Commercial Investment Real Estate Spring 2020 | Page 29

DOWN BUT
NOT OUT
Leasing of flexible workspaces is expected to grow, though
more modestly following WeWork’s difficulties.
already dipping a toe in the water. For example, Brook-
field Properties, The Blackstone Group, Sterling Bay,
and Brandywine Realty Trust are a few of the owners
who have partnered with Convene to create highly
curated flexible office space within their Class-A office
towers in major metros around the country.
However, running a coworking operation is a
business that most landlords don’t want to tackle on
their own because it’s management intensive. “Most
investors are a little more hands-off than what is re-
quired to run a coworking operation,” notes Soozi Jones
Walker, CCIM, SIOR, broker and president at Commer-
cial Executives Real Estate Services in Las Vegas. The
general business model for landlords and investors is
to focus on doing long-term leases with as few tenants
as possible. Not only is that less work, but it also helps
with building valuations and financing. “If a landlord
was running this operation on their own, in a 30,000-sf
space with 200 or 300 contracts with different individ-
uals, that would be a very difficult thing for a lender to
underwrite,” notes Walker.
CRE PROS HAVE MIXED VIEWS
Coworking has attracted plenty of critics who are wary
of the added competition for landlords and the poten-
tial oversupply of flexible space in some markets. “We
specifically would not do any coworking leases over the
past three years, while the competition was leasing to
them in a frenzy,” says Brent W. Roberts, CCIM, senior
vice president and office specialist at Block Real Estate
Services in Overland Park, Kansas.  Roberts handles
over 4 million sf of office space in the Kansas City
metro area. Ownership represented by Roberts chose
to avoid coworking deals partly because potential
oversaturation in the market and the underlying risk
of the business model that involved leasing space to
occupiers on a short-term basis that could disappear
instantly in a downturn.
“A landlord would also be creating competition
inside its own building as the coworking entity is try-
ing to attract subtenants, while I am trying to fill other
vacancies,” Roberts says. Successful coworking sites
tend to overpark, which makes filling other vacan-
cies more difficult, he adds. In some cases, landlords
also have upped their game to better compete with
coworking firms. For example, some of the buildings
CIREMAGAZINE.COM
that Roberts represents have become more willing to
negotiate short-term leases, as well as providing some
furnished space options within buildings.
Plenty of CRE professionals ask, “How will flex-
ible space providers survive in a downturn?” In some
cases, coworking can be a good option for fast growing
companies that have changing space needs, especially in
the San Francisco Bay area with a lot of startups, notes
Tran. However, the coworking model presents a lot of
challenges, he adds. From the landlord’s perspective,
one master tenant is paying market rent for a space.
They are going to make improvements and turn around
and rent that space to subtenants. “What happens in a
down market when there is less need for space? Does
that leave someone like WeWork hanging, which at the
end of day leaves the landlord hanging?” says Tran.
Landlords are taking a very hard look at how
much tenant improvement dollars they are willing to
provide for coworking concepts, adds Walker. In some
cases, WeWork was spending millions of dollars on
tenant improvements. “The concern from landlords is
that if we start sliding into a recession and small entre-
preneurs start closing offices, landlords don’t want to get
stuck with those large coworking spaces that are now
built out for co-occupancy and are not good for a general
occupancy user,” she says.
Percentage Growth in Flexible Workspace (2016-2Q2018)
Dallas-Fort Worth
Raleigh-Durham, N.C.
Boston
Seattle
Minneapolis-St. Paul
Portland, Ore.
Denver
San Francisco
New York (Manhattan)
Atlanta
Washington, D.C.
San Diego
Kansas City, Mo.
Austin, Texas
Houston
Los Angeles
Chicago
Miami
Philadelphia
0%
Source: Colliers International
50%
100%
150%
200%
250%
Supply Growth of Flexible Workspace (2016-2Q2018)
Dallas-Fort Worth
Raleigh-Durham, N.C.
Boston
Seattle
Minneapolis-St. Paul
Portland CBD
Denver
San Francisco
New York (Manhattan)
Atlanta
Washington, D.C.
San Diego
Kansas City, Mo.
Austin, Texas
Houston
Los Angeles
Chicago
Miami
Philadelphia
0
500
Source: Colliers International
1,000
1,500
2,000
2,500
3,000
3,500
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
27