Landlords Can’t Quit On Coworking — Even If Rents Are No Different Than Traditional Tenants


Bisnow Boston

February 24, 2020

By Cameron Sperance,

Traditional office deals and coworking leases make no difference to landlords when it comes to the rent they collect, according to a new MIT report.

Coworking companies have expanded in recent years to become the leading office tenants in some of the world’s largest real estate markets like London and New York City. The providers were willing to enter into longer lease terms with a higher base rent when many companies were shedding space and wanting shorter commitments.

But 10 years of coworking lease data in six of the largest U.S. office markets show landlords view coworking tenants as viable substitutes for any traditional office tenant, according to the report from MIT’s Real Estate Innovation Lab, called “The Financial Impacts Of Coworking: Rental Prices And Market Dynamics In The Commercial Office Market.”

“It looks like the landlord is doing this calculus and saying, ‘This works for us,’ especially if they have the same credit quality as the other tenants in the building,” said MIT Real Estate Innovation Lab Director Andrea Chegut, who co-authored the report. “But there was no cost benefit really hanging out in either [the landlord or tenant] direction.”

Coworking companies were typically paying $4/SF more in rent and had a six-year longer lease duration than other tenants in their buildinga, according to the report. But incentives like free rent and higher tenant improvement allowances associated with longer leases brought the companies’ effective rent payments down to a similar level as their fellow tenants in a building.

Tenant improvement allowances lowered rents by around 6%, according to the report. A month of free rent lowered the overall rent by 1.7%.

“From a pricing perspective, the [MIT] analysis suggests that coworking tenants are treated like any other tenant,” Savills Chief Economist Heidi Learner said. “Perhaps a follow-up analysis would consider credit quality. Do landlords appropriately price the risk of a tenant default in terms of net effective rents?”

The study included 222 coworking leases and 3,979 control leases of tenants in the same building as each of the coworking spaces in six cities between 2008 and 2018: New York City, San Francisco, Los Angeles, Boston, Chicago and Seattle. WeWork, at 90 leases, had the greatest sample size in the research followed by Regus (75), Knotel (28) and Industrious (11).

The coworking sector isn’t treated differently than other office tenants on pricing, according to leases studied in the report. Coworking providers typically get more tenant incentives like higher build-out allowances and more months of free rent due to the long-term nature of their leases. But that all balances out to similar effective rent levels of non-coworking tenants studied in the report.

The average tenant improvement allowance for a control tenant was around $30/SF, Chegut said. But a coworking company received anywhere from $53 to $60/SF. The earlier data suggests it took more to build out coworking offices in older Class-B office space. But even when companies like WeWork and Industrious were opening offices in Class-A buildings, T.I. allowances remained high.

“The lease terms are longer because the T.I. requirement is higher — not vice versa,” said Accesso founding and Managing Partner of Investments Ariel Bentata, a national office landlord who has deals with coworking firms like Serendipity Labs and Regus. “These guys have to create a lot of common areas, devise offices in small spaces and use a lot of glass that makes space much more expensive for T.I. than for a typical tenant. The only way to make these deals work is have them operate over a longer period of time.”

There may be no price differentiation between flexible space tenants compared to traditional office tenants, but there is a large demand difference. Landlords are signing the newer tenant type as more companies opt into enterprise leases at a coworking company to get more flexibility and shorter lease terms. In turn, landlords still have a long-term lease with the coworking provider.

Between 2016 and 2017, coworking companies accounted for as much as 100% of annual office net absorption in markets like Houston, Miami and New York City, according to the MIT report.

WeWork is the largest private office tenant in Central London, New York City, Washington, D.C., and the second-largest tenant in Boston, according to Savills. WeWork accounted for nearly half of all coworking lease activity from the beginning of 2017 through Q3 2019, according to JLL.

While the coworking giant’s momentum stalled last year following its failed IPO and ensuing financial dive, coworking still has a future — albeit less of a WeWork-centric one. JLL anticipates more diversity in leases going forward from entities like Knotel and Convene and through franchise agreements with companies like Serendipity Labs and Regus.

“Our broad view is that real estate is changing from a commodity to a consumer product. The innovations that these next-generation coworking operators have introduced around speed, flexibility and services are really going to be the lasting legacy of that innovation,” JLL Senior Director of Office Research Scott Homa said. “Landlords have to respond. This is an industry that hasn’t been known for innovation and disruption and evolution for generations.”

Overall coworking leasing volumes have declined since WeWork’s IPO attempt failed, and the average flexible space transaction size was down 38% in Q4, according to JLL. But even with WeWork’s downfall and ongoing attempt at a turnaround, the coworking giant’s uncertainty isn’t expected to alter rents or deals with landlords.

Many landlords also like having a coworking tenant in their building even if the rents are no different than traditional tenants. Having a tenant like WeWork enabled building owners and operators to sometimes attract new tenants to other parts of the property, according to an October Savills report.

“There’s an incubation potential for future tenants,” said Bentata, who added his firm has struck deals with tenants that previously worked out of coworking spaces in his firm’s buildings. “Plus, there is some allure of coworking operators bringing in more of the tech-savvy folks and younger talent and making buildings more vibrant.”