It turns out, while flexible co-working space operators seem to have it all figured out, the commercial real estate operators and financial institutions haven’t. Owners of office buildings and lenders of financing are acknowledging the outsized growth of the flexible workspace industry. But they are doing it too slow.
At a panel event organized by AnySizeDeals, Toby Moskovits, CEO of Heritage Equity Partners, likens the impact brought on by disruptors such as WeWork to the commercial leasing space as “death by a thousand bug bites.” Traditional commercial real estate players have yet to learn the new rules of the game.
Managing Principal of Onyx Equities Jon Schultz, who was also a panelist at the event, added that these companies are “here to stay and it’s not going away.”
If the size of the real estate footprint is any indication of a company playing the long game, then WeWork is here to stay. The Wall Street Journal recently reported that WeWork is now the largest tenant in Manhattan, surpassing JP Morgan. Altogether, flexible co-working space operators contribute close to ten-percent of all new leases signed in 2018 year-to-date.
WeWork is at the right place at the right time. It follows where the market is going or where it needs to go, said Moskovits.
Five or six years ago, the real estate industry did not know how to respond to this intrusion. Real estate owners, Schultz said, were debating whether the co-working business model was a fad. Now, building owners understand that they need to respond constructively to the changing industry tide. Co-working firms “have pushed landlords in the community to be better, taught us a bit how to cater to this new workforce, which every tenant that we speak to is very concerned with,” he said.
“We all have to get used to it,” advised Schultz. “Right now, it’s about getting the industry comfortable. The industry has to get used to this new model so that all of real estate can function—the way all the different food groups of debt and equity have functioned in the past.”
“Everybody is still trying to figure it out. It’s more mainstream, it’s not a fad, it’s the reality,” said Moskovits. This new business model is “here to stay, but we are waiting for more information.” Larger corporations seeking to expand their spaces are also getting used to it.
Financial institutions such as banks are testing the water. There is a “growing chasm between what the underwriters of the banks expect with regards to commercial real estate and the reality of what commercial real estate is becoming. It’s changed dramatically, and there is a disconnect,” said Moskovits. She also urged that “whoever is funding these acquisitions needs to deal with the reality.”
Moody’s also stopped rating WeWork’s bonds, said Moskovits, because they are probably not getting enough data.
The Real Deal reports that properties that had a higher WeWork occupancy were trading at higher cap rates than they would for similar buildings. Part of the reason is an investor’s assessment of risks associated with a product that hasn’t been stress tested. David Bitner of Cushman’s capital research team said, “With this new co-working environment, we haven’t yet been through a full office cycle.”
In the Wall Street Journal article, WeWork’s chief development officer Granit Gjonbalaj responds to such skepticism by arguing that their company is well-positioned to face a downturn because larger businesses would shrink their offices and attempt to secure short-term leases.
The commercial real estate industry seems to agree that these flexible co-working space operators will be around for at least a while, so it’s best that the industry act fast and make room for them.