The co-working conundrum - With the rise of the modern flexible-office sector; has co-working gone from hero to villain to antihero?
• Flexible office operators—WeWork being the best-known globally—have grown rapidly over the past decade and are major tenants in the world’s largest cities. These firms occupy approximately 5% of office space in London, New York, Singapore and Hong Kong and represent an even higher share of office leasing in recent years – 17% in the US, 12% in Europe and 14% in Asia.
• WeWork went to industry darling to fallen angel overnight in 2019 after failing to IPO, forcing Softbank to unveil a rescue plan to provide the capital necessary to stabilize the business.
• We explore the question of whether WeWork is the canary in the coalmine, indicating that the flexible office business model is fundamentally flawed, or whether it is an example of venture capital-fuelled profitless over-expansion.
• Most importantly – what does the rise and fall of flexible office occupiers mean for institutional investors? What are the risks? Does flexible office and co-working present an opportunity? Will office real estate become more operationally intensive than before?
• The key for institutional investors is to keep as much exposure as possible to traditional, high-quality leases even though these are becoming rarer as time goes by. In addition, investors should prepare for the changes coming their way by looking for “trophy” office assets such as headquarter-quality, unique properties as well as properties in supply-constrained markets where tenants are looking to have a presence.
• Critical to investors is understanding the economics of flexible-office space and be able to underwrite and identify locations that will be successful. Also, working with best-in-class partners to craft bespoke flexible-office strategies and laying the groundwork to better position themselves to invest effectively in the office space over the coming years and decades.
Published on Institutional Real Estate, Inc (IREI), Feb 2020
The co-working conundrum...
