Commercial Basis explores how technology, branding and demographic preferences are shaping office and retail real estate in New York City. As these forces break down the barriers from where we live to where we work and shop, Lead Commercial Specialist Alex Cohen assesses the impact on real estate values and opportunities.
Last week, I conducted a national web conference sponsored by Gerson Lehrman Group (GLG.it) to advise investors on how WeWork and other coworking firms are disrupting office real estate. Between August 2016 and July 2017, only Amazon has leased more office space than WeWork in the United States. Though shared office spaces (office environments in which multiple firms sublet places to work within a single demised office space) still occupy less than 1% of all office space in the United States, coworking (like other disrupters AirBnB and Uber) is having an outsized impact – specifically on where and how freelancers, entrepreneurs and established corporations inhabit office space.
Together WeWork and the executive suite firm Regus lease nearly 80% of shared workspaces in the United States, totaling about 30 million square feet. But there are now hundreds of independent coworking operators in spaces of typically less than 15,000 square feet – much smaller than the typical WeWork location.
What explains the explosive growth of WeWork, founded only in 2010 and now operating 216 locations in 53 cities, 19 countries and with more than 100,000 members, as well as the rapid expansion of its smaller peers?
- The near universality of handheld mobile devices that allow “office” work traditionally bound to an immobile desktop computer to be performed anywhere has transformed the traditional rationale for “going to work.”
- The rise of the freelance economy, estimated to grow to 40% of the workforce by 2021, and the demand from this segment for workspaces that foster community, collaboration and flexibility.
- Millennials’ importance in today’s workforce – 63% of whom are as comfortable working from a mobile device as from a desktop.
- The appeal of coworking workspaces, in terms of their cool, organic design aesthetic and the opportunities they create for business owners and their employees or contractors to benefit from proximity to other firms and their talent and business offerings.
- Unlike traditional office space leases of 5 or 10 years in term, coworking occupancy obligations can be as short as 1 month and may allow for rapid growth or retraction of seats and offices. Individuals and companies taking coworking space do not have to invest capital in furniture, space build-out or technology. As demonstrated by WeWork‘s “client savings” presentation, particularly for firms that occupy 3,000 square feet or less, the higher density of coworking occupancy and the fact that tenants do not have to pay for square footage devoted to reception, conference rooms and amenity space like pantries generates occupancy and operational savings. This translates to potential occupancy savings per employee even though coworking space can be substantially more expensive per square foot than regular office space.
Even large corporations that want to give their employees flexibility and avoid or delay expensive capital investment in new office space are committing to significant coworking occupancies. For example, IBM recently leased an entire WeWork location of 70,000 square feet to serve 600 employees on University Place. Additionally, Microsoft just bought 300 WeWork memberships for its New York-based sales team that allows them to work in any WeWork location globally.
How is traditional office space disrupted? Below are three examples:
- I previously wrote about professional service companies de-emphasizing fixed work spaces in favor of decentralization. This trend will reduce overall demand for traditional leased office space and extends to the sales and client-oriented oriented functions of TAMI firms that otherwise want to focus and consolidate their occupancies in campus settings as Amazon plans to do with its new second headquarters facility.
- Outside of the realm of the top tier Class A office building, where owners often pre-build smaller spaces (less than 10,000 square feet) to appeal to boutique financial tenants like hedge funds and private equity firms, fewer landlords will demise and build small offices spaces because they cannot compete with coworking efficiencies and appeal.
- To compete with the flexibility of coworking space, landlords must offer tenants shorter lease obligations, even though this presents a challenge financially for them to amortize capital investments and transactional costs and incentives over shorter term leases.