There’s Still a Place for Coworking in CRE: Boston Properties Execs

The stability and future of co-working office space in the real estate market has long been debated, and the coronavirus crisis has more squarely focused industry executives to question short- and long-term prospects.

The COVID-19 pandemic ushered in historic double-digit unemployment claims, and furloughs and other cost-cutting measures have cut across professional industries. Local, state and federal authorities instituted broad guidelines limiting social contact, measures that are counter to shared workspace.

“I don’t think there’s any doubt that it’s going to be a challenging industry during the term of this recession,” Owen Thomas, CEO of Boston Properties, said on the company’s first-quarter earnings call. “That being said, I do think long-term there is a role and a place for shared workspace in the real estate market.”

Thomas said some companies “like the flexibility and the speed to market of that product” and he asserted that he didn’t think the co-working model was going away. He said larger companies that “will continue to want to procure a small percentage of their space on a short-term basis” will drive demand. He added that there could be consolidation in the co-working sector.

“I think that the industry over the long-term will still be around. But in the short-term, it’s challenged and clearly there is limited growth, probably contraction, amongst the co-working operators,” Thomas said.

Boston Properties president Doug Linde predicted “there’s no question” that some coworking operators would reduce the number of locations they’re leasing. He questioned whether those co-working spaces will be amenable, as configured, to any new installation.

“Now, that doesn’t mean that it can’t be retro fitted, with the reasonable amounts of capital put into it to make it very functional,” Linde said. “But the landlords are going to have to make those decisions as to whether or not they want to spend the money to redo those types of spaces because obviously, they were constructed from a different kind of a utility.”

In some major markets, Linde said, some shared workspace “will come back and that we will have to deal with that from a supply perspective.” He said New York “is going to have more of an issue with the number of installations that are there. And then, clearly, some of the other markets where the co-working flexibility as operators have had a larger proportion of the absorption are going to have some impact.”

Indeed, signs are plentiful about coworking’s current struggles.

“With the spaces now inaccessible, many [cowork] tenants are stopping rent payments even if their lease agreements don’t include a fully articulated force majeure clause,” Alex Cohen, a real estate advisor at Compass, told Marketplace last month. He added: “At the end of the current crisis, given, at least short-term, severe economic uncertainty, I expect new and renewed commitments to coworking space to be dramatically off original forecasts.”

And Avison Young senior consultant Michael Kloppenburg said at a NAIOP Advantage Series webinar last month that “due to the structure of most coworking deals with landlords, primarily long-term leases, and the short-term nature of their client agreements, there is significant cash-flow exposure.”