Co-Working Spaces Attract NYC Tech, Startups Amid CRE Underwriting Challenges

Co-working spaces will play a significant role in commercial real estate. The shared office spaces may pose challenges to underwriting and valuation standards for the commercial mortgage-backed securities market, according to a recent report released by Morningstar Credit Ratings.

Since co-working’s kickoff with executive suite giant Regus PLC, the number of spaces climbed to about 7,800 globally — a 36% rise between 2014 and 2015 — as stated in a survey conducted by co-working magazine Deskmag. Even with this rapid growth, companies lease roughly 1 million square feet backing just 1.1% of the $139.32 billion in outstanding CMBS office loans, as of November 2016. That’s a small portion of the 849.9 million square feet of leasable office space that secures these loans. Nevertheless, co-working, which typically involves individual members or member businesses paying a fee to share office space, is spreading quickly, evolving with pioneering rental models and innovative service offerings.

Independent professionals, freelancers, technology companies and even corporations are typical tenants who occupy co-working spaces. It’s popular with many startups who are looking for an affordable, professional space to launch their company.

How this works is the co-working sponsor leases space from the primary landlord and then subleases to individuals or corporations by desk, private office, or suite. The operator provides flexible terms, various amenities, and building programs to create a strong sense of collaboration and synergy.

Co-working spaces have been largely occupied by independent workers seeking a cost-effective place to work outside the home, but corporate occupiers are showing increased interest in shared workplaces. Although millennials are major influencers of office design and will most likely factor into how companies address co-working, they aren’t solely behind the trend. According to CBRE Group, Inc., 63% of workers using these spaces are between the ages of 31 and 50, and less than 25% are millennials.

In New York City, WeWork dominates the co-working scene with 36 locations. Some other notables include, Corporate Suites, which has eight locations in the city, The Yard (eight, soon to be nine), Work Better (five) and Alley NYC (four).