Addressing the Demand for Residential Coworking

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In the pre-pandemic world, multifamily property owners were strongly focused on creating amenities that would appeal to prospective residents’ desire to socialize and on building a sense of community in their projects. While those considerations remain, the rise of the hybrid work schedule has made creating comfortable and productive workspaces a top priority for residential developers and investors.

Unit sizes were shrinking as the pandemic arrived, and there is little evidence that in-unit workspaces are the most effective way to meet residents’ demands, since larger units result in higher rents and don’t address the typical desire to leave the unit for at least part of the workday. Rather, coworking suites are becoming increasingly common in multifamily projects as a way to help residents be productive, allow them to socialize safely, and activate lobby or club levels in large developments.

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According to Phyllis Hartman, president of interior design and architecture firm Hartman Design Group, small work pods with sliding glass doors yield the highest utilization rate for residential coworking suites. The glass is to create “a visual connection to social activity and to allow sunlight into the space,” said Hartman.

Conference rooms designed for six to eight people are a popular workspace option but tend to be taken over by one person, so they are not always the best use of limited space. Hartman’s firm is working on a design project for a building with 500 residents and has dedicated a coworking area with 20 pods in various formats, including enclosed spaces, booths, open pods and outdoor pavilions. While fitness and outdoor amenities have remained popular with residents during the pandemic, Hartman said, “every nook and cranny is being designed as a work pod. This is true for new and repositioned developments.”

Designing amenity spaces to meet residents’ coworking needs is particularly sensible given the fairly low cost of implementation and the flexibility such a choice offers. Christine Espenshade, vice chairman in Newmark’s multifamily capital markets group, said that coworking spaces are “a hugely popular amenity” not only because of the current conditions that favor remote work but also because it is easy to convert coworking spaces to another function if resident preferences change.

“Owners are mostly focused on the short-to-medium term,” noted Espenshade. Since “low cap-rate sales need the newest and best amenities,” most core buildings have coworking spaces and often can reposition dead space to use for this purpose. Owners’ return on investment comes from being “more core.” That is, having top-quality offerings that will attract both residents and prospective buyers to the property.

Return on Investment

In the current investment environment, in which multifamily assets are appreciating rapidly, it is difficult to determine how much return on investment the installation of a coworking space may generate. While transaction data for 2021 is not yet final, data tallied by CBRE indicated that U.S. multifamily investment volume totaled $179 billion through the first three quarters of the year and was on pace to easily surpass the $193 billion record total from 2019.

Despite the strong sales market, property owners are being proactive in meeting resident demands for coworking facilities, perhaps because they anticipate a more competitive environment in the year ahead as rent growth decelerates. According to the most recent national multifamily report published by Yardi Matrix, the national asking rent average increased 13.5 percent in December 2021 from a year earlier, but that represented only a 0.1 percent increase compared to November 2021. Rent development has been slowing, and the pandemic has increased monthly volatility. Many property owners are responding to this volatility by investing capital in their properties to improve their market positioning.

Those capital improvements include efforts to accommodate many residents’ hybrid and remote work schedules. As a result, most trophy and Class A properties either already have a shared office suite with workstations, strong Wi-Fi and wireless printing capabilities, or plans to create one. These buildings are most likely to appeal to higher-wage renters with professional services jobs and the flexibility to work remotely.

Conversely, Class B properties are not creating coworking suites to the same extent. “We are not seeing investors looking to expand on this on Class B deals,” according to Dean Sigmon, an executive vice president in Transwestern’s multifamily sales practice who specializes in value-add transactions.

Some stronger Class B properties—including high-rise and midrise developments—are adding coworking suites in order to remain competitive, Newmark’s Espenshade indicated. The cost to build a coworking suite varies widely depending on the size of the amenity and the quality of the design.

Coworking Essentials

Part of creating a successful residential coworking suite is not just offering Wi-Fi-enabled workstations but also a productive environment with a community atmosphere that reinforces an investor’s brand.  “AV equipment for teleconferences and a coffee bar—either a Keurig-style coffee machine or coffee on tap,” can help residents strike a balance between the need for productivity and the desire for a pleasant work environment, noted William Rich, president at Delta Associates, a real estate information and consulting firm.

One challenge multifamily owners face when creating a coworking space in their projects is whether to charge separately for the use of this amenity. Most owners, Espenshade noted, have made these spaces available for residents to use at no additional charge, in part, because “residents already pay amenity fees in many projects” and, in part, because the fees they would charge are not worth the administrative policing and revenue collection that would be involved. In many instances, the effort required to collect hourly or daily fees could reduce their ROI.

“Communities with more elaborate spaces tend to charge for various components, such as a conference room or private office,” Rich said.

Rich has encountered a project that charges $150 per hour for an on-site conference room and $40 per day or $825 per month for the use of a private office. “Residents are not willing to pay for coworking spaces and, if there is a charge, it is too little to pay for the build out and upkeep,” he said.

Despite the lack of additional revenue generally associated with this amenity, it is becoming essential in top-quality projects, regardless of their location. “All of our new developments and repositioning projects are to have a significant coworking aspect,” said Hartman. “I don’t think it matters whether they are urban or suburban.”

Alexander “Sandy” Paul is an expert on commercial real estate research, market analysis and thought leadership. He is a 20-year veteran of the industry and most recently served as Newmark’s senior managing director of national research.