CRE FinanCE W Rld

Sharing the Experience — As Co-Working Grows, the Office Isn’t Necessarily an Office Anymore
According to an October article from The Real Deal, WeWork
is preparing to launch an investment vehicle to buy its own real
estate properties then sell and lease the space back, which would
bring in more outside investors through a dedicated investment
fund with outside capital. Through this plan, WeWork would directly
compete with some office landlords it partners with. Additionally, a
person familiar with WeWork told The Real Deal that the company
is exploring managing headquarters or large office campuses for
corporations.
Although most co-working environments are in office buildings,
Workbar, a Boston-based company, recently partnered with
Staples to fill vacant or underused retail space and opened shared
workspace locations in three of Staples’ suburban stores. The
concept provides Workbar with a partner in case of an economic
downturn and access to tenants who want to escape their home
offices but would find the commute to the nearest city onerous.
However, it may not be the big money making answer to the glut
of retail space on the market left by the ongoing consolidation of
big-box stores.
Even restaurants double as a shared workspace. Spacious, a New
York City startup, offers restaurant space to freelancers and others
during empty hours, which serves as an alternative to busy coffee
shops. Unlike the typical co-working model, Spacious does not
sublease space from the landlord. Rather, the company charges a
monthly fee for access to all locations and shares the profits with
its partner restaurants.
Investment in properties with a focus on shared workspaces
has generated interest from REITs. For example, Resource Real
Estate Innovation Office REIT Inc. acquires buildings that provide
a collaborative office space environment. It looks to buy existing
creative space and traditional office space that it would renovate.
Its offering prospectus says it is interested primarily in markets
that attract young, creative, and educated office workers, which
are the types of employees for whom creative space has the
greatest appeal.
The Bottom Line
In today’s fast-changing and uncertain business environment,
flexibility and agility are priceless. As companies of all sizes are
tightening expenses and space, we expect co-working to expand
because of enduring trends that are shaping workplaces. We
also do not believe co-working threatens the traditional landlord
business model. Rather, shared workplace offerings can be an
important part of a landlord strategy to attract and retain tenants.
CBRE forecasts that traditional workspaces will be in the minority
by 2030.
As co-working evolves, so must CMBS underwriting and valuation
standards. Larger, better-capitalized companies will make up a
large part of co-working spaces. However, given the fragmentation
in the market, investors may have to become more accustomed to
cash flow volatility as smaller players in the marketplace come and
go. Lenders may have to seek additional security in CMBS loans
that are backed by co-working spaces to account for this volatility.
In addition, leased occupancy may not always be the true barometer
of how much space is being used. Demand, as measured by
occupancy at a property within the collateral’s market, is a better
indicator.
We expect growth to be uneven, however, adding another layer
of risk to commercial real estate. With its unpredictable revenue
streams and high fixed costs, the shared-space concept is difficult
to successfully pull off. Co-working has yet to be tested in a
downturn; a bear market would suppress office space demand
from freelancers and small businesses that have short-term leases
and larger businesses that have sizable leases with co-working
providers. Operators that focus on membership diversity are likely
to have more stability through the next economic downturn.
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A publication of CRE Finance World Winter 2017
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