December 23, 2019
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.
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.
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.
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
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