Institutional Landlords Come Around to Coworking

Even with the array of problems that the WeWork troubles and the COVID-19 pandemic presented, Jennifer Frisk, senior managing director with Newmark Knight Frank’s downtown Los Angeles office, thinks coworking will catch on as an asset class.

Need proof? The big institutional owners are starting to get on board.

“I think going forward traditional landlords have realized that the WeWorks of the world provided a solution,” Frisk says. “We think that institutional landlords will finally be able to get into this sector, which they haven’t been able to do up until this point.”

In the past, these landlords would allocate a small amount of their portfolio to WeWork. But Frisk sees these firms allocating that percentage to their own coworking model or flexible office space solution. For example, Hines and Tishman Speyer, opened coworking spaces before the pandemic.

“Let’s say you take 10 percent of the building, and you build it out on spec suite,” Frisk says. “Maybe you include a big conference room that’s easily cleaned and easily monitored. You could also do a plug-and-play space and maybe furnish it. Then you provide three months, six months and one-year leases, similar to the WeWork model.”

Frisk thinks landlords will start small and allocate portions of their building or their portfolios for flex office space. “Maybe cap rates will be adjusted somewhat to account for the shorter-leases,” she says. “But WeWork was also getting a premium on those rents because of their flexibility.”

While flexible space may look different after COVID-19, Frisk thinks it is here to stay. And institutional acceptance isn’t the only reason for this. “Banks are starting to come around to that [flexible offices] finally,” she says. 

When they’re underwriting deals, Frisk thinks lenders understand a traditional 10-year master lease with WeWork, even if the space was ultimately going to be used for coworking. 

“But looking at underwriting for one month, six months and one year is much more challenging for them,” Frisk says. “But they can do it. Look at how hotels are structured. Those are one-, two-, three- and four-night stays. Even multifamily is not all one-year leases.” 

Why are institutional owners and banks finally coming around to flexible space? Frisk thinks there are several reasons. 

“A lot of things are going on in the world right now,” Frisk says. “The pandemic pushed it over the edge. I also think they’ve realized there is a need. WeWork is giving back a significant amount of space around their portfolio. The infrastructure is already there [for the office landlords].”

While these spaces may require some changes, Frisk thinks it could just make more sense for landlords to cut out the middleman and lease out their own space.

“It feels like the world changes every week now,” Frisk says. “How do they [tenants] get comfortable with even a three-year lease. You’re going to get a lot of tenants that keep signing up for six months and then six months and then another six months.”