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Like a monster in a horror movie, coworking is the idea that refuses to stay dead. With the global leader in coworking, WeWork, in bankruptcy and reports that only about 2 percent of office space is flexible space, there’s still no shortage of entrepreneurs who fervently believe that the market is there and they know how to tap it in a sustainable way.
The demand for flexibility and short-term occupancy of offices is still there, but it’s becoming the domain of smaller operators, said Ryan Masiello, co-founder and chief strategy officer of VTS, a commercial real estate technology platform. “It’s more important than it’s ever been,” he said. “Every company knows it needs to have optionality.”
One of those working in the wake of the WeWorks is Drew Sanden, a 39-year-old ex-broker at CBRE (CBRE), Cushman & Wakefield and Newmark (NMRK) who co-founded and is CEO of TailoredSpace. The nearly five-year-old coworking operator has nine locations sprinkled around the Los Angeles region, in places such as Rancho Cucamonga and San Juan Capistrano. Sanden also started SimplerSpace, which is a more pared-down version of TailoredSpace, with three locations, also around Southern California — namely Carlsbad, Placentia and Pomona.
To Sanden, the need of fledgling companies and startups for a place of business that’s not their owners’ kitchens remains, even or maybe in spite of the throes that WeWork is going through.
And WeWork isn’t the only company to run aground trying to serve startups looking for space minus the long-term, multiyear commitment required in most conventional office leasing. Coworking startup daybase went out of business early last year, and Knotel also went bankrupt, though it’s being relaunched at one of Sanden’s alma maters, Newmark.
The key, Sanden says, is to start small and to be sure you’re delivering the right services to your clientele. It doesn’t hurt either to nail down one market before you move on to the next. That is, TailoredSpace will not be going global anytime soon.
Sanden jumped on Zoom in early January to explain what TailoredSpace is doing and why it will succeed where others have failed.
This interview has been edited for length and clarity.
Commercial Observer: Talk to me about what the idea around TailoredSpace is.
Drew Sanden: I started my career at CBRE doing multitenant office leasing in Southern California. Around 2018, I was watching the explosive growth of coworking operators like WeWork and Industrious in downtown locations. It became clear that companies were willing to pay a premium for well-designed spaces with a focus on community.
But, when I looked around my suburban markets, there was a real gap in what was being offered. That was the genesis of our exploration into creating a scalable coworking operation.
Given what’s happened to WeWork, what makes you think there’s a future in coworking?
I wasn’t part of WeWork’s operation, so I’m not really in a position to comment on potential mistakes that were made along the way. What I can share is how watching WeWork and other coworking operators has shaped our business model at TailoredSpace.
We try to take a really disciplined approach to growth, which starts with a detailed understanding of who our customers are. We can’t be all things to all companies. We are really focused on servicing suburban markets, which means most of our members are small companies and solo-preneurs. Understanding our customers allows us to focus on specific demand indicators like proximity to residential, access to freeways and retail, and high per capita income.
Secondly, we believe the traditional coworking model has been broken. The traditional model being a coworking operator signs a long-term lease and then attempts to arbitrage the lease rate with coworking revenue. The results of that structure have not proven to be effective over time. What we’re trying to do at TailoredSpace is to align the interests of the landlord and TailoredSpace. We are focused on being a service provider for the landlords, and we sign management agreements that have our compensation directly tied to performance. Our goal is to create a win/win structure. We believe this model is sustainable and the future of coworking.
I don’t know what the future of coworking will be in the urban markets, but we feel really confident in the suburban ones.
One of the things I think that made WeWork run aground was that they were charging relatively high prices and, like you mentioned, arbitraging that space to clients who were not interested in long-term leases. Ultimately that proved to be a problem. There was a constant churn. And then we had a pandemic, which put a damper on interest in that space. So it sounds like you are doing a go-slow approach. You’re renting lower-rent space, so it’s easier to make a profit off that space.
I think you’re right. What you’re getting at is the margins. There’s a cap on what somebody’s going to pay, whether it’s a downtown location, or if you’re on the water in Santa Monica, there’s a cap. That’s one of the reasons why it’s working in suburban markets for sure.
And we have seen landlords who liked having coworking in their buildings because they can pick off some of the more successful tenants for their more traditional long-term leases. It sounds like that’s where you’re going with it.
Absolutely. What you’re describing is a key component. We’re graduating several of our members on a monthly basis. We’re happy to let these tenants move along because it helps solidify that relationship with the owners. We’re definitely seeing that.
We have seen landlords actually operating their own coworking spaces in the hope that some will graduate into traditional leases. And they might bring you in as an operator. Is some of your operation on an asset management basis on behalf of landlords who are thinking along those lines?
I think you’re definitely on to where I personally see the market going. The same way you compensate a property manager on performance metrics, that’s the way we operate too. What we do is not rocket science. But it’s a real learning curve for ownership. They get to focus on what their core competencies are.
Are you actually getting landlords coming to you and saying they want something like what you are doing in their building? Are you getting such requests outside your core markets?
I guess the answer to that question would be yes. It’s really about leveraging relationships that I built in 16 years as a broker. Most of our clients are really private family funds as well as lenders and appraisers.
We’ve had the opportunity to look at some sites that are outside California. But we’re taking a disciplined approach to growth. We’re still a small company. We do have some plans to open one to three locations in Northern California. Disciplined growth is a key business strategy for TailoredSpace. We’ve started with a focus on Southern California, and our next targeted expansion will be in Northern California. From there, we plan to expand within the U.S.
By Northern California, do you really mean the Bay Area, or like Chico, really Northern California?
The initial focus is going to be on the Bay Area — 20 minutes outside of San Francisco.
You have another brand called SimplerSpace. They’re both now in their fifth year. That’s enough time to go from being the new kid on the block to being an institution unto yourself. What’s been going on during those five years?
TailoredSpace actually launched in 2019, and SimplerSpace launched in the third quarter. TailoredSpace is a premium brand, a higher-end model.
What we realized, though, was that there was a fair amount of second-generation space that had a lot of value. So the SimplerSpace model which we’re trying to do is kind of a value brand. So the pitch to the landlord is we can be up and running. We’re filling a lot of these commodity spaces that are sitting in our markets. We’ll be rolling out a few more.
So TailoredSpace caters to the high end of the market, and SimplerSpace is more like commodity space, for the clients who just want space where they can slap down their laptop and maybe get a cup of coffee?
Exactly. SimplerSpace is for companies that are less interested in amenities and more driven by affordability and flexibility. The space is well designed, but doesn’t have a lot of amenities. Some people just want to throw down their laptop and work.
So, bottom line, you feel that companies that are very slow and meticulous in preparing coworking space will succeed, but it will not become a worldwide brand. Slow and steady wins the race.
I think that’s it. It’s picking the right markets and taking the right buildings and picking the right landlord partners. Landlords today are saying the coworking operations model works for my building. If I have a market that’s suburban Class A, or if I have the best building in downtown L.A. or New York, I’d better ask somebody to focus on that.
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