The Financial Impacts of Coworking: Rental Prices and Market Dynamics in the Commercial Office Market

This paper aims to understand a fundamental relationship in the business of coworking: the building landlord/owner and coworking provider. What they found was that landlords over the 2008 to 2018 period treated coworking providers similar to other tenants in their buildings as represented by the effective rent price-per-square-footage they pay. However, this ‘similar’ pricing is offset by an increase in longer lease terms and lease concessions (longer rent-free periods, tenant improvement dollars) for coworking providers. What does this mean for us? Despite all the hype and barring any serious default issue, we will stand to see coworking providers be contractually obligated to be in the buildings around us for quite some time.

With the emergence of space dominators like WeWork and Regus, co-working providers have shifted the competitive landscape for office tenants, with a tenfold growth from 2013 to 2018. As of 2018, there are close to 18,900 distinct co-working spaces and over 10.2B industry investment into this niche market.

But first, we must define coworking. We define coworking as a space that allows customers to rent the usage of a product, such as a desk or small office, over a flexible monthly time period and in some cases, with a highly amenitized fit-out usually reserved for luxury spaces. Coworking denotes a way of establishing an office floor plan that also bundles shared technology used by tenants, new types of amenities, optimized building floor-plan use, and collective design strategies.

 

Coworking: We define coworking as a space that allows customers to rent the usage of a product, such as a desk or small office, over a flexible monthly time period and in some cases, with a highly amenitized fit-out usually reserved for luxury spaces. Co-working denotes a way of establishing an office floor plan that also bundles shared technology used by tenants, new types of amenities, optimized building floor-plan use, and collective design strategies.
This paper explores the landlord’s perception of co-working providers as a substitute, anchor, or risky by looking at rent differentials.

 

The Method

Even though coworking providers are a tenant type in consumer demand, little is known about the strategic interaction of this growing tenant type with landlords in the real estate sector. With all the hype around co-working spaces, how do landlords truly feel about these providers? We assess landlord-coworking provider interaction through lease contract valuation, assessing if landlords see coworking providers as a substitute, benefit or risk, compared to other tenants. 

Using lease contracts from six US cities (San Francisco, New York, Boston, Los Angeles, Chicago, and Seattle) between 2008 to 2018, we compare rent conditions between coworking providers and tenants within the same building using a hedonic pricing framework. In order to control for building variables, we only consider leases of building with coworking and non-coworking tenants at any point in time. The final sample contains 222 coworking leases and 3,979 control leases in the same building, resulting in a sample size of 4,201 lease contracts in total.

“Coworking providers have become a long-term tenant in our buildings and cities, where the earliest leases taken up by coworking providers in this sample will not expire until 2023. So despite all the hype in the media around valuations, coworking providers and the role they play in anchoring our buildings through a full business cycle is incredibly relevant for us to understand.” – Dr. Andrea Chegut

 

  •  We document that landlords treat coworking providers as substitutes, not differentiating in effective rents compared to other tenants.
  • Coworking providers take systematically longer lease durations (12 years on average), resulting in higher tenant incentives, such as free rent periods and tenant improvement concessions.
  • Even when taking into account lease duration through statistical modeling, coworking providers receive significantly more tenant concessions.
  • We do not find value-increasing external effects of coworking providers, concluding that landlords are indifferent towards coworking providers as tenants from a financial perspective

 

What surprised us

 “Coworking providers strategically aim for tenant incentives through extending lease duration, enabling them to improve their short-run cash flows.” – Mike Langen

“Coworking providers have become a long-term tenant in our buildings and cities, where the earliest leases taken up by coworking providers in this sample will not expire until 2023. So despite all the hype in the media around valuations, coworking providers and the role they play in anchoring our buildings through a full business cycle is incredibly relevant for us to understand.” – Dr. Andrea Chegut

 

A special note on WeWork: 

In most major US cities, WeWork ranks among the five biggest real estate tenants. As one of the largest coworking providers, this paper paid special attention to how WeWork is perceived: 

We find that they receive systemically higher tenant improvement dollars per square foot and rent-free periods than non-coworking provider tenants and smaller coworking provider players in the market.