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Coworking Revives Office Real Estate

Investors and participants in REITs should pay close attention to the opportunities and risks.

Yousuf Hafuda: Once a dormant corner of the commercial real estate industry, office real estate has come to life recently as a result of various shifts affecting the U.S. economy. The most salient of these shifts has been the rise of coworking, popularized in large part by WeWork. Notwithstanding WeWork’s well-publicized struggles, the coworking model continues to gain traction as tenants seek greater flexibility in the way they utilize office space. The ever-increasing pace of change in the economy and growth in freelancing both provide a wellspring of demand for office space not tethered to the multiyear leases featured in traditional office space.

We view the effects of this shift on the office industry as being mixed, with the positive impacts broadly outweighing the negatives. Although coworking is additive to demand in that it aggregates space from individuals and small organizations that would not have otherwise had access to an office, such tenants are much riskier than their larger corporate counterparts. The short-term nature of lease agreements in coworking, which are typically signed for a month or as little as a day, likewise magnifies risk. Such agreements provide much-needed flexibility but allow tenants to rapidly shrink their usage of space during periods of economic difficulty.