How is Co-Working Impacting Commercial Real Estate?

The first co-working space appeared in 1995 in Berlin and was a revolution in thinking about sharing premises and amenities. It was a hackerspace, a place where people would meet, share ideas and work independently or together. Until this day, most co-working spaces are unconventional, have a hip vibe and are a world away from the corporate cubicles. Yet, for commercial real estate (CRE) the co-working movement is a catalyst.This trend is here to stay and will grow.

The Good

The co-working movement was a breath of fresh air in the world of CRE. The unconventional vibe of the spaces meant that abandoned places like former warehouses or factories could be repurposed as offices. This new approach to premises helped young companies or solo-entrepreneurs to combine their money and get access to office spaces instead of garages. Some would even get fully central zip codes that otherwise would have been out of their reach. Overall, the movement diminished vacancy rates in CRE.

By hosting a more extensive range of businesses on their premises, landlords are less dependent on the success of a single entity. As long as there is a constant flow of new tenants, this model could actually help landlords get a more consistent revenue stream and avoid long periods of no business between large tenants.

The Bad

Co-working spaces come with more flexible terms than regular office spaces. The contract length could vary from a monthly subscription to at most a few years. This is very low, compared to the industry standard of 5-15 years. This brings an element of volatility and vulnerability to landlords.

This can have a severe impact on cash flow prediction if the landlord is used to single-tenant models. The higher churn rates of co-working spaces force owners to increase prices and find innovative ways to ensure there is no vacancy.

The Ugly

The legal side of co-working needs to get to a more mature level. There are still gray areas like sub-letting clauses and business restrictions. The most significant issues include property rights, sharing the responsibility for common spaces as well as unexpected costs and liability issues.

The landlords need to find the delicate balance between control and trusting the tenants.

Most co-working tenants ask for a high degree of autonomy they need to create an eco-system. Not all landlords are ready to offer this since they worry about risks.

If you are just opening up to the co-working environment, don’t go alone in this endeavor. At Douglas Commercial we have the know-how to help you draft the right agreements for you and your future tenants and assist you during negotiations.