The Impact Of NYC Coworking Offices On The Commercial Real Estate Market

Photo: Crain’s New York Business

NYC coworking offices potential impact on the NYC commercial real estate market…None, Some or Significant?

New York firms large and small often have one thing in common when it comes to the desired address of their corporate headquarters…That it have a New York City, and more specifically Manhattan, zip code (although Brooklyn can be up there as well)!

Such a footprint can come in a variety of shapes, sizes and cost ranging from the outright lease of a space, a sublease of someone else’s space and then all the way down to an a la carte office space menu option in the form of a coworking space.

Each of these options will have differing levels of attractiveness based on a variety of factors surrounding the prospective tenant that include, but are not limited to, company size, expected timeframe for both move-in and move-out, bank account and the firms strategic growth plan.

The industry group will also come into play as will the age demographic of the workforce.

For some validation of the prior point, anyone who has been to the offices of both an old-line law firm and a technology start-up will understand that the needs of tenants can vary widely.

‘Commercial real estate and the office market have undergone tremendous change in the last few years, thanks in large part to the influence of the millennial generation on the way we look at the workplace. From urban locations to amenity-rich spaces, the modern office caters to their preference for a more social, collaborative, and flexible environment. Beyond that, today’s workforce includes a wider range of options than ever before. Mobile technology allows us to work remotely (like I am now!), and we can collaborate with partners and colleagues in the next room or on the next continent –no desk required. People in consulting roles, as well as entrepreneurs who are just getting started can take advantage of this, but they often crave the structure and social stimulation that comes with spending each day in the workplace with others.

These individuals are generally in no position to lease office space- nor are they inclined to take on the multi-year obligation that involves. Enter co-working, an elegant solution that’s been building steam. It’s estimated that there are now more than 2000 co-working sites worldwide, and it’s attracting people from a broad range of occupations.‘ (Source)

New York City Start-up Sailthru

New York City Law Firm Cravath, Swaine & Moore

Photo: The New York Times

Coworking office spaces: Have they had any impact on the NYC commercial real estate market, good or bad?

In thinking about coworking spaces and the extreme flexibility and options that they offer, the question came to mind as to whether this type of office option has had any effect on vacancy rates, asking rents and then by extension NOI’s and property valuations.

Full disclosure this question falls outside my knowledge base so I thought to reach-out to some of the coworking players and commercial building owners in the marketplace to ask their opinion.

Charlie Aini, Workville, NYC Co-owner: ‘In my dual role as both an affiliate with the landlord and owner of Workville, unless the rents are below market rate, I don’t necessarily see coworking as a lucrative stand-alone business for the long term.

But, as a building owner, it is definitely an attractive tenant to have and feature to offer to other tenants in a building.

I would liken it to having the ability to offer a hotel room to residential tenants within the same building. And while of course the rent being paid by a co-working office owner is critical to making for a viable investment, it’s no less critical than the style and environment that is being provided to prospective space users as that is what is going to differentiate one coworking office from another.’

Scott Sassoon, Blender Workspace, NYC Co-Founder: ‘Blender Workspace offers a design-focused alternative to the myriad of co-working spaces opening in New York City. Our landlord considers Blender a building amenity, providing a turn-key workspace solution for new tenants transitioning to other full/half floors, or existing tenants in need of flexible space. Blender’s upscale aesthetic and strong hospitality services further bolster its value proposition to landlords seeking to reposition their assets for the lucrative TAMI office market. With an atmosphere that bridges lifestyle with workstyle, Blender proves that comfort and design can coexist.’

Economics, New Construction and ? ‘This year, the Midtown vacancy rate jumped 80 basis points to 9.5 percent after hitting a recent low of 8.8 percent at the end of 2015. The rise in vacancy is partially attributed to a 3 percent decline in new leasing activity year over year through October with 14.8 million square feet leased. Despite this, overall average asking rents are up 3.9 percent this year to $79.78 per square foot…‘ (Source)

‘In Manhattan during December, a record 26.4 percent of leases signed included some form of concession. In December of 2015, just 13.1 percent of leases included concessions…‘ (Source)

The nature of the beast is that some percentage of coworking tenants will fail!

‘Behind the rush toward co-working spaces is the growth of the freelance economy and the venture capital flowing into local startups that are the sector’s target market. Venture funding in New York increased 49% from 2014 to 2015 to reach $7 billion, according to research firm CB Insights. Meanwhile, there are 4.7 million freelancers in the New York metro region, according to a 2015 report commissioned by the Freelancers Union and Upwork.

Jason Bram, an economist for the Federal Reserve Bank of New York, says there’s still plenty of room for co-working spaces to grow in New York City because employment in the fields most likely to use shared space—tech, advertising, media and internet—is expanding by more than 10% a year…‘ (Source)

Of course, not every startup will survive. And when they fail if they are large enough and not easily replaced they could take their coworking space owner with them.

And if that occurs the impact on the building owner domiciling the coworking company could be significant.

Bottom-line is that the coworking model can be and is for many extremely lucrative, offering a very attractive ROI for the business owner!

Going forward will the market thrive and grow or become saturated seeing players fall to the wayside? Will an economic hiccup throw a wrench into the works? We will monitor and report back.

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