Coworking has taken the real estate market by storm, and now traditional landlords are realizing the sector cannot be ignored.
Some landlords have either decided to directly compete by creating their own coworking spaces, while others have opted to partner with operators.
This has led some real estate executives to worry that coworking is shifting the fundamentals of commercial real estate by densifying spaces.
“The bottom line is that densification creates a meaningful drag on office fundamentals that isn’t visible in traditional inventory growth statistics — and that means it can be overlooked by commercial real estate executives,” said Danny Ismail of Green Street Advisors. “In effect, markets need more employment growth to compensate for the increased utilization.”
Along with this “shadow supply”, concern over the sustainability of short-term leases through an economic downturn is growing.
A study from Eastdil Secured revealed that leasing less than 25% of the total building to WeWork has minimal cap rate impact on the landlord, but when it leases 50 to 100%, a cap rate premium of 50 to 75 basis points or more is common.
While the outcome of coworking in the long-run is unpredictable, if operators can focus on increasing occupancy and utilizing technology to reduce discord through the leasing process, it may become sustainable.