Vincent Altieri, CPA
02.14.19 | Berdon Industry Insights
In 1999, New York City’s first co-working space opened1 in a loft at 42 West 24th Street, in the heart of the Flatiron district. Two decades later, the booming co-working industry has ushered in a new era in the New York metropolitan commercial real estate market.
Recently, WeWork became the largest commercial leaseholder in Manhattan when the co-working giant inked a deal to occupy 258,000 square feet at 21 Penn Plaza, a TH Real Estate property. With 5.3 million square feet under lease, WeWork now occupies more NYC commercial real estate than JP Morgan.
The past several years have seen exponential growth within the co-working industry. On its own, WeWork has grown to 220,000 members in just eight years, with offices in more than 70 international cities.
WeWork’s competitors are also gobbling up2 prime commercial NYC real estate. In recent months, Convene signed a deal for 116,000 square feet at RXR Realty’s 530 5th Avenue, while another burgeoning co-working concern, Spaces, has announced plans to occupy 111,000 square feet in the Chrysler Building.
The Global Co-working Unconference Conference (GCUC) has estimated that the number of co-working spaces will reach 30,000 over the next five years, representing nearly a 75% increase from 2017. According to Forbes, “By the end of 2017, nearly 1.2 million people worldwide will have worked in a co-working space.” Indeed, over the past two years, co-working has accounted for nearly 30%3 of new commercial space leased in the U.S. And according to The Real Deal, the co-working office footprint in New York City has grown by 600% since 2009. By 20184, co-working spaces accounted for 27 million square feet of office space in the U.S. alone. There are over 14,000 co-working spaces worldwide. Recent studies show the number of people who use co-working spaces is set to skyrocket to 3.8 million by 2020 and 5.1 million by 2022.
The popularity of co-working spaces, therefore, is driving a transformation of the office leasing industry.
In order to attract—and retain—the wave of millennial workers entering and transforming the labor market, many businesses are embracing the concept of flexible work arrangements. This, in turn, is helping to fuel the boom in co-working spaces and has given rise, in recent years, to what is now a billion dollar industry.
It is not surprising, then, that the co-working phenomenon is having a concomitant effect on the how the commercial real estate market does business.
In fact, the sheer magnitude of growth within the co-working industry is drawing major real estate players into the game. CBRE—the world’s largest real estate services and investment firm with over $100 billion in assets under its portfolio—recently announced that it is getting involved in the co-working market. In October 2018, CBRE announced the launch of the co-working company Hana, which will seek to provide large corporates and small-to-mid sized firms, and individuals with flexible office space. And in September 2018, the real estate investment giant Tishman Speyer announced plans to launch its own co-working concern, Studio, at 600 5th Avenue.
Meanwhile, leading corporate giants such Microsoft and Verzion are reportedly embracing the co-working phenomenon. In 2017, IBM leased5 complete WeWork space at 88 University Place in Greenwich Village.
In their bid to attract co-working outfits and corporate tenants, landlords, building developers, and management companies are tearing up the old playbook. Which makes sense, after all, the needs and requirements of companies like WeWork and Knotel are vastly different from the requirements of financial giants as JP Morgan and Goldman Sachs or law firms, including Sullivan and Cromwell and Skadden Arps.
The era of co-working and “pop-ups” is forcing commercial real estate owners to find creative ways to maximize value, which, in turn, is changing the way office buildings approach cash flow and valuation.
As one property developer recently observed6, “Real estate is no longer a bond-like industry where long-term leases of office space lead to long-term returns on investment.”
According7 to some experts, the move away from long-term leases will lead to an increase in tenant turnover. Typically, under the traditional, long-term corporate leasing model, expenses between tenant turnovers were high. Under the new short-term model, where tenant turnover is expected to be more frequent, owners will aim to hold costs down, which may ultimately lead, in some experts’ opinions, to greater standardization, not dissimilar to how management companies approach hotel or multifamily assets.
In order to stay competitive in an environment where the demand for long-term leases has shrunk, commercial landlords have begun incorporating co-working space into their space planning, while also striving to provide high touch amenities to keep pace with the competition. Management companies are expanding their role from traditional property maintenance (e.g., janitorial, security, HVAC, and elevator upkeep services) to focusing on overall user experience. Providing niche benefits and such other amenities as free Wi-Fi and highly upgraded office spaces and common areas with kitchens, big screen TVs and even game rooms, is becoming every bit as important for attracting co-working clientele.
Yet, despite the co-working industry’s rapid growth and the changes it has wrought within the NYC metro commercial real estate space, questions remain as to whether the co-working revolution has ultimate staying power.
One warning sign is that despite a $20 billion valuation, industry leader WeWork has yet to turn a profit8. WeWork board member Ron Fisher claims that the company “is literally changing commercial real estate.” Yet, the Financial Times countered by stating: “Mr. Fisher’s bold claim backs a bold valuation. But it has yet to be proved.” One recent report showed that 60% of co-working spaces9 actually lose money.
Cushman and Wakefield, however, sees some cause for optimism. The real estate services provider predicts that should a recession occur, small co-working providers will close, and growth within the industry may flatten, but notes “since the majority of locations and two-thirds of co-working square footage are managed by the two largest and best capitalized providers, the risks to the industry as a whole are small.”
However, questions remain as to whether the co-working phenomenon can survive a serious economic downturn. As one real estate broker put it, “when the market turns and the economy softens, the flexible workspace will be the first thing shed.”
Questions? Contact Vincent Altieri at 212.699.8824 | email@example.com or your Berdon advisor.
Berdon LLP, New York Accountants