Regus Accusations of heavy marketing or poaching in co-working industry

Abstract: Shared office space provider WeWork has been accused of trying to poach customers from rival firms in San Diego, and Wolf Bielas, managing partner of Downtown Works, believes the company is trying to live up to its $20bn valuation. A WeWork spokeswoman said the start-up was trying to "make it as easy as possible for people join our community", but WeWork has come under fire for similarly heavy-handed marketing tactics in New York and Washington.

Downtown Works, a co-working space in downtown San Diego has been opened for about a year, shown here on Wednesday, Oct. 25, 2017.

Is there a limit to the San Diego County market for hip, social life-focused, shared office space — including craft beer on tap — that comes at a premium price?

In almost the blink of an eye, an estimated 175,000 square feet in “co-working” office space has sprung up from North Park to Carlsbad, with the biggest concentration in downtown San Diego.

What is co-working? Think open-plan offices with upbeat music, bright wall paint and colored lighting.

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Snacks and drinks are provided, along with networking gatherings with other entrepreneurs and start-up founders who are flocking to this model.

You can even bring your dog along.

Technology start-ups with a handful of employees are common customers, but so are independent contractors.

A “hot desk” -- meaning it’s not assigned to you -- typically starts at $200 to $300 a month. A tiny, private or semi-private office goes for upwards of $1,000. Use of conference rooms and other niceties can be extra.

The big player arrives on the scene

WeWork, the New York-based real estate juggernaut, instantly became the biggest player in town in December when it leased multiple floors in downtown’s financial district, with space for 1,700 memberships.

WeWork was clearly bullish on San Diego’s entrepreneurial spirit and tech culture: At the time, it was reported as the company’s largest location in California.

And, the expansion continues.

On Wednesday, the company told the San Diego Union-Tribune that it has signed a lease to next year open an additional 54,000 square feet in University City, with space for nearly 1,000 desks.

But WeWork’s recent aggressive sales tactics, including targeting competitors’ customers — a spokeswoman called it “spreading the WeWork love” — have called into question whether the market has become saturated and is now entering slash-and-burn tactics.

Opinion is decidedly mixed.

Some San Diego brokers say too many co-working companies — roughly a little over a dozen, the majority of which are downtown -- will continue to fight for a small pool of customers.

“Undoubtedly, some of these co-working firms will fail,” said Jason Hughes, founder of San Diego’s Hughes Marino, which represents tenants in leasing deals and represented WeWork in its downtown lease.

“There will be a bloodbath trying to lure co-working tenants from one co-working location to another.”

But others say this is the long-lasting result of the Great Recession in the late 2000s, when droves of employees who lost corporate jobs learned they could string together a living as entrepreneurs in the “gig economy.”

Matt Carlson of San Diego’s CBRE commercial real estate said he sees the co-working market expanding.

“I think we’re going to see a lot more,” said Carlson, senior vice president.

“I would not be surprised if 12 to 18 months from now, the base doubles.”

Another point of view is that, while co-working is here to stay, the players who don’t get the niche right will fall by the wayside.

Danny Fitzgerald of Endeavor, a San Diego brokerage company, said some neighborhood players are doing a good job localizing the co-working experience.

“Here’s your surfboard, here’s your paddleboard, here’s your amenity in the neighborhood. You can ride your bike to work. You are right near home, near your kids, pick-the-kids-up-from-school kind of thing,” he said.

“It’s the people who don’t — like, ‘I made my building a co-working building, but I don’t know what I want’ — that’s where there could be some shake out.”

A company on an expansion binge

WeWork, a 7-year-old start-up, has made the concept famous -- and also possibly raised questions about its sustainability, after headlong expansion and now aggressive marketing tactics nationally.

Also last week, the company announced that, along with an investor, it is buying the Lord & Taylor flagship store on Manhattan’s Fifth Avenue for a new global WeWork headquarters.

The company’s $20 billion valuation was described as “Silicon Valley pixie dust” by the Wall Street Journal recently.

Some San Diego co-working innovators say they are glad that high-profile WeWork is raising the visibility of the new workplace concept.

“All boats rise as more people find out about co-working and think, ‘Huh, maybe I should try it,’” said Ping Wang, who founded Kearny Mesa’s Ansir Innovation Center, a co-working and start-up hub that merged with ScaleMatrix Launch Center.

“It’s not a zero-sum scenario.”

But there is criticism of WeWork’s tactics — both nationally and in San Diego.

Poaching, or just heavy marketing?

In Little Italy, WeWork sent employees to erect an elaborate booth near competitors’ front doors.

The site was a Little Italy lunchtime food truck “rodeo” directly in front of Downtown Works, a locally owned co-working space, and a few blocks away from two executive suites locations owned by the international Regus brand.

Wolf Bielas, managing partner of Downtown Works, accuses WeWork of trying to poach his members by snooping around the office.

Bielas said WeWork sent emails to him and some of his members soon after the booth stunt, offering them six months or a year of free rent if they sign a year or two-year lease — also promising “we will work with you” if “stuck” in a current contract.

“I don’t think it’s specific to San Diego, that they took too much space,” said Bielas, who opened Downtown Works in August 2016.

“I think (the aggressive marketing) is to justify their valuation” of $20 billion.

Bielas is bullish on the strength of the San Diego co-working market. He has enjoyed an 80 percent occupancy rate recently, convincing him to expand co-working into another floor of his West B Street building.

A Regus spokesman didn’t comment on WeWork’s marketing behavior.

The company is also a big flexible-office-space player in San Diego County, with 500,000 square feet here. The great majority is executive suites — a more traditional scenario, in which a lawyer or small branch operation rents closed-door space with shared administrative support.

Regus has ventured into co-working, particularly with its Spaces product in University City.

WeWork has used some of these tactics elsewhere, including New York and Washington, D.C.

One New York office space competitor, Knotel, engaged in its own maneuvers by parking a school bus painted with the words “graduate from co-working” in front of WeWork headquarters in New York.

Asked about the company’s behavior in San Diego, a WeWork spokeswoman this week said that the company is still new to a lot of regions and that means it needs to market the business.

About the booth at the weekly food truck rodeo, the spokeswoman added, “We set up a booth in an area where folks could sit and talk to WeWork about what makes WeWork unique. We want to make it as easy for as many people as possibly to join our community.”

A blip, or will co-working last?

At present, the regional economy is healthy and the office market is hot, with a low downtown vacancy rate of less than 12 percent, according to Jones Lang LaSalle San Diego.

It’s the lowest vacancy rate since 2008, before the last recession hit.

After a fast expansion during good economic times, the question looms: What happens to co-working companies during a downturn, when money for start-ups dries up and companies rein in satellite offices?

Real estate professionals say the co-working model, with its high-end amenities, is more expensive than just renting offices -- for companies that need at least a small amount of space.

Class A office space is going for roughly $3 per square foot in downtown San Diego right now.

Star Hughes-Gorup, also of Hughes Marino, said co-working space — which her company also markets to tenants — is going for $5 to even $10 a square foot.

Jones Lang LaSalle pegged the co-working cost premium at 181 percent, in a 2016 national report on shared work spaces.

“Does it have legs during a recession?” asked Jason Hughes, of Hughes Marino.

On the other hand, the result of the past recession was more people working as independents.

“We haven’t seen a recession with this amount of co-working space out there,” said Carlson, of CBRE.

“Recessions do force people to be more entrepreneurial. Will some people work from their kitchen tables until they are profitable? Sure,” he said.

But they might continue going to co-working for the business connections that will become even more valuable in lean times.

“You may pick up business from going into that space,” Carlson said.

“Instead of hiring a full-time marketing person, or design person, they may just use the people around them.”

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jen.steele@sduniontribune.com

Twitter: @jensteeley