Co-working, flexible leases at Twin Cities office buildings continue to grow

Co-working used to be the haven for tech start-ups and entrepreneurs.

Now, hundreds of thousands of square feet of shared office space exists throughout Minneapolis, St. Paul and surrounding suburbs with tenants including law firms, nonprofits and traditional businesses trying to spark creativity and attract more young workers.

In addition to a proliferation of co-working providers opening chic new offices, several building owners also plan to convert empty office space into co-work-like hubs with short-term leases.

"Organizations are embracing the concept of co-working because they want to take advantage of innovation that isn't happening in traditional workplaces," said Brent Robertson, a managing director at real estate company Jones Lang LaSalle's Twin Cities office.

The ability to collaborate and rub elbows with different people gives employees access to different mind-sets that can spur innovation, Robertson said.

There are expected to be a million co-working members globally by 2018, JLL said. Minneapolis is not tops when it comes to shared workspace — JLL ranks it 19th in the country, and the metro would need to add close to 215,000 square feet to be on par with Chicago.

However, co-working providers made up 10 percent of the local leasing activity in the second quarter of this year, according to real estate company CBRE.

More than 640,000 square feet of office space is occupied by shared workspace concepts, with 28 percent in downtown Minneapolis and 23 percent in the Interstate 494 corridor, CBRE says.

Market newcomer WeWork has signed more than 53,000 square feet of space in Capella Tower. Industrious, which already has a co-working space in RBC Plaza, has decided to open a new 34,000-square foot office in the new T3 building in the North Loop.

"Minneapolis, I think, has been such a hidden gem for so long, but now is a hub for so many start-ups as well as Fortune 500 companies, and what we are seeing now in the North Loop is it's this super hot area to be a part of this growth," said Marie Adrian, the community manager for the new T3 Industrious location, which is scheduled to open in late fall.

While co-working spaces like Industrious — which include everything from standard printing to fruit-flavored water — have become popular, the appeal of flexibility in office leases has spread outside of just those spaces.

"I think that flexibility is just a key item for a certain segment of businesses," said Brent Erickson, executive director of brokerage services at Cushman & Wakefield. "So I think the classic co-working arrangement is going to have a place, and then if you want to call it that tangential working arrangement," short-term space also will hold a segment of the market.

Nick Peterson, director of acquisitions at Maven Real Estate Partners, said there is still a local need for flexible work space without all the bells and whistles.

Earlier this month, Maven purchased the 26-story Rand Tower in Minneapolis for $18.65 million and is in the process of repositioning the building for tenants that may want the co-working flexibility without the higher rates that come with some of the amenity-rich co-working spaces.

"We're offering nontraditional leases for their nontraditional type of businesses in a grade-A location," Peterson said.

Instead of the typical lease of five years or longer, tenants will be able to choose a lease that would only last six months, a year or 18 months, Peterson said. Tenants could occupy a partial floor or a full floor of 5,500 square feet. They can choose the degree of finishes and flexible options.

"It's really hard to sign five-year leases when you are saying I need space for 15 people today, next year is going to be 30, and if I'm five years out, I might need space for 150," said Jeff Hinck, general partner at venture capital firm Rally Ventures. "This is great for companies early on."

Hinck already had started directing some start-ups, which he said may have appeared undesirable to the typical broker, to look into renting space in the Rand Tower.

In St. Paul, some office buildings that are in the process of renovation have considered the same sort of flexible space. At the 428, the old Woolworth building that sat empty for years, the rooftop is being envisioned as a short-term lease space.

Developers met with a co-working consultant to discuss the options for the space, which will have all-glass walls and a sizable outdoor terrace. An open space co-working hub is planned, along with separate offices for lease, said Pat Wolf, owner of Commercial Real Estate Services, which is in charge of the development.

Wolf said building owner HFS Properties was willing to "test the market" with the new flexible model.

"I think having owners and developers do it themselves is a new concept for our market," she said. "It just seemed like a good fit."

The Osborn370, the former Ecolab building on Wabasha Street downtown, is adding a "flex floor" as well as another possible floor for a separate co-working provider to operate. The flex floor offers leases from 12 months to two years, and tenants would be able to have their own individual offices in the space.

The building has already signed three tenants for the flex space — Paul Davis Restoration, software company OppSource, and Structural, a software company co-founded by Scott Burns, one of the investors in the Osborn370.

"We see it as support for the overall vision of the building and certainly we look at it as kind of opportunistic for us," said Tanya Bell, co-founder of Grand Real Estate Advisors, one of the partners in the development. "We hope that if a certain percentage of those companies do succeed … they will hopefully then move up to a half-floor or full floor in the building and fulfill that life cycle."

While real estate professionals said co-working segments and other short-term lease options will continue to grow, extended leases for offices aren't expected to disappear.

"We'll keep exploring different ways to house our people, and as much as we all want personal and flexible and unique and different … will we give up the design customization that we have come to appreciate in the traditional office place?" said Jim Vos, principal at commercial real estate firm Cresa Minneapolis. "I think that's going to be a slower adjustment."