Real Estate Spotlight: Coworking spaces here to stay, but questions remain

Spaces has a 43,000-square-foot coworking space at 1433 N. Water St. in downtown Milwaukee.
Spaces has a 43,000-square-foot coworking space at 1433 N. Water St. in downtown Milwaukee. Credit: Spaces

Real estate experts say coworking spaces are likely here to stay, even as they grapple with questions, such as the risk they carry and how they will fare during the next economic downturn.

One sign the industry considers coworking spaces to be more than a fad came last fall, when Los Angeles-based real estate giant CBRE Group Inc. launched a new coworking brand, Hana. CBRE says the new service is designed to help property owners meet the rapidly growing demand for flexible office space.

Scott Marshall, president and chief development officer with Hana, said the service was born out of CBRE research that showed coworking operations were taking up more and more office space.

“This is truly a way an occupier wants to add flexibility to their portfolios,” he said.

Marshall was among a panel of industry experts that spoke on the topic during Marquette University’s recent National Real Estate Strategies Conference on its campus.

Jason Geer, managing director and head of transaction services with Dallas-based Invesco Real Estate, said the amount of coworking space has grown by about 25% annually over the past decade, compared with 1% annual growth of the office market as a whole.

The coworking craze has spawned a number of brands looking to replicate the success of established companies such as WeWork. Marshall said Hana is attempting to differentiate itself by focusing on hospitality and worker productivity.

Specifically, Hana is designing its space so that 70% is made up of suites for enterprise users, or large corporations; 20% is high-end meeting space; and 10% is more “traditional” coworking space.

Enterprise users are finding coworking space to be a great option for them, he said. Those larger companies make up about 40% of coworking space users, he said.

“I think a lot of people think all the time it’s just the one-off person that’s using (coworking space),” he said. “But a lot of companies are using it.”

Marshall noted “glossy names” like Nike and Microsoft are among that group.

Even so, uncertainty lingers among investors and lenders over what the future may hold for coworking spaces and the firms that run them. As evidence, look no further than WeWork parent company We Co. and its recent postponement of plans to take the company public. Investors are concerned about WeWork’s actual value and questioned how it would become profitable, according to some national news reports.

Kim Liautaud, managing director and head of U.S. commercial real estate with BMO Harris Bank, expressed similar concerns at the Marquette conference. She said WeWork is a landlord but is being valued like a tech company.

Moreover, BMO takes little chance on lending to buildings that have significant amounts of coworking space. The general rule is BMO looks for less than 10% of a building to have coworking space, Liautaud said.

“Nothing against WeWork or Hana, or any other concept. It’s new; it has not been tested through a cycle,” she said. “I realize everyone has a good business model; it’s too much risk for us to underwrite. So, we have zero exposure to WeWork at BMO. That’s intentional.”

Marshall said buildings should aim for around 15% to be dedicated to coworking space.

The panel likewise had mixed thoughts on how coworking spaces would fare in the next eventual recession.

The industry’s only reference point is when, during the economic downturn of the early 2000s, Regus filed for bankruptcy protection. The firm, now called International Workplace Group, struggled in the wake of the dot-com bubble.

Liautaud said she expects that in the next recession building owners will see higher vacancies, and they will come more quickly, in coworking spaces. She said the enterprise users are attracted to flexibility of these workspaces because it allows them to downsize quickly once profits start declining.

Meanwhile, Josh Jeffers, president and chief executive of J. Jeffers & Co., said co-working spaces could prove useful to people who had been laid off and wanted to strike it out on their own.

“They don’t necessarily want to work in their basement, and a coworking option could become more attractive,” he said.

Geer said a recession would likely weed out some of the smaller coworking firms, leaving those like WeWork and Hana that have strong financial backing.

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Alex Zank
Alex Zank covers commercial and residential real estate for BizTimes. Alex previously worked for Farm Equipment magazine and also covered statewide construction news at The Daily Reporter. He graduated from the University of Wisconsin-Eau Claire, where he studied journalism, political science and economics. Having grown up in rural western Wisconsin, Alex loves all things outdoors, including camping, hiking, four-wheeling and hunting.