Empire State Realty CEO Tony Malkin: Coworking Is The 'Donald Trump Of This Cycle'
Coworking has accelerated at breakneck speed this year, forcing many landlords to face up to the fact the phenomenon is not a passing fad. But while many of the city’s biggest office property owners embrace coworking brands, others are digging in their heels.
Empire State Realty Trust, for one, does not have any coworking providers in its 10M SF portfolio. ESRT Chairman and CEO Anthony Malkin’s ongoing skepticism suggests there probably won’t be any coworking lease announcements anytime soon.
“Don’t kid yourself, these are disrupters, they are seeking to disrupt the relationship of the landlord to the tenant. They are seeking to disrupt the relationship of the landlord to the broker,” Malkin said at Bisnow’s New York State of the Market event last week.
“Personally, I think shared office/coworking are the Donald Trump of this cycle," he continued. "I’m referring to when he borrowed so much money in the late '80s so that by the early '90s, the bankers got together and said, ‘It's better to put him on an allowance and support his lifestyle than to let him go bust.’”
Coworking leases have been the driving force of New York City’s office leasing market this year. WeWork, the largest private tenant in Manhattan, now has a footprint of at least 7.2M SF in the city.
Knotel expects to surpass 2M SF by the end of the year, and Amsterdam-based Spaces bagged around 300K SF in the third quarter alone. This swift rise, and what it means for the city’s commercial real estate environment, was a major topic among speakers at the event.
“The coworking thing, people didn’t see coming, and what I don’t think people see coming is how it will continue ... the dynamic of current companies is such that they need flexibility,” Muss Development principal Jason Muss said, adding that he believes a healthy pipeline of companies seeking small space is a good thing.
“Even if 5% or 10% of [the startups] hit, they are going to become large tenants and they are going to need stability and they will need larger spaces for longer.”
Kushner Cos. President Laurent Morali described coworking as an unavoidable reality.
"A lot people ... say, 'Oh, I am waiting for WeWork to fail. It's not going to happen. It's too late," he said. "It's not only for small companies ... now you have corporate America renting space from WeWork.”
Coworking was once considered the realm of fragile startups and freelancers that would seek long-term, traditional spaces once off training wheels.
But its increasing popularity with more established tenants has meant many landlords have begun to consider how they can get a piece of the pie.
Tishman Speyer, for example, created its own coworking outfit called Studio, and brokerage CBRE announced its coworking operation in October called Hana, much to the displeasure of some coworking operators.
Major REITs SL Green and Columbia Property Trust have agreed to hand over entire office buildings to WeWork, while Rudin Management is co-developing Dock72, a 675K SF building at the Brooklyn Navy Yard, with the coworking giant.
Others operators, like RXR Realty and Blackstone, are opting to form partnerships and management agreements with coworking providers, an arrangement WeWork has said it is now pursuing more aggressively in the United States.
“The question is, does your capital stack allow you to take the risk on the downside? How will your lenders, partners look at this? You may not be able to underwrite that,” said Colliers International New York Tri-State President Michael Cohen of landlords’ arrangements with coworking providers. “I think we are going to see a lot of balancing out there, as the different owners and different operators seek solutions along that continuum.”
The aggressive growth of coworking unnerves some people, many of whom worry such a widespread reliance on it would leave the city’s office buildings in a precarious position in the event of a downturn.
Malkin said that while his company hasn’t done any coworking leases, there are still lessons to be learned.
“It’s the pain points. The lease process is annoying, the move is difficult, choosing furniture is tough, IT is a challenge,” he said, adding that ESRT is responding by redoing its pre-built leases to reduce the negotiation time down to five days and will provide “vetted” consultants to assist with the move in process.
“We have to make these things more fun and minimize the pain points,” he said.
Oxford Properties Group Head of New York Leasing Adam Frazier said WeWork has proved that tenants want to be in office buildings where employees can be most productive. Google is reportedly planning to either buy or lease Oxford’s St. John’s Terminal complex, a 1.3M SF office redevelopment.
WeWork Chief Development Officer Granit Gjonbalaj said in the past, companies haven't adapted as the needs of the employees change.
“And the minute that [companies figure out what employees need], they design this beautiful space, they build it out and then the architect disappears,” he said. “I think that's the problem that me and my team are very excited about cracking.”
Vornado Executive Vice President Glen Weiss said there are still plenty of companies seeking traditional, long-term leases.
“A lot of tenants still love to have their long-term space … they love to create their own culture,” he said, adding that coworking has been around for decades and a welcome part of the market. “I think it's really, really healthy ... There's plenty of room for all of us to play and be very successful."