The Real Deal Chicago

Could co-working offices save malls?

As shopping centers struggle nationwide, flexible office and retail space could prove the answer, a new JLL study says

By Joe Ward | August 10, 2018 12:00PM

(Credit: iStock)

A new kind of co-working space is seeking to capitalize on two current market trends: the increasing number of freelance and remote-location workers, and the loss of tenants in the retail sector.

The idea? To combine vacant retail space with co-working offices.

Commercial real estate firm JLL conducted a nationwide study of 75 co-working offices occupying more than 1 million square feet of former retail space. The study found such new, specialty co-working spaces not only help backfill vacant retail space, but also provide added benefits to workers, consumers and retailers.

“The current retail market is pushing landlords to find new ways to invigorate their space with alternative tenants, including co-working spaces,” Holly Rome, director of retail leasing for JLL, said in the study.

Rome said retail properties offer workers amenities like ample parking and nearby shopping and dining options.

“On the flip-side these tenants bring in daily traffic and have a stable master lease that’s typically five to 10 years,” Rome said.

More retail property owners are turning toward office tenants to fill spaces left when big chains close and move out, squeezed in large part by the continued expansion of e-commerce. In Los Angeles, Hudson Pacific Properties and Macerich have plans to convert 500,000 square feet at the Westside Pavilion mall into an office park.

And just this week Macerich announced a partnership with co-working company Industrious to turn unused retail space into flexible offices. The first Industrious-managed co-working space inside a Macerich mall is set to open in Scottsdale, Arizona, in January 2019.

The JLL study found 21 percent of retail-based co-working spaces nationwide are in malls, and one in Chicago is proving there’s a new way forward.

Cowork at the Mall is a co-working space in Water Tower Place that combines office space, meeting and event space with retail areas for brands and start-ups. The 15,000-square-foot space will open in th fall, according to JLL.

Such a tenant can not only invigorate a mall — it could help rethink the flailing mall space altogether, according to the report, by turning the mall into a gathering place where “sales happen organically.”

These kinds of co-working spaces are largely concentrated in high-foot traffic areas with relatively high local average incomes, like Water Tower Place’s Gold Coast. That doesn’t do much for the suburban retail market, which is suffering from the closure of big boxes and the struggle to fill malls.

But there is a new kind of co-working space that could help these markets, the report said..

“Telework Hubs” are the most common type of co-working operation taking up former retail spaces, like the Union Cowork locations in La Jolla and San Diego, California, cited in the report. They are all-encompassing co-working spaces that target corporate workers, entrepreneurs and creatives, and that sublease space to small retailers like coffee shops.

They are also the most likely to backfill spaces left vacant when Toys “R” Us went out of business, the report said.

These new co-working and flexible retail spaces could not only transform the retail sector, but the office market as well. Since 2010, the flexible space sector has grown at an average yearly rate of 23 percent, compared to just 1 percent for the broader office market, according to the report.

In Chicago, the amount of co-working space has tripled in just four years.

“We’re forecasting a dramatic shift in office space in the next decade as tenant demand for more flexible space options forces building owners to adapt,” Scott Homa of JLL said in the report. “We expect this to drive a convergence of office, retail, and hospitality uses into one seamless, integrated tenant experience.”