Co-working space is here to stay

Co-working space is here to stay

20 September 2019

Co-working hubs have been steadily filling gaps in our biggest office markets but a sudden shift in gear as operators pursue larger chunks of space and even entire buildings carries high risk and could spell trouble for office tower landlords, comments The Australian Financial Review.

“Our view is that the co-working phenomena is a great thing. WeWork has been fantastic for the market; they have effectively killed the home office, but I think they may have gone too far, too quickly,” said Michael Cook, group executive for property at Investa, one of Australia’s largest commercial real estate companies.

Upon entering the market, big co-working companies initially took up small vacant spaces, often of just a few hundred square metres but activity has intensified and the co-working/serviced office sector in Sydney – the largest market in Australia – has increased tenfold from 16,000 sq m to 160,000 sq m in the past three years, according to Savills data.

Rob Harley, former Property Editor of The Australian Financial Review said “Co-working or flexible office – where ready-to-plug-in space is occupied on short-term licences, or memberships – is here to stay, to grow and to evolve. It is the biggest secular shift in work space since the open-plan office emerged 30 years ago and it brings similar opportunities, and challenges, for the owners of the nation’s office towers and work spaces.”

Dror Poleg, a highly regarded US advisor on technology and real estate said “Even if WeWork will never be profitable, even if WeWork is worth only $US20, $US15 or $US5 billion, even if WeWork goes bankrupt – the office market will never be the same,” he wrote recently.

“Office end users want service, they want flexibility and they want to interact with a brand that stands for something.

“A growing number of employers are unable to sign a long lease, unable to project their headcount five or 10 years hence, unable to spend millions on upfront fitout costs, unable to keep up with the latest trends of office design and operation, unable to open an office in every location in which they have employees and unable to provide the guarantees that landlords and lenders would ideally like to see.”

Mr Cook said that while co-working providers had been the “saviours of the Sydney and Melbourne markets” by keeping the vacancy rates relatively low, such large scale deals were a “huge risk” for landlords.

“The idea of WeWork or any other third space provider taking out 10,000 or 20,000 sq m is unproven at the moment, particularly in Australia. It might work in the US or Europe where you’ve got tenants with 100,000 or 200,000 sq m requirements but it’s not necessarily applicable to the Australian market.”

“If they can’t fill the space, they can’t pay the rent, which is why many of these co-working operators enter into each of these leases on a special purpose vehicle, which is a $2 company. So if one centre isn’t doing well, they will allow it to fold and they will walk away from it,” Steve Urwin, director of Kernel Property, said.

“In five years’ time if WeWork achieves the growth and profitability it is projecting, everyone will be happy. At the moment the covenant strength is a little bit questionable; however, some owners are prepared to take that risk” said Mr Cook.