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When your tenants have tenants

08/12/2019

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In our soon to be published Market Views report, CrowdStreet turns an analytical eye on the commercial real estate industry. What are some of the biggest trends? What does the future hold? And how are different types of commercial real estate faring? Our goal is to help investors better understand what’s happening in the space overall so they can make the best investment decisions possible.

One of the topics in this quarter’s report: coworking office spaces.

The rise of coworking

WeWork started in 2010 with just one location. Fast-forward nine years and there are now almost 700 WeWork locations in 120 cities around the world.

The rise in coworking spaces echoes the transformation that the traditional “office” finds itself in. Large corporations and small companies alike are hiring contractors, freelancers, and part-time employees, many of whom never physically report in at the main campus. That also means they can tap into talent anywhere in the U.S., and that those workers can live where it’s more affordable, but still have access to well-paying jobs. Independent contractors can manage their projects/clients from anywhere, as long as they have a steady WiFi connection, so their offices could easily be their living room.

But a shared workspace, which might be as simple as deskspace, can be less lonely than working from home, and more office-like (and likely quieter) than a coffee shop. Plus, many coworking companies offer their members amenities like rentable conference rooms, fully-stocked kitchens, a gym, and more.

Tenants, tenants, tenants

But the thing that people tend to forget is even while WeWork and other companies have their own members, the coworking companies themselves can also be tenants.

Some office building landlords are relieved to have someone like WeWork lease-up 40,000 to120,000 square feet of their building. Instead of managing multiple tenants, they just work directly with one: the coworking company. But other landlords have restrictions on who they lease spaces to and only want “creditworthy tenants.”

A creditworthy tenant is simply one that pays its rent on time and upholds all of its lease obligations. Seems fair — you wouldn’t rent a residential property you owned to someone who couldn’t pay the rent each month, right? But coworking, as popular as it is, has never been fully stress-tested in an economic downturn, making more traditional landlords hesitant to have coworking operators in their building. What if the coworking company is unable to meet the lease obligations because their members pull out and just work from the spare bedroom again?

Furthermore, some coworking companies come in with plans for major build-outs — adding full kitchens with beer taps, building a gym space, and in some cases re-organizing the literal walls to make more, smaller offices — which can make them a trickier tenant for the building manager.

Exceptional demand, exponential growth

And yet, even with the caution of some landlords, coworking is a major growth driver within the commercial office market. JLL’s 2019 coworking report stated the coworking sector has grown 23% on average annually since 2010, which is unlike any other sector’s growth. Right now, coworking space accounts for less than 5% of the total U.S. office stock, but they predict that number will skyrocket to 30% by 2030. Fast-growing cities like Denver, Nashville, and Charlotte are among the top cities expanding the footprint of coworking spaces.

All real estate (even commercial) is local. And given the growing demand for office space in major and mid-tier markets across the U.S., we expect to see more of these investment opportunities on the CrowdStreet Marketplace in the coming months. A few of them will likely be destined, and maybe even intentionally designed, for a coworking future. You can view all our Marketplace deals here.

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