people were being offered space for “free with no obligation for a long period of time”—terms that Fueled simply won’t match.

While many of the large operators gravitate toward Class A office buildings, Fueled prefers funkier venues. Its outpost in northeast Minneapolis, for example, is in a vintage brick-and-timber building that dates to 1916.

Ball declines to disclose revenue for Fueled Collective’s local spaces, but says that the operation is profitable. WeWork, on the other hand, has never made a profit.

“We’re trying to run a sustainable business,” says Ball, who notes that many of the big players are bankrolled by venture capital, using that money to offer below-market deals to fill up their spaces.

“The rest of us are then forced into heavy price competition. It’s a classic story, right? You force your competitors out because they can’t afford to keep up with the low rates,” Ball says. “But eventually though, as we’re seeing, gravity has to kick in. Someone’s going to say, ‘How about a profit?’ What we came to realize after running this a while, it still is kind of a real estate arbitrage business. There is no great fortune to be made. I don’t think WeWork has any secrets about how they’re going to make money in a way that the rest of us won’t.”

Right now, Ball sees the local co-working market as overcrowded. Fueled Collective has not opened any new location here since 2015.

“We might have a few too many chairs seeking too few bodies,” Ball says. “But that’s only a temporary thing. If the predictions of how much this [industry] space grows are true, then ultimately I think we’ll be right-sized, and there might be room for even more.”

Co-working by the Numbers

As of September, Cushman & Wakefield counted:

Approximately 1.2 million square feet of co-working space (including “executive suite” space).

A 500 percent jump in the amount of flexible office space in the Twin Cities since 2010, when there was just 200,000 square feet.

40 different operators of shared office space.

22 co-working companies with space of less than 10,000 square feet.

A September report from Los Angeles–based CBRE Group Inc. on the flexible office market in 2019 tallied 71 million square feet of office space in the 40 largest office markets in the U.S. More than 20 percent of that space is in Manhattan, which has 15 million square feet of co-working space. It remains a small slice of the market, accounting for a U.S. average of 1.8 percent of office space.

CBRE’s baseline forecast estimates that by 2030 there will be 600 million square feet of shared office space in the U.S., which would account for 13 percent of the market.

Chicago–based JLL found that for 2018 and the first two quarters of 2019, co-working accounted for 41 percent of all office space absorption in the U.S.

Co-working gets down to business

Another national co-working firm, CommonGrounds, just opened in a downtown Minneapolis skyway. The 27,500-square-foot space opened at 801 Marquette, the former TCF Bank building, in July. The space is dominated by private office spaces behind double-wall glass. A glossy booklet promoting the space says it can provide “headquarters-as-a-service” for companies looking to “outsource” their main office.

“We are enterprise grade”—marketing to large companies, says Patti Faulkner, the spokeswoman for CommonGrounds, based in Carlsbad, Calif.. “We’re the only co-working location directly on the skyway.”

CommonGrounds has nine current locations nationally, but 12 more in development. The company has raised $140 million in venture capital financing.

Minneapolis–based Bright Hat moved into CommonGrounds in early September, relocating from another co-working space. The technology outsourcing firm has about 120 employees, but almost all of them are in India. CEO Josh Berger is one of three staffers here. While open-plan co-working offices can sometimes be noisy and disruptive, Berger says that’s not the case at CommonGrounds: “The main thing that we moved over here for is they really did a great job of sound-proofing the space.”

Berger says that the flexibility of co-working is important to him in case he needs to make quick changes to his business. And in today’s digital/cloud-based world, many workers don’t need lots of workplace infrastructure to do their jobs.

“For me, the flexibility of being able to pick up and move if I need to or to be able to add more space and size down is really a killer opportunity that didn’t exist a decade ago,” Berger says. “When we moved over from our last location, it took us literally a couple of hours to pack up and move down here.”

But bigger businesses are also taking notice. Global agrochemical and seed company Syngenta, based in Switzerland, moved all of its Twin Cities staff to co-working space. As the company’s lease was expiring in Minnetonka, it took a full floor at WeWork’s Uptown location in March.

Lesley Ferguson White, a spokeswoman for Syngenta, says that the company has about 140 employees in the space. “It provides a really nice collaborative space with flexibility,” White says. Syngenta has used co-working space in other markets as well.

But bigger companies taking larger amounts of space have to sign deals that look a bit more like a traditional lease. “We negotiated our lease … we are not on a month-to-month situation,” says White, who declined to disclose terms.

Fortune 500 3M Co. is based on a campus in Maplewood, but some 3M staffers are sometimes working out of Fueled Collective in downtown St. Paul. 3M spokesman Kyle Thompson says that the number of employees co-working is always fluctuating; various teams may make the decision to work there for certain periods if it can boost creativity and productivity.

It all raises an obvious question: Are landlords cannibalizing their own market by leasing to co-working firms? And does it matter, since the space is leased anyway?

“I don’t think we’re losing tenants to the co-working model,” says Brent Robertson, a managing director with the local office of Chicago–based JLL, a commercial real estate services firm. Robertson says he’s heard that many co-working operators are signing long-term leases for 10 or 15 years. “I don’t see them as competitors.”

Co-working companies have taken on a lot of space, says Tom Tracy, an executive director with Cushman & Wakefield Minneapolis-St. Paul. He adds that new co-working space in the Twin Cities is nearly equal to the total net absorption in the office space market in the last 18 months. (Absorption is a measure of the change in occupied space in commercial real estate.)

Some building owners have even decided to get into the co-working business themselves.

In downtown St. Paul, the redevelopment of the former Woolworth’s now includes the Wellworth co-working space—a 7,000-square-foot glass cube on the roof of the building now known as The 428.

“It’s basically a business that we started from scratch,” says Pat Wolf, president of Commercial Real Estate Services Inc., which redeveloped the building. She notes that most of the building’s ownership group are also partners in Wellworth.

So far, there are no other tenants. But Wolf says that the co-working operation is off to a good start. She says that about 35 companies have Wellworth memberships. “Co-working was probably originally focused on ‘solopreneurs’; that has definitely changed,” Wolf says. “Our members tend to be small to medium-sized companies.”

Find your niche

Another emerging trend is co-working spaces with a specific focus. The Coven, a women-oriented co-working space, opened its Minneapolis location opened in 2018. Its North Loop space is about 5,000 square feet. The Coven plans to open a second local space in St. Paul in December but is looking beyond the Twin Cities for growth. Alex West Steinman, CEO and co-founder, said that the business plans to open a location in Nashville in mid-2020.

“We’re expanding through the middle and southern parts of the country first,” says Steinman, who declined to name any other cities under consideration. Steinman made Inc. magazine’s Female Founders 100 list in September.

The Coven’s St. Paul location will be in the Blair Arcade in Cathedral Hill. The 9,700-square-foot space will include some private offices. The Coven’s goal is to have 20 locations within the next five to seven years.

“We are raising our initial round of funding right now,” Steinman says. She declined to disclose how much money she is trying to raise.

Two other metro co-working locations also focus on women: ModernWell in Minneapolis and a location for Seattle-based The Riveter, in Edina. The new Third Haus in Linden Hills is a co-working space that will focus on retail-oriented businesses.

Jody Winter started Cornerstone Studios in northeast Minneapolis in 2018. Cornerstone is not your average shared workspace: it primarily caters to wedding and event professionals. Winter says that Cornerstone is home to 23 businesses including photographers, wedding planners, floral designers, and hair and makeup stylists.

“There wasn’t a space in the Twin Cities that was suitable for each of our businesses,” says Winter. “I see it as kind of the beginning of a new way to work.” Winter was a hair and makeup stylist, but now her business is running the co-working operation. Cornerstone expanded in April and covers 8,000 square feet. The space also hosts weddings and events on evenings and weekends. Winter is interested in expanding to St. Paul.

Co-what now?

Business is business, work is work, and money is money. Co-working doesn’t change that.

New business categories are all subject to the same fundamental economic trends. A few pioneers get things started; no one pays much attention. Then it becomes the next big thing and the market is flooded with new companies and investors, all trying to perfect the model and hit the jackpot. After that comes the shakeout; some fail, while others get acquired. Opinions vary on whether co-working is still in the second phase or has started to cross into the third.

“I think co-working is beyond a trend, I think it’s a real workstyle,” says Brent Erickson, senior managing director in the Minneapolis office of New York–based CRE firm Newmark Knight Frank.

Erickson says that a potential recession could bring more people to co-working, rather than see a shakeout. Companies may lay off staff, then hire them as contractors to keep doing work for the firm. “Those employees very likely could wind up being on contract, and they’ll be part of the universe for co-working.”

On that point, Life Time Work’s O’Reilly agrees.

“I do think there is a counter-cyclical element to this,” O’Reilly says. Translation: A potential recession could mean more business for co-working operators. It’s perhaps no accident that co-working got its start during the Great Recession.

“We see price compression, but we see demand maintain or increase,” says O’Reilly of a recession’s effects. “Margins will probably take a hit, but we don’t see it falling off.”

Burl Gilyard is TCB’s senior writer.