Companies like Regus and Servcorp have been around for decades offering users a serviced office product not too removed from the “flexible” or “coworking” offers we see much more of today. The rise, and more recent fall, of WeWork though has put a former mundane sector under the microscope.
All it took to elevate the beige-painted, fluorescently-lit serviced office concept to a higher plane in our collective consciousness was fresh paint, free-flowing kombucha, a charismatic CEO, and a mission statement differentiating the WeWork business model from its many “office hotel”1 peers.
As a result, the coworking movement has been tethered to the highs and lows of WeWork’s seemingly endless expansion. Until the failure of The We Company’s proposed US$47 billion2 IPO, which has now been scrapped, that is.
AREIT investors are now surveying the discrete impacts of WeWork’s current travails. Of more importance are the system-wide implications of a potential collapse. What might be the lasting effects on tenant behaviours and expectations that this and other co-working groups have spawned?
Despite the illusion of difference, WeWork’s business model was little different to that of other coworking companies; sign-up for real estate on long term leases at a rent lower than the one being charged to end users on a far shorter time frame. That’s coworking in a nutshell.
Somewhere along the way aggressive expansion, the free flow of investor capital and public pronouncements of wanting to change the world blurred the line between tech unicorn and rental arbitrageur.
Regardless of WeWork’s longevity, coworking has broadened the appeal of office premises. That’s a good thing for the markets in which we invest. Nevertheless, we must assess the likely fallout from the potential demise of this interrupted disruptor.
Dexus Group (DXS.ASX) is the country’s largest listed office landlord. Currently, it has two tenancies leased to WeWork, comprising about 0.60% of the portfolio’s total income. Both spaces are located within the tightly-held Sydney market. We are told they enjoy 90-95% utilisation3. Among the AREITs in which we invest, the discrete impact of WeWork’s potential failure is minimal.
It’s also worth noting that other major AREIT office landlords, while happy to support multiple coworking brands, have been reticent to extend any level of portfolio access to WeWork due to concerns over the group’s lower-quality start-up, sole-proprietor tenant base.
What about the Sydney and Melbourne office markets, where AREITs have the greatest exposure? The rise of coworking has been swift. The sector now accounts for 23% of all net absorption since 20164.
While WeWork has been a large component of this growth, overall coworking tenant penetration remains low in absolute terms – less than 10% even in the cities like New York and London, where coworking has really taken hold. Relative to such cities, the market penetration in Sydney and Melbourne is even less.