Can the co-work­ing revo­lu­tion in of­fice real es­tate sur­vive a mar­ket down­turn?


The largest oc­cu­pier of of­fice space in Man­hat­tan is not a bank or a law firm. In­stead, it’s a real es­tate com­pany that makes flex­i­ble of­fice space avail­able to com­mer­cial ten­ants, one cu­bi­cle at a time.

Ear­lier in Septem­ber, WeWork Cos., a provider of co-work­ing of­fice space, left JP Mor­gan Chase and Co. be­hind by be­com­ing Man­hat­tan’s largest ten­ant. The com­pany rents 5.3 mil­lion square feet of space in Man­hat­tan alone. It al­ready at­tained the same sta­tus ear­lier in Lon­don, where it first opened shop in 2014.

Co-work­ing com­pa­nies rent of­fice space from other in­sti­tu­tional land­lords, up­grade the space to meet the needs of star­tups and oth­ers ac­tive in the shar­ing econ­omy, and later sub­lease the space at a premium to short­term ren­ters.

A distin­guish­ing fea­ture of the co-work­ing busi­ness model is the flex­i­bil­ity in the ten­ancy du­ra­tion and the amount of space one can rent. Es­sen­tially, one may rent as lit­tle space as a desk for in­cre­ments of time the can be even less than a day.

Yet this flex­i­bil­ity comes at a premium rate, in which the monthly rent for a desk (de­pend­ing on the lo­ca­tion) could be as high as $500. Yet, if one needs only a cu­bi­cle in a high-end of­fice lo­ca­tion, a cowork­ing space will prove a lot cheaper than rent­ing an of­fice.

The co-work­ing spa­ces of­fer other ameni­ties, such as Wi-Fi, lounges, cof­fee bars, and, in some in­stances, beer on tap. The turnkey rental spa­ces have thus be­come a rapidly grow­ing seg­ment of the of­fice real es­tate since the econ­omy started to grow af­ter the Great Re­ces­sion. JLL, a real es­tate ser­vices firm, re­ported that the co-work­ing and flex space in­ven­tory in the U.S. has grown from 12 mil­lion sq. ft. in 2010 to 59 mil­lion sq. ft. in 2018.

Some have likened the cowork­ing com­pa­nies to Airbnb. How­ever, the two busi­ness mod­els are in­her­ently dif­fer­ent. Airbnb is true to the fun­da­men­tals of shar­ing econ­omy, in which peerto-peer com­merce is en­abled via a tech­nol­ogy-based mar­ket­place. Un­like co-work­ing firms, Airbnb does not ac­quire rental space. In­stead, it fa­cil­i­tates peers to sub­lease their ex­cess space for short­term rentals.

The co-work­ing busi­ness model in­volves sign­ing long-term leases from other land­lords first and then sub­leas­ing the space in smaller chunks for short-term leases. For some real es­tate ex­perts, the longterm obli­ga­tions of the co-work­ing firms add to their vul­ner­a­bil­ity be­cause their rev­enue-driv­ing sub­leas­ing con­tracts are of shorter du­ra­tion.

The mis­match be­tween the long-term obli­ga­tions and short­term rev­enues has made some ques­tion the $20 bil­lion val­u­a­tion of WeWork. Those in­clude Elaine Moore and Eric Platt, who won­dered in a Fi­nan­cial Times ar­ti­cle whether the com­pany was worth a val­u­a­tion of be­tween 10 to 20 times the ex­pected sales.

By com­par­i­son, IWG (for­merly Re­gus) is the largest op­er­a­tor in the co-work­ing space and is ac­tive in Toronto and Van­cou­ver. The firm has re­ported prof­its sug­gest­ing a sus­tain­able busi­ness model. Yet, IWG “has an eq­uity value be­low $4 bil­lion.”

The fu­ture eco­nomic out­look ap­pears less favourable. As in­ter­est rates rise and volatil­ity re­turns to the mar­kets, busi­ness lead­ers have started to won­der about the next re­ces­sion. The re­silience of new busi­ness mod­els that have not

weath­ered a re­ces­sion is of great in­ter­est to many. How will the cowork­ing firms man­age their ex­pen­sive obli­ga­tions if the de­mand for short-term rental space were to de­cline or dis­ap­pear?

The re­cent in­flux of mas­sive cash into co-work­ing firms by large in­vest­ment funds would sug­gest that the in­vestors be­lieve the co-work­ing model is ro­bust to re­ces­sions and eco­nomic down­turns. The re­cent ex­pan­sion of such firms in the Lon­don’s of­fice mar­ket, which is suf­fer­ing from the un­wel­come con­se­quences of Brexit, sug­gests that such firms ex­pe­ri­ence growth when com­mer­cial rents de­cline and cov­eted of­fice space be­comes va­cant. Cush­man and Wake­field es­ti­mate that co-work­ing spa­ces will rep­re­sent as much as 10 per cent of the of­fice in­ven­tory in the fu­ture.

The co-work­ing space has been grow­ing rapidly in Canada’s large ur­ban labour mar­kets in Toronto, Mon­treal, and Van­cou­ver. Backed by in­vestors, co-work­ing firms have ac­quired ex­ist­ing space and signed onto large un­der con­struc­tion space that will be­come avail­able in two to three years’ time.

A lot could change in two to three years. Will the de­mand for of­fice space in the next few years be as ro­bust as it has been over the past 10 years? The an­swer to this rid­dle holds the key to the long-term sus­tain­abil­ity of the co-work­ing busi­ness model.

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