Co-Working Space: Not Gloom and Doom
The flexible office sector — and co-working space, specifically — has been in the news recently. WeWork, perhaps one of the best-known companies in the co-work sector, backed away from a late September 2019 IPO amid troubling financial and corporate governance news and investor wariness. Recent news has the company announcing layoffs and an uncertain outcome.
However, it’s important to recognize that WeWork is not the sole provider of co-working space. At this point, it just seems to be the most visible. In truth, the sector, itself, isn’t ready to crash and burn, according to a just-released report from Cushman & Wakefield. The report, appropriately entitled “Flexible Space: Misplaced Schadenfreude?” examined metrics within the co-work/flexible space sector.
On the positive side, the report’s analysts pointed out that demand drivers are still strong, with co-working memberships in the U.S. expected to increase from approximately 750,000 today to one million by 2023. Furthermore, large corporate occupiers believe that approximately one-fourth of their workforce will use co-working or flexible space in some capacity by 2023; an increase from 5% in 2018. Cushman & Wakefield’s analysts pointed out the importance of this metric, as “corporate occupiers or enterprise-level users are the investment-grade portion of a co-working operator’s sublease cashflow.”
On the not-so-positive side, capital is a little shaky, following the WeWork debacle. As such, “co-working startups may find it harder to raise both debt and equity, and existing operators may even struggle to fund expansion,” the report said. This, in turn, could lead to supply constraints which, in turn, could lead to a leasing pull-back from the sector. This, however, might not be a negative, as the researchers believe that a pullback could help landlords and operators determine issues, such as breakeven occupancy level and sustainable cashflows. “There is also likely to be greater focus on the credit strength of a co-working operator, lease guarantees and a shift toward management contracts,” the report noted.
Finally, the Cushman & Wakefield analysts point out that, for all of the hype, co-working space accounts for less than 1.5% of the total U.S. office inventory. Furthermore, co-working has allowed small businesses access to more traditional office. As such, if co-working spaces are restricted or constrained, landlords could see a boost in the small-leasing market.
For comments, questions or concerns, please contact Amy Sorter
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