With WeWork Expected To Be Boston’s Largest Office Tenant, Experts Assess Coworking’s Risk Factor
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WeWork is on track to have Boston’s largest office footprint by year’s end, the latest benchmark in coworking’s rapid ascent in New England’s largest city.
Since first arriving in Boston in 2014, WeWork has quickly grown to be one of the largest tenants in the city. Deals this year include a 250K SF, 11-story lease at One Lincoln Street and a 29K SF lease at One Milk Street in downtown Boston. With anticipated deals at 95 Berkeley in the South End and 200 Berkeley in Back Bay later this year, the coworking giant is expected to have the largest office footprint in the city with roughly 1.5M SF.
But as the city’s entire coworking sector has grown to roughly 2.5M SF, Boston’s real estate experts are watching to see how this segment of the office market fares when the economy isn’t as strong.
“The general structure of Boston’s economy is so profoundly different than it was 10 years ago,” Colliers International Managing Director Aaron Jodka said. “Some of these companies have done well with a fantastic economic backdrop, but what happens when demand dries up and job losses occur?”
As much as real estate circles like to debate what inning the economic cycle is in at the moment, they also tussle over whether coworking providers or traditional landlords will perform better in an economic downturn.
Traditionalists will point to Regus’ bankruptcy filing after the dot-com bubble burst as a testament to coworking’s volatility when economic waters get choppy. Coworking brands will argue it is a different ballgame today, and tenants will crave flexibility rather than being locked into high rents in a down market.
But what also gives coworking more power in the next downturn is its large footprint and ability in recent years to be a viable place for bigger tenants to locate, if even just for a waiting period while a long-term space is being built.
“Anybody controlling that amount of real estate, by nature, will have some level of negotiating power,” Boston Realty Advisors Managing Director and Senior Partner Wil Catlin said. “It’s just part of the business.”
While not every landlord in Boston is willing to sign a deal with a coworking company, there are plenty who do, thanks to the coworking sector’s willingness to sign longer-term leases.
Technology, advertising, media and information, or TAMI, tenants account for 72% of Boston’s current office market, according to Catlin, and many of them aren’t comfortable with long-term leases.
The rise of coworking is expected to account for a 2% to 3% reduction in demand for office space by 2030, according to Green Street Advisors. While that shift could drive more landlords to court coworking brands, some lease structures are also shifting more risk to building owners.
Coworking companies typically pay above-market rent in exchange for higher tenant improvement allowances, Jodka said. WeWork often uses single-purpose entities for each of its leases, which often run as long as 15 years to sell landlords on the typically high build-out costs. Since the credited WeWork parent company isn’t backing most of the lease, it is easier to close one of its locations in the event of reduced demand.
“The leverage WeWork has created with these LLCs and high build-out costs is something landlords aren’t used to,” Jodka said. “Many have relinquished more power and control than they anticipated to this tenant.”
But for now, coworking and landlords are experiencing smooth sailing in Boston.
Greater Boston’s urban ring, including areas like Cambridge and Somerville, has 3.7M SF of coworking space and a little more than 1M SF of active requirements and pending deals, according to Avison Young Senior Research Analyst Tucker White. New entrants like Knotel and The Wing have joined the local coworking sector, and occupancy rates — at least publicly — appear to be fine.
Most coworking brands tend to say they are at 90% occupancy, White said. When Bisnow reached out to some of Boston’s leading coworking brands, representatives with the companies willing to share the data responded with similar figures.
Workbar and Industrious said their Boston locations were at 90% occupancy. The Downtown Crossing Workbar that opened on School Street last September is “exceeding its opening occupancy targets,” a company representative added.
The Yard is at 80% occupancy in Back Bay, company officials said. WeWork declined to comment.
Oficio, a Boston-based coworking company that recently shuttered its Fenway location, didn't respond to Bisnow’s request for comment.
Despite the momentum, some of those interviewed for this story still feel some type of coworking contraction will occur with a market correction, and that will likely change many landlord opinions about coworking.
“If stuff hits the fan, they’ll have to start folding locations if not enough debt and stock is raised in the coming months to sustain market-rate rents,” White said. “It’s a margin game, and I don’t think WeWork is going to swoop in and be the savior there. Deep-pocketed and creditable landlords will be.”
For others, WeWork and other coworking brands continue to impress with their growth and ability to reinvent the office game. It might be too soon to tell how the coworking cards will fall.
“We’ve had a strong market for years, and what everyone talked about is what does it look like on the downside for these coworking companies,” Catlin said. “We don’t know that answer yet. That part of the film hasn’t played yet.”