CRE FinanCE W Rld

Sharing the Experience — As Co-Working Grows, the Office Isn’t Necessarily an Office Anymore
However, WeWork appears to have grown too large, too fast. In
June 2016, Bloomberg and other news organizations reported that
WeWork cut 7% of its workforce and implemented a hiring freeze.
CMBS exposure to WeWork is small, as the company leases a
little more than 500,000 square feet in eight properties that back
$514.1 million in loans. But any problems could be magnified
because of concentration risk—the company occupies more than
40% of the space at six properties backing CMBS loans with a
$162.6 million combined balance.
Other co-working companies have had their struggles as well,
underscoring the fact that co-working isn’t always profitable.
In October 2016, Sunshine Suites, one of New York City’s first
co-working companies, which opened in 2001, shuttered its last
location, and five-year-old New Work City closed its doors in June
2015. Both faced declining tenant retention rates amid increased
competition from WeWork.
Corporate Demand
Despite WeWork’s pullback, the trend in co-working appears to
be poised to enter a new growth phase. Large employers make up
the fastest-growing market for WeWork, according to Bloomberg.
Corporate demand drivers are as varied as those of entrepreneurs
and independent workers and range from cost savings and labor
skill shortages to the need to satisfy the requirements of specific
departments and project teams that may not fit the cultural mold
associated with legacy office space. Additionally, co-working allows
corporations flexibility to expand and cut space requirements
according to business demand, while a conventional office lease
does not typically have that flexibility.
Facing the challenge of rising wages and rents in urban areas,
where companies must compete to secure the best talent,
companies are exploring co-working space to attract and retain
millennials. According to a study conducted by HOK, an architectural
and engineering design firm, large and midsize businesses are
embracing workplace flexibility to attract and retain talent as well
as increase employee engagement.
As co-working spaces go corporate, larger companies have discovered
that co-working also fosters connectivity. With their employees
working side by side with startups, large businesses hope to be
better-equipped to spot emerging trends, continue innovation, and
identify opportunities to sell services. For example, Verizon has
teamed up with Regus to provide its employees a network of flexible
space, taking advantage of cost savings and being closer to
customers. In Los Angeles; New York City; Tucson, Arizona; Texas;
and other locations, the telecom company could reduce some of its
2 million square feet of its leased space and use more co-working
space over the next five years, according to CBRE. WeWork
tenants include KPMG and Microsoft Corp. KPMG, for instance,
provides business services to startups while sharing space
alongside the young entrepreneurial crowd.
Co-working is also a useful way to manage real estate costs,
because the shared space is not always more expensive than
traditional office space. According to a CBRE report, in the
Washington, D.C., market, the average annual cost for 10 desks
in a co-working space is $52,000-$84,000, which compares
with $72,000-$92,000 for traditional leased space. Co-working
companies are able to make this differential work because they
can spread their costs out over a greater volume of tenants than
traditional landlords.
Furthermore, co-working allows employees to work independently
without having to consolidate remote or satellite offices. For
example, Miami-based homebuilder Lennar Corp. rents space in
Chicago and Minneapolis from co-working company Industrious
so it can hold meetings near construction projects, according to
Bloomberg.
Rolling Leases, New Business Models, and
Unconventional Workspaces
As interest ramps up, corporate tenants may consider switching to
co-working space as economic uncertainty and tightening markets
are compelling companies of all sizes to better manage expenses
and space. In particular, there will soon be many corporate tenants
who signed inexpensive, 10-year leases after the financial crisis
that will face a potentially higher price tag when it’s time for renewal.
As of November 2016, we found that leases on 182.2 million
square feet of office space, which back $74.94 billion in CMBS,
expire through year-end 2018. If just 1% switched to co-working,
the amount of co-working space in CMBS would double.
According to online news outlet Bisnow, two former WeWork
executives and a partner are developing what they term “co-working
in a box.” The plan is to allow office landlords to turn their vacant
space into a co-working environment and turn a profit themselves.
The trio will provide design, construction, and engineering to turn it
into a viable co-working space. Landlords can choose to manage
the co-working space themselves or use a third party.
Since co-working emerged as an option for office space, competition
among co-working companies has revolved around different rental
models and new service offerings. Recently, these companies
are thinking outside the proverbial cubicle to expand demand.
CRE Finance World Winter 2017
28