The coworking phenomenon has certainly disrupted the commercial real estate (CRE) market over the last few years, as well as changed the way we perceive office space. With a possible economic downturn looming around the corner, the question of how the coworking trend will be affected has become a common discussion among CRE professionals and office building landlords.
Over 70% of economists are predicting another recession by 2021
The coworking trend has been a quick solution for filling empty office spaces. Landlords have been satisfied with positive returns from long-term leases, especially after experiencing gaps in time without tenants. This sounds like a win-win situation until the coworking company can’t afford to maintain their business model. While they’ve grown at a rapid pace, various coworking companies are now facing financial problems that have been headlining in the media.
WeWork reported losses of over $1.6 billion last year
If economists are correct with their prediction of another recession, the CRE industry needs to be prepared to adapt to a new wave of coworking trends. This poses a big opportunity for landlords looking to take back their spaces from large, unstable, coworking companies and run a coworking facility of their own.
The future of coworking could consist of working directly with landlords instead of through subleases at premium rates
In order to successfully compete, landlords will need to offer more flexible terms for this type of space. They will need to hire the right leasing and management team to offer this service and present higher commissions to get their leasing team interested in handling smaller deals. Similarly, Regus has offered a 10% commission to brokers for years and at one point, WeWork offered the entire first year’s rent as a commission. It doesn’t need to be that drastic but 6 to 10% shouldn’t be out of the question.
The cost of space should be adjusted accordingly to be competitively priced against other coworking options. These spaces will also need a higher management fee, as small tenants tend to move in and out more frequently, which requires extra work and dedicated staff on-site. To save money on legal costs, they will also need a simple lease document that can be quickly edited.
Both landlords and tenants will benefit from this competitive edge
The rent on coworking spaces can be $100- $140 per square foot in buildings with third-party providers, compared to a direct lease in the very same buildings for $35 – $50 per square foot. The landlord can likely offer this same space for $50 – $70 per square foot, which would be essentially half the cost to the tenant, assuming a full occupancy, could achieve a higher return. This shift in the coworking business can be very lucrative. TRC Capital Partners is doing this in their 3773 Richmond Avenue building and it has been very successful.
Cost savings is the main advantage
Landlords could still market the coworking space as available and if they find a lucrative long-term tenant, they could exercise 30-90-day termination notices in their coworking leases to make the space available. There is virtually no risk just upside, aside from any build-out costs. This model works especially well where the floor is already built out for a single-tenant use, minimizing the capital outlay.
If landlords happen to have multiple buildings all across town, they can sell a “membership” where a tenant can drop in at any of their buildings, depending on where they are working that day. Each building could have a full floor of “flexible” space for “hoteling” their tenants. And with the steady rise of cloud storage and commuting, many tenants don’t need hard copy files or permanent storage space. Lee & Associates has offered this service to landlords with vacant floors when discussing the leasing of the building. This is a great “incubator” space for small startup companies who may eventually take a larger, more permanent space in the building.
