Coworking spaces allow freelancers and companies in growth mode access to flexible lease terms. But real estate experts see headwinds ahead for less sophisticated coworking businesses, and ones relying on one company or industry, if a recession hits.
Those most at risk are coworking spaces with a mix of corporate users and individuals who occupy open desks inside the same building, WorkSuites CEO Flip Howard said.
Products along these lines are heavily funded by a few larger corporate tenants seeking shorter office leases. If these companies decide to suddenly depart or ask tough budgeting questions during a recession, their evacuations could cause sudden pain for less prepared coworking ventures, Howard said.
“I see spaces coming out that are WeWork-like, they have a freelance, hip collaborative [concept], but their revenue comes from corporate users,” he said.
Coworking giant WeWork is leaning heavily into that model, recruiting larger corporate leases through its enterprise model. Going a step further, the company has devised a two-year membership plan, which it calls HQ by WeWork, to give corporate clients shorter-term lease options in space exclusive to the tenant.
“When the market turns down, do these corporations that are paying two or three more times for their office space in exchange for a cool environment and flexibility stay?” Howard asked.
Some will and some won’t, he said. The same goes for the coworking spaces they occupy. As an operator of flexible office space, Howard is mindful of not depending on one large tenant. WorkSuites currently has 14 locations in Dallas-Fort Worth and five in Houston.
“I’ve had to practice restraint in not letting one single client get too big,” he said. “If they have 20 people that means they are only there for flexibility, which means by definition they are not there to be with you forever.”
Whitebox Real Estate President and Managing Director Grant Pruitt has the same reservations about newer providers and landlords who are not mindful of what types of coworking firms land on their monthly rent rolls. He saw culling of similar product in the recessions of the early 2000s and 2008, making him more wary of overbuilding in one segment of the market — even if it is a segment that is otherwise primed to stay active.
“[Coworking] feels like the data center business in the 2000s, when everyone who could house a server was converting to a data center, and with so many entrants to the market, there is price compression and consolidation of firms,” Pruitt said. “You saw that with executive suites during the recession as well. Everyone flooded into that market, but when times got really tough, you had to have staying power to sustain the downturn.”
Pruitt expects to see some culling of coworking spaces if another downturn hits, but the exact level of impact is unknown. He advises landlords who lease out large amounts of space to coworking tenants to exercise some due diligence before signing leases.
“I would be very concerned about track record,” Pruitt said. “You want to pay attention to the ownership side [of coworking firms]. Who is it and what is it? How is it capitalized? Really pay attention to how much of the building they occupy, because if something happens and you lose that tenant, how does that play into your building or portfolio?”
Still, Howard and Pruitt believe office-sharing is here to stay in different forms — from executive suites to desk-sharing and a combination thereof.
“It is filling a void that was there prior to it, and I think you are going to continue to see it,” Pruitt said.
“I don’t think coworking is a fad. I think it is here to stay,” Howard said. “Even if there is a downturn, the overall amount of demand for this is going up because we live in the sharing economy.”
Data from JLL supports Howard and Pruitt’s assertion that while some players in the space may face challenges, especially during economic slowdowns, flexible office space is booming. The sector has grown at an average annual rate of 23% since 2010 and is expected to comprise 30% of the office market by 2030, up from just 5% today. Dallas-Fort Worth ranks No. 12 in a recent JLL study outlining the top 15 markets primed for additional growth in office sharing, and office marketplace LiquidSpace reported that Dallas already possesses the largest swath of coworking space in Texas — over 1.2M SF.
Despite the risk of price compression and consolidation, both Howard and Pruitt admire what coworking has done for office tenancy overall.
“The biggest obstacle was lack of awareness that our type of product existed. WeWork is solving that for us, so we see more demand for our type of office space,” Howard said.
Investors love it, too.
“In some way shape or form, you will have a coworking component to your stack of real estate offerings,” Pruitt said.