“…may be the biggest disruption to real estate since the invention of the elevator.”
Rob Speyer, CEO of Tishman Speyer, Wall St. Journal, September 2019, talking about Co-working.
Co-working fills an obvious but challenging gap in the office property market – offering maximum flexibility to tenants by removing the duration risk of fixed term / fixed space leases. From its inception in 2005, exponential sector growth was driven by an increasingly buoyant office property market and a steady stream of start-ups that ensured minimal voids.
With a vaccine on the horizon, the global pandemic may become a non-issue; but has there been a permanent downshift in demand for city center office space? And if so, can the co-working model survive?
The sector was showing signs of saturation even before COVID, when heavily indebted WeWork pulled its planned $47bn IPO in September 2019, ending the year in the hands of Softbank with a more modest valuation of $5bn. CBRE noted a huge drop (75%) in flexible leasing demand in Q4 2019, mainly due to WeWork slamming on the brakes.
Consensus data shows a 30% – 40% increase in default probability over the past 6-8 months for companies with significant co-working exposure. This corresponds to single notch declines in credit quality on the traditional 21-category scale. For example, CRAs have downgraded WeWork – one of the few co-working firms assessed by agencies – from lower B to a range of CCC ratings; the credit consensus has followed a similar trend [please continue below to access full report].