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June 27, 2018

Shared Work Spaces: Disruption, Cost, Community and Cool

Shared spaces have shifted from being an anomaly in the workplace to an anchor occupant over the past decade or so. The rapid advent and adoption of co-working environments into a modern office setting has ridden a tide of disruption, cost-effectiveness, sense of community and a quest for a cool place to work.

What started as a hip hang out for freelance workers in a gig-economy seeking to graduate from a coffee shop or out of their apartment, has evolved into a formidable force across the business sector. The trend has spread to other areas, too, including multifamily, hotel, retail, and the food sectors.

According to research by the Freelancer's Union, more than 1-in-3 U.S. workers perform some form of freelance work, and by 2027 that number is expected to rise to more than half of the workers in the country. That growth is driven in part by the fact there’s an increasing number of professional shared spaces in which to work.

A recent analysis by Yardi Matrix found that co-working represents a small, yet growing segment of the office market. The study of co-working leases in 20 major markets revealed there were 1,166 co-working sites with 26.9 million square feet of space. Admittedly, that represents just 1.2% of office space in those markets. Still, co-working spaces have increased by 24% in the United States since 2010. By contrast, traditional leases by small tenants (5,000 square feet or less) dropped between 2013 and 2017.

The most co-working space is found in Manhattan, which has 7.7 million square feet, followed by Los Angeles with 3.7 million square feet. The co-working space sector is dominated by two companies, which account for nearly 60% of all co-working space leased in the 20 markets surveyed by Yardi. Regus has 9.4 million square feet, and WeWork has 6.5 million square feet.

Co-working spaces have served as suitable professional environments for start-ups to gain a footing and grow. The giant co-working operator, WeWork, says 75% of its members are small businesses, including first-time entrepreneurs, local companies, nonprofits and growing startups. (More than two-thirds of WeWork members are employed in the innovation economy.)

Filling shared space with those types of users has proven to be a good partnership for landlords too. Not only do co-working operators take vacant space off a landlord’s hands, but it can also be an opportunity to capture future growth. That could be from either the co-working company itself or the next rising entrepreneurial star that wants to transition into its own space. And those advocating for the co-working concept say this “aggregator” model meets demand from small tenants that previously was unmet in the office marketplace.

WeWork says its members grow at an accelerated pace, and they save thousands of dollars a year in rent, fit-out costs, and broker and agent fees. For a four-person company, WeWork notes that amounts to $18,000 on average, based on a comparable 600-square-foot office, fit-out costs, and agent fees. There are also added benefits for members, such as quickly being able to move in or easily downsize.

Not only have shared-space operators emerged with an appetite for space to meet the demand for start-ups, entrepreneurs and freelancers, they’ve also evolved into a landlord partner for larger organizations, too.

As they’ve grown in size and financial clout, companies like WeWork have realized they can claim larger chunks of space, add their distinctive touch, and rent it to big companies. WeWork created an operating unit, WeWork Enterprise, to focus on corporate end users and office solutions for teams of any size, as part of a strategy to transition away from being a co-working space company.

A prime example of that was WeWork Enterprise subleasing roughly 457,000 square feet at The Village at San Antonio Station in Mountain View, CA from LinkedIn last year. Facebook took more than 200,000 square feet of that space initially, and in June 2018 decided to lease all of WeWork’s space at the property.

While Millennials make up roughly half of WeWork’s U.S. membership base, the company notes more than 40% are experienced professionals over 35 years old. In fact, WeWork says 22% of its members come from Fortune 500 companies.

A risk to the landlord equation is the fact that WeWork’s members typically sign short-term – monthly or annual leases – which would be problematic should demand drop during a recession. An economic slowdown would translate into lower rents it charges tenants, while WeWork’s obligation to landlords would remain the same – reportedly at $18 billion at last count.

Critics point out WeWork’s business model of short-term leases leaves it with a big mismatch between the reliability of its revenue stream and the rent it owes landlords too. Simply put, the freelancers or start-ups it rents space to lack the credit bigger companies who traditionally lease space deliver.

One way the company addresses this discrepancy is to cater to enterprise users that may be seeking to shift away from owning and operating real estate while providing employees the option to work in cool offices close to home. WeWork also recently introduced a new concept called revenue-sharing leases, which also may diversify risk.

Last year, nearly 30% of WeWork’s revenues came from corporate customers, including more than 1,000 companies that have more than 1,000 employees signed up to use WeWork sites. This “Space as a Service” strategy has WeWork managing all real estate requirements of an organization.

The business case for co-working extends to the enterprise-level members of WeWork, who are fighting to attract top talent by leveraging the entrepreneurial spirit that typically surrounds shared spaces. WeWork says roughly 40% of its enterprise members are seeking to build culture and community at the sites, with about 30% of them having set up offices at multiple WeWork sites.

So far, WeWork has yet to turn a profit, though has raised considerable amounts of venture capital, which it is burning through at a rapid rate.

Progressive and opportunistic commercial real estate landlords and property managers have also recognized the added value a co-working space can bring to a property – as an amenity and a tenant. In fact, property owners themselves have invested in co-working operators, and some now even operate their own brand of co-working or shared workspaces.

Examples include Blackstone’s EQ Office recent licensing agreement with Brooklyn co-working firm Industrious. Brookfield Office Properties and Tishman Speyer also have partnered with or mirrored, co-working firms.

While office or retail landlords don’t face some of the disruptive challenges and regulatory obstacles other companies in the sharing economy (like Airbnb), does in the multifamily space, they all understand the forces behind the shifts taking place. Co-working and shared spaces are working to create hospitality-focused elements into the mix, whether at an office, retail center or restaurant environment.

The trend in today’s world increasingly is to deliver experiences, as people seek flexible spaces that offer a dynamic work, life and play balance. It is that sense of community that deserves the most credit for fueling users’ attraction to these environments. That, coupled with the host of amenities, time and cost savings, is expected to continue earning these cool co-working spaces a place in future office settings.

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