Coworking Revives Office Real Estate

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.

Furthermore, with coworking firms often assuming responsibility for occupancy risk by signing long-term leases for large chunks of space, some landlords may be forgiven for considering this space to be fully accounted for. However, this false sense of security could represent yet another added risk should these firms encounter their own difficulties in an economic downturn.

These factors affect our five office REITs, which should embrace coworking but tread carefully to avoid being overexposed to its added risks. Meanwhile, commercial real estate brokers CBRE CBRE and JLL JLL will benefit from the added demand for office space but should remain vigilant as they compete for real estate services such as consulting and facilities management that are increasingly being provided by coworking firms.

Such shifts represent added opportunities, yet also added overall risks to the office industry. Investors and participants in the industry would be well advised to pay close attention.