Commercial Real Estate Debt: Can Coworking Work?

WeWork’s failed IPO does not signal the demise of flexible office space.

December 23, 2019

This Commercial Real Estate Debt sector report is excerpted from the Fourth Quarter 2019 Fixed-Income Outlook.

Flexible space is a commercial real estate leasing model that offers office tenants short-term leases or memberships with access to amenities that they would not receive under traditional office leases. Small- and mid-sized businesses and mobile workers were early adopters, but large enterprises are increasingly seeking flexible office platforms. Flexible space is often equated with tenants such as WeWork or Regus that lease large, long-term blocks of space from property owners, build out that space, and then sublease the space or sell memberships to use the space to short-term users. The core business model of such operators is tenant intermediation: operators pay less in rent to the property owner than they charge their customers to use the space.

While coworking spaces are not new, the market has accelerated rapidly over the past five years.

Coworking Office Spaces Gain Market Share

While coworking spaces are not new, the market has accelerated rapidly over the past five years.

Coworking Office Spaces Gain Market Share

Source: Guggenheim Investments, JLL Research. Data as of 9.30.2019.

Traditional office space owners have responded to the rise of coworking companies by launching their own flexible office spaces, choosing to collect rents directly from users rather than take the risk of a long-term coworking operator lease. In doing so, they rely on a third-party coworking management company to build out and manage the space under a more traditional property management agreement.

Lenders view significant exposure to flexible office use with caution, preferring the certainty of long-term leases with creditworthy tenants. Transient tenants make the asset vulnerable to general market trends and can demand much higher capital expenditures for tenant improvements. CBRE recently concluded that buildings with a high concentration of coworking companies may yield a lower price in the investment sales market, and that once coworking as a percentage of tenancy exceeds 40 percent, the asset may see higher cap rates.

While the ultimate success of the flexible office space model is still uncertain, its rapid growth represents a macroeconomic trend that may influence the office sector for years to come. Regardless of the ultimate fate of one coworking company, we believe the growing demand for turnkey service without long-term commitments in our technologically dynamic, gig-economy world means that flexible office spaces are here to stay.

U.S. Flexible Workspace Operators in 19 Leading Office Markets

While WeWork represents the lion's share of the flexible offce space market, growing demand for turnkey service without long-term commitment has fostered a thriving market.

U.S. Flexible Workspace Operators in 19 Leading Office Markets

Source: Guggenheim Investments, Colliers International. Data as of 9.30.2019.

—Jennifer A. Marler, Senior Managing Director; Margot Latham, Managing Director; Zach Johnson, Vice President

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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