Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Since SoftBank took control of the troubled coworking giant WeWork last year, landlords worldwide have been concerned that the company would downsize or exit its spaces altogether. This was especially true for landlords that allowed leases to be negotiated in the name of the operator’s holding company, potentially placing them on the hook for free rent and tenant improvement costs. So far, SoftBank has honored WeWork’s commitments.
In the meantime, landlords are considering their response should WeWork default on leases. And WeWork tenants are actively evaluating other space options.
With WeWork out of the growth equation, the average size of coworking leases fell by 38% in the last quarter of 2019. WeWork accounted for 49% of coworking sector leasing activity over the past three years. But other operators are growing market share given the company’s pause in new leasing.
Other business models emerge
Regus is aggressively pursuing a franchise model and other venture-funded groups, like Industrious, are pushing a new, collaborative business model that provides revenue sharing and other benefits to operators, such as lower start-up costs and the elimination of long-term lease liabilities.
Similar to the model used in the hospitality industry, rather than completing lease agreements, major office owners are forming management agreements with select coworking brands to operate coworking space in their buildings.
Some believe management agreements align the interests of landlords and operators. The model eliminates the quasi-competition that previously existed between landlords and larger coworking operators.
Management agreements typically protect landlords’ financial interests by providing them with the greatest revenue share upfront to recoup their share of TI investments and incentivize the co-working operator to quickly grow occupancy.
How they work
While every deal is unique, management agreements are typically structured as “waterfall” arrangements: once a space hits market rent and/or a specified occupancy level, the revenue-sharing split for the coworking operator increases.
Industrious, for example, has formed management agreements with about 40 large office owners.
Still, management agreements require a leap of faith on the part of landlords. They are betting on incubating new tenants in the coworking space, which they hope will eventually convert to long-term, conventional leases.
It’s also predicted that coworking operators opting for traditional leases over management agreements will prioritize lower rent spaces going forward Meaning they will take space in class-B and class-C office buildings and repositioned warehouses, rather than in highly-priced trophy assets.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com