The idea of investing in shared office space, has recently received more mainstream notoriety thanks to efforts by so-called unicorn WeWork to launch an initial public offering (IPO).
Advisors and investors should tread carefully when measuring the validity of the shared space investment thesis against WeWork because the company has myriad issues to work through. Like so many in the unicorn realm, including Uber, WeWork has been around for years, but is not yet profitable. In fact, the shared space company is nine years old and has yet to shed its money-losing ways.
Earlier this year, the New York-based company said it was seeking an IPO at a valuation of $47 billion with Goldman Sachs saying WeWork could eventually be a $65 billion firm. However, the tide has turned against WeWork.
Sources close to the matter said the company “was said to be considering a market debut at a
valuation of $20 billion to $30 billion just last week. The range could end up closer to $20 billion,”
reports Bloomberg.
WeWork has issues to work through, but the company's struggles belie opportunity in the shared space/coworking investment niches, a market segment undergoing significant growth.
What Say The Data
Currently, the combined global market value of flexible work spaces is around $26 billion, implying a significant runway for growth.
Through “ 2022, the number of coworking spaces is expected to grow at an annual rate of 6% in the U.S. and 13% elsewhere,”
according to AllWork.
Coworking and shared space are disrupting the normally staid commercial real estate industry, data suggest the trend is here to stay and the trend is global.
“By 2030, the flexible workspace market is expected to represent 30% of U.S. office stock,” notes AllWork. “Coworking spaces accounted for almost 10% of space leased in Manhattan in the first half of 2018. Europe is forecast to see 255 million square feet of flexible space in 2019, which represents a 12% increase. Flexible workspaces are expected to make up 7% of the London Commercial Real Estate market in 2019.”
Allure And Access
For advisors, understanding the allure of coworking spaces as an investment idea is an important part of having an informed conversation with clients on the subject. As is the case with other commercial real estate (CRE) investments, the shared space thesis includes a steady income proposition.
“A Coworking space, on average, can yield 2 to 3 times more revenue per square foot over a traditional space,”
notes Yardi Kube. “A CRE investor can drastically increase income by converting vacancies into Coworking spaces.”
CRE investments, include shared space, do not possess the barriers to entry many investors expect. For example, advisors can direct clients to a limited partner with a broad CRE portfolio. This gives the client diversification and puts them on the same team as industry veterans.
“This gives investors the ability to mitigate some risk by teaming up with battle-tested investing veterans,” according to Forbes.
Advisors can also discuss with clients the franchise route, which is available via several dedicated coworking real estate firms, including Venture X. This scenario is most applicable for highly affluent clients with robust liquidity. As Venture X points out, “many of our franchisees spend between $1.1-$3.4 million before any real estate concessions or financing options on their coworking space franchise. Investors should expect to have at least $450,000 in liquid capital to qualify.”
For clients considering the franchise model, advisors should highlight benefits, such established branding and experienced management, as well as drawbacks, including high upfront costs, advertising fees, revenue sharing and limitations on personal creativity within the shared space.
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