/perspectives/sector-views/commercial-real-estate-debt-can-coworking-work

Commercial Real Estate Debt: Can Coworking Work?

WeWork’s failed IPO does not signal the demise of flexible office space.

December 23, 2019


This Commercial Real Estate Debt sector report is excerpted from the Fourth Quarter 2019 Fixed-Income Outlook.

Flexible space is a commercial real estate leasing model that offers office tenants short-term leases or memberships with access to amenities that they would not receive under traditional office leases. Small- and mid-sized businesses and mobile workers were early adopters, but large enterprises are increasingly seeking flexible office platforms. Flexible space is often equated with tenants such as WeWork or Regus that lease large, long-term blocks of space from property owners, build out that space, and then sublease the space or sell memberships to use the space to short-term users. The core business model of such operators is tenant intermediation: operators pay less in rent to the property owner than they charge their customers to use the space.

While coworking spaces are not new, the market has accelerated rapidly over the past five years.

Coworking Office Spaces Gain Market Share

While coworking spaces are not new, the market has accelerated rapidly over the past five years.

Coworking Office Spaces Gain Market Share

Source: Guggenheim Investments, JLL Research. Data as of 9.30.2019.

Traditional office space owners have responded to the rise of coworking companies by launching their own flexible office spaces, choosing to collect rents directly from users rather than take the risk of a long-term coworking operator lease. In doing so, they rely on a third-party coworking management company to build out and manage the space under a more traditional property management agreement.

Lenders view significant exposure to flexible office use with caution, preferring the certainty of long-term leases with creditworthy tenants. Transient tenants make the asset vulnerable to general market trends and can demand much higher capital expenditures for tenant improvements. CBRE recently concluded that buildings with a high concentration of coworking companies may yield a lower price in the investment sales market, and that once coworking as a percentage of tenancy exceeds 40 percent, the asset may see higher cap rates.

While the ultimate success of the flexible office space model is still uncertain, its rapid growth represents a macroeconomic trend that may influence the office sector for years to come. Regardless of the ultimate fate of one coworking company, we believe the growing demand for turnkey service without long-term commitments in our technologically dynamic, gig-economy world means that flexible office spaces are here to stay.

U.S. Flexible Workspace Operators in 19 Leading Office Markets

While WeWork represents the lion's share of the flexible offce space market, growing demand for turnkey service without long-term commitment has fostered a thriving market.

U.S. Flexible Workspace Operators in 19 Leading Office Markets

Source: Guggenheim Investments, Colliers International. Data as of 9.30.2019.

—Jennifer A. Marler, Senior Managing Director; Margot Latham, Managing Director; Zach Johnson, Vice President

 
Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


FEATURED PERSPECTIVES

September 29, 2020

Guggenheim’s 2020 Election Portfolios

Our portfolios are constructed based on the key aspects of each candidate’s policy agenda that we believe will move markets. We will publish daily updates in the run up to the presidential election on Nov. 3, 2020.

August 19, 2020

The Impact of the Fed’s Corporate Credit Facilities

As a result of the Federal Reserve’s efforts to shore up credit markets, the leveraged credit sector has delivered stellar performance since the lows in March.

July 29, 2020

China Matters More Than Ever

Cooperation and understanding between China and United States is vital as global economic and environmental challenges mount.


VIDEO

Third Quarter Outlook 

Third Quarter 2020 Outlook

Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.

2020 Macro Themes 

Macro Themes for 2020

Brian Smedley, Head of Macroeconomic and Investment Research, discusses major trends likely to shape markets this year.







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.