David A. Krebs, DA Krebs Inc.

Coworking office space is a hot trend in commercial real estate.  According to JLL, the coworking sector increased an average of 23% each year since 2010.

This is evident in South Florida. Nearly every Class A office building in downtown Miami and Brickell has coworking space. Although coworking has yet to be stress tested by a recession, it continues to be a strong trend for now.

What is coworking?

Also known as "flexible" or "shared" office space, coworking is a communal office environment. Regus and WeWork dominate the industry, and CBRE and Tishman Speyer recently entered the sector.

A popular alternative to traditional offices, coworking allows individuals and companies to purchase office space without long-term leases but rather in flexible increments of hours or months. The space can be as small as a dedicated desk for one person or as large as a suite for many workers.

In addition to the turnkey office space, coworking offers many amenities, including fully stocked kitchens (even with fresh-baked cookies), high-speed internet, upscale furnishings, conference rooms for meetings and networking events, gyms, scenic views and natural light. Usually located in urban areas, coworking offices are within walking distance of restaurants, apartments and public transportation.

Coworking is appealing for many reasons.  For self-employed individuals, rather than work at home alone, they can enjoy a sense of community, network with others, and partake in water cooler banter.

Corporate demand for coworking is also growing. Large companies like Verizon and KPMG, for example, are moving permanent teams to coworking spaces. Coworking helps companies stay competitive and create a presence in new markets without being hindered by long leases and relocation costs.

How has coworking affected South Florida?

Coworking has changed the commercial real estate landscape in South Florida. According to Colliers International, as of the second quarter, approximately 2.7 million square feet in the tri-county area was leased by coworking firms, with 2 million of that total in Miami-Dade County.

To put that in perspective, according to a February 2018 YardiMatrix study, Miami topped Manhattan as the number one city with the most coworking space when measured as the percentage of the city's total CRE stock. Miami came in at 2.7% compared with Manhattan's 1.7%. By the end of 2018, Miami slipped slightly to third place at 2.4% behind Manhattan's 3.0% and Portland, Oregon's 2.5%.

With all the recent activity in 2019, Miami is no doubt still near the top of the list. The city's entrepreneurial spirit and diverse economy are ideal market conditions for coworking. In the first half  of 2019, several major coworking leases were signed in Miami totaling 530,500 square feet, according to Colliers International. WeWork announced new locations this year at 830 Brickell Plaza and Southeast Financial Center. Meanwhile, Spaces, a Regus affiliate, signed a lease in Coconut Grove (where it will be the anchor tenant of One CocoWalk, slated for delivery in 2020) and two in Miami Beach.

Elsewhere in 2019, Quest Workspaces opened a location in Coral Gables, and Chicago-based Novel Coworking bought a 63,000-square-foot office building in Edgewater for $20.6 million with plans to convert it to coworking space.

Like an inkblot on a map, coworking has spread to Broward and Palm Beach counties. According to YardiMatrix, as of the second quarter, Fort Lauderdale had 760,000 square feet of coworking space with Regus as the largest provider. West Palm Beach had 575,000 square feet with The Nexus and Regus as the top providers. In the same 2018 YardiMatrix rankings, West Palm Beach and Fort Lauderdale placed seventh and tenth, respectively, as the top U.S. cities with the most coworking space as a share of total stock.

What are some of the challenges of coworking?

The coworking trend is socially appealing and clearly has reduced demand for traditional office space, by some studies pulling roughly 1% to 3% of market demand from traditional office leases.

However, it is too soon to tell whether this is a good development as indicated by the charged debate surrounding the WeWork IPO. Only growing steadily since 2010, coworking has not been challenged by a major economic downturn. During a recession, startups fail, and entrepreneurial workers may decide to work at home instead. Likewise, rather than break their traditional long-term leases, large corporations may find it easier simply not to renew their shorter-term coworking arrangements.

Office landlords, therefore, may be hesitant to lease to coworking companies. In a downturn, the rental income can dry up quickly as more people lose their jobs or work from home. A better alternative to leases may be management agreements, where the operator gets a percentage of revenue, the landlord gets the remainder and no rent is paid. For now, however, leases dominate this industry.

Additionally, banks are reluctant to provide mortgages for this type of CRE. There are relatively low barriers to entry to compete in the coworking industry. But for the smaller-player real estate investors looking to enter this market and acquire a building to convert to coworking space, they may find it difficult to find financing.

Because coworking spaces are unique (entailing, for example, kitchens with beer taps, gyms and odd medleys of office sizes), it will be very impractical for the lender to repurpose and liquidate the real estate in the event of a foreclosure. These investors will need to seek out alternative lenders with higher risk appetites.

Despite those challenges, JLL predicts that coworking will skyrocket to 30% of the total U.S. office stock by 2030 from its current 5%. Time will tell if this prediction comes true. For now, coworking is here to stay in South Florida, with nearly every major office building embracing this concept.

 

David A. Krebs, president of DA Krebs Inc. in Miami, is an originator of residential loans in Florida and  commercial mortgage loans nationwide. Contact him at [email protected].