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How Many Co-Working Operators Can the Market Sustain?

All tier one co-working operators are in expansion mode and have completed or are in the process of doing funding rounds.

Established co-working operator WeWork once welcomed the presence of other flexible space providers in the market. But in certain cities, including D.C., San Francisco and Los Angeles, the multitude of co-working companies is now over-saturating the market, says Dallas-based Ryan Hoopes, a senior associate at real estate services firm Colliers International who co-founded and heads the firm’s global flexible workspace advisory practice.

All tier one co-working operators are in expansion mode and have completed or are in the process of doing funding rounds, Hoopes notes. For example, WeWork recently raised $4.4 billion from Softbank Group Corp., investing $3 billion directly into WeWork and $1.4 billion to expand its Asian subsidiaries, WeWork China, WeWork Japan and WeWork Pacific.

New York City-based NeueHouse, which offers co-working space with a private club-style membership, is also engaged in a funding round, with plans for expansion. This effort is being led by investor Barry Diller, who is also an investor, as well as his wife Diane Von Furstenberg’s Family Foundation and Hong Kong-based Great Eagle Holdings Ltd.

Meanwhile, co-working start-up Knotel raised $25 million last year and has already ratcheted up its presence in New York City, growing from 14 locations at mid-year 2017 to 50 locations, including 45 in Manhattan. Knotel isn’t the only operator competing with WeWork in Manhattan and Los Angeles, as Beijing-based UrWork, China’s leading co-working unicorn, has announced plans to enter these markets.

“The next big push will be the marriage between landlords and co-working operators in various ways,” Hoopes says, pointing out that office investors see the value of including flexible office space in their portfolios and are either launching their own shared-office brands or are pursuing partnerships with co-working operators.

Two major office building owners, Hines and Blackstone’s Equity Office, for instance, are seeking partnerships with established co-working providers to bring shared office space to their buildings. They recently issued requests for proposals from operators.

As office owners add co-working options to their property portfolios, the move will create additional competition for co-working operators, notes Alan Pontius, senior vice president/national director, specialty divisions, at brokerage firm Marcus & Millichap. Pontius adds that large office owners are exploring new strategies to shore up occupancies and grow revenues. The co-working model serves the need of start-ups and growing companies for flexibility in space configurations and lease terms, while also helping landlords expand their tenant rosters. As their space requirements shift, co-working tenants can transition into permanent offices in the same building.

Pontius suggests that rather than create a co-working brand directly, Hines and Equity Office are opting to add a co-working partner with a high profile to meet the demand for flexible space requirements.

At the same time, co-working operators are beginning to invest in ground-up development. WeWork recently completed a $380 million, 675,000-sq.-ft. project on a strip of land in the Wallabout Bay section of Brooklyn, N.Y., which was backed by Boston Properties Inc. and Rudin Management Co. WeWork plans to occupy 222,000 sq. ft. in the building.

Knotel, along with its developer partners Cogswell Lee, GLUCK+ and MCP President Street LLC, recently announced its first ground-up development, a 150,000- to 300,000-sq.-ft. project at 473 President Street in Brooklyn’s Gowanus neighborhood, with plans to occupy the entire building. This area of Brooklyn has historically served as a light industrial area, but with an influx of millennial entrepreneurs and freelancers it has seen growth in co-working space since 2010.

Co-working operators are building their own projects in office markets where occupancy averages 90 to 95 percent, says Hoopes. He notes that building out new co-working locations is expensive and, therefore, co-working operators rely on free rent and generous tenant improvement (IT) allowances to help them launch new locations. Landlords with nearly full occupancy, however, are unwilling to invest in expensive build-outs for new tenants, which is why WeWork and Knotel are building from the ground up in Brooklyn.

A more popular solution is to identify projects where the developer has included free rent and a generous TI allowance. “We are seeing this trend all over the country,” Hoopes says, noting that numerous co-working operators are going this way. For example, WeWork is the anchor tenant in a new class-A development in Uptown Dallas called 1920 McKinney, and Spaces by Regus is the anchor tenant in a class-A project in downtown Los Angeles’ Arts District called The Row.

In conclusion, Hoopes says, “When this cycle ends, we’ll see consolidation of smaller and regional operators into the larger brands. At the end of the day, there’s going to be four or five clear, big winners in the national co-working market.”

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