Why Lease-Arbitrage Coworking Model Carries Too Much Risk
According to a survey by Deskmag less than 3% of coworking space providers owns the real estate they operate from. The remaining 97% opt to effectively sub-let workspace to their members and profit from the margin on lease costs.
While this lease-arbitrage business model appears attractive during the growth phase of the first few years of operation, there are also considerable risks for the operators, landlords and any investors in coworking firms adopting this strategy.
The Deskmag survey reveals that around one-third of coworking spaces have leases that are up for renewal in the next two years, leaving them open to rent increases that could force them to move. It is notable that the more stable coworking business model of investing in real estate to underpin security is such a rarity in this relatively new growth market.
Lease-Arbitrage Coworking Model lacks Sustainability
Riding on sociocultural trends, as well as real estate dynamics, co-working has achieved a critical mass that is making it a disruptive force in commercial real estate. Liz Elam, founder of Link Coworking in Austin, Texas, and executive producer of GCUC, the largest international coworking conference series said:
“The biggest barrier to entry to coworking is the lease. Some potential operators do not have a good understanding of the real estate industry. And good operators may choose to shut down because their lease gets renegotiated.” But Elam also maintains that because a good coworking space creates community, members will move with the space if relocation is necessary.
Lease-Arbitrage a Risky Business for Landlords
There is significant turnover in membership in most coworking spaces, with most memberships on a month-by-month basis and tenure lasting around 14 months on average according to Deskmag. Successful spaces are bringing in new members at the same rate.
However Julie Whelan, head of occupier research for the Americas, CBRE and the author of CBRE’s four-part series on shared office space, says: “When landlords and investors are looking at credit they are looking at the coworking space, not that of the customers. But the coworking space owners should be aware of the credit base of the tenant mix they are servicing.”
Whelan believes that the coworking spaces that endure the next cycle will be those that hedge their tenant base or who create innovative relationships with landlords and developers, versus the traditional tenant-landlord relationship.
Other coworking space providers who will survive the next cycle of growth in the sector will be the tiny 3% of those owning the buildings they operate from. An investment in coworking without the underlying asset of physical real estate presents significant risks to all parties and is not for the faint-hearted.