By Aaron Jodka | JANUARY 2019
At Colliers International’s 40th Annual Trends In the Real Estate Market Seminar, “Connecting the Dots,” the topic of coworking was front of mind. Coworking has had a profound impact on the real estate market: It’s a new food group that landlords, tenants, and capital sources are paying close attention to. It is disrupting the model of long-term leases, offering tenants flexibility and ease of entry.
There are numerous providers in this space in Boston, which—compared to other markets—is still in the early stages of coworking growth. In fact, in London, coworking represents 4.8% of the market’s occupancy, in 1,100 locations and with more than 100 different operators! Coworking is just 2.4% of occupancy in Boston. WeWork is the largest tenant in both New York and London. San Francisco has a larger coworking concentration than Boston as well. If those markets are a guide, coworking has the potential to grow dramatically here.
Our own Lauren Vecchione noted that locally WeWork has leased close to 1 million SF and currently has proposals out for hundreds of thousands of square feet, exploring Class A and B assets alike. Despite having no physical ownership in Boston, over time WeWork will become one of our city’s largest space providers and will continue to do more enterprise-type deals like the one in Related Beal’s Congress Square project—where
WeWork isn’t the only coworking game in town, as Industrious and Regus both look to expand their footprints. Also, there are new concepts like The Wing, coworking and community space for women, which recently opened at AEW’s building in the Back Bay.
And it seems that the attraction to coworking is not necessarily about the “one-size-fits-all” kind of solution we once thought of, with the allure of hip, collaborative spaces,
Acknowledging this market shift, some landlords are proactively accommodating their clients’ needs for flexible terms. Boston Properties successfully launched and leased its first FLEX location at the Pru and will open its second location at 100 Fed this coming June. Similarly, after a New York City trial run, in the next several months Tishman too will open its own flexible concept, branded “Studio,” at 125 High. Over the next several years, more landlords will roll out similar flexible solutions, potentially converting their more challenged spaces to accommodate changing tenant needs.
On the lending side, price discovery is still taking place. Colliers Boston’s Jeff Black mentioned speaking with a
Most lenders prefer to keep coworking tenants at under 50% of a building’s net rentable area; while this is just a rule of thumb, typically anything north of 50% gets treated as a single- tenant deal and the loan terms get dinged.
Lenders and rating agencies will want to understand the occupancy of the space and how profitable the location is, and
If a coworking company occupies a significant percentage of the building but its rates are in line with
We’ve found these underwriting themes to be consistent across the coworking, co-living and short-term housing operator space, so this is all highly relevant as
Keynote speaker Bryan Koop from Boston Properties also discussed the need for flexible terms and the opportunity that presents for landlords. Their typical model, of long-term leases to credit tenants and often for headquarters locations with 7–20-year terms, has served them well. Coworking tends to work for those seeking short-term options of less than one year, while the 1–5-year term presents an opportunity for landlords. This is where FLEX by Boston Properties will come in. The Prudential space is full, while 100 Federal Street and Hub on Causeway will roll out FLEX in the future. This is not coworking but fully designed space available for shorter, more flexible lease terms. It also gives Boston Properties better insight into tenant needs and allows it to form stronger relationships with tenants than a sublease through an existing tenant would allow.
Boston is still in the early stages of this coworking/flexible/service-office world. Tenants want flexibility and have more options than ever to find the space they want, in the locations they want, with the providers they want. But we have a long way to go before coworking here comes close to its share of London’s market. It will be important to watch coworking providers during the next market down cycle. Will they be the first to suffer, or will they provide refuge for companies in this emerging flexible environment?