Landlords should allocate 15-30% of a building to coworking
The coworking trend continues to grow globally, yet remains a lukewarm investment for landlords. That’s according to Cushman & Wakefield’s Coworking and Flexible Office Space report, evaluating the financial impact of this new mode of commercial leasing.
The research found landlords are comfortable with 15%-30% of a building being allocated to a coworking provider, while anything above that could become less profitable than conventional leases.
This is because providing flexible space often means higher upfront costs, hidden costs in the form of higher wear and tear on buildings, security, and intellectual property concerns for occupiers.
The research also found that properties where 40% or less of the space was leased as coworking had a capitalisation rate similar to other comparable sales in the area. Capitalisation rate, or cap rate, is the rate of Net Operating Income to property asset value, indicating the potential rate of return on the property investment. The gap between cap rates expanded as the proportion of space allocated to coworking increased.
However, Cushman & Wakefield predict confidence in coworking leases will increase as landlords gain more experience trading assets with significant coworking occupancy.
What is the current coworking marketplace?
According to the report, coworking currently accounts for 1% of total worldwide office inventory, though it is expected the sector will triple in size over the next decade and represent between 5% and 10% of inventory in many markets.
In the UK flexible office working space already represents 5% of the total UK office stock. In Central London, there is currently 11m sq ft of coworking space and WeWork is already London’s largest office occupier.
The Coworking and Flexible Space report focused on the US market, and estimated there are 200 coworking companies across the country operating at least one location 5,000 sq ft or more. There are nearly 20 companies with at least 10 locations in the US.
WeWork continues to dominate the sector, accounting for over 8m sq ft between 2015 and 2017. That trend is not expected to change in the near future. In the first half of 2018, WeWork accounted for 8 times the amount of newly leased space in the US as the other 9 largest firms did combined.
Coworking is a fast-growing sector, with half of all current US coworking space opened since early 2015, and over 5m sq ft of new space coming online each of the past 3 years. Another 3m sq ft of new space has opened in the first half of 2018.
Currently, 11% of all coworking locations globally are joint ventures between a coworking provider and the landlord. Other options for landlords to enter the space include white labeling with a partner, or proactively recruiting a coworking provider for buildings.
Despite landlords’ slight reticence investing in coworking, Cushman & Wakefield are confident the trend towards flexibility is here to stay. This demand will lead to a number of solutions in the marketplace including coworking, spec suites, and more flexible lease terms in traditional leases.
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