Will Co-Working Spaces like WeWork be the Future of Office Real Estate

A Tishman Speyer co-working space at Rockefeller Center in New York PHOTO: GENSLER/TISHMAN SPEYER

Large landlord are re-acting to the disruption created by co-working start-ups.

WeWork has been covered extensively recently due to their planned IPO, specifically, regarding the value of its company.

The Wall St. Journal spoke with Charlie Kuntz, the chief innovation officer of Hines Interests LP, and other landlords regarding WeWork and common use office spaces.

Charlie Kuntz said that in the the beginning WeWork would lease unused space in their porperties and rent it to businesses too tiny to be ordinary tenants. But it didn’t stop there, WeWork began going straight to large corporations too. Over a short period of time WeWork went from being a great customer of Hines’s core business to a bug competitor. WeWork’s move reminded like Kuntz of how Airbnb Inc. stole business from hotels and how taxicab companies saw Uber and Lyft eat their lunch.

“It’s not too late for us,” Gerald Hines, the 94-year-old family patriarch and CEO’s father, told the group.

This June, the Kuntz decided to fight back. It launched its own co-working business, called Hines Squared, as a direct competitor to WeWork. Hines is not the only landlord to do so. Boston Properties, British Land PLC, and Tishman Speyer, to name a few have done the same.

The big question is can large office-building owners avoid an Uber-like undermining of their business.

We said in its IPO filing that 40% of WeWork’s business now seeks to sign up larger enterprises, rather than the smaller entrepreneurs and microbusinesses the firm initially targeted with deals offering flexible lease lengths and amenity-filled work spaces.

“We have disrupted the largest asset class in the world—real estate,” We’s IPO statement boasts.

 Amol Sarva, CEO of another co-working startup, Knotel Inc., shrugs off the efforts of the legacy landlords, saying they have been notoriously slow to adopt new technology. “This movie has played many times before,” Mr. Sarva said. “Life will be hard for incumbent businesses that try to compete with the newcomers.”

While some landlords are willing to create partnership with co-work spaces, in which expenses and profits would be shared, others have decided to refuse to lease space to a company like WeWork.

“Why would a landlord fund someone who is trying to disrupt their entire business,” said Anthony Malkin, CEO of Empire State Realty Trust ,owner of the Empire State Building and other New York buildings. “I think it has been shortsighted, lazy and unintelligent.”

One landlord, RXR Realty LLC, decided to team up with WeWork in May to operate 90,000 square feet at 75 Rockefeller Plaza in New York. “We do want to align with the landlord,” said WeWork’s chief real estate development officer, Granit Gjonbalaj, earlier this year.

Co-working “may be the biggest disruption to real estate since the invention of the elevator,” said Rob Speyer, the CEO of Tishman Speyer.

Traditionally office leases are very complicated and leave little wiggle room for the tenants, but the co-working leases are much more flexible in their terms. Part of the disruption to the industry is this dichotomy. Recently, Verizon Communications, Inc. signed more than 60 flexible-space deals with co-working startups world-wide.

A co-working firm might charge $110 per square foot per year for space that a large landlord would lease directly to a tenant for only $50, said John Vazquez, Verizon’s head of real estate. Yet the costs come out about the same, he has found, because flexible space is more efficient and the co-working firm, not the tenant, spends the money to outfit and design the space.

”If I can use someone else’s capital and shorten my time commitment and my financial commitments, how is that not a win for me?” Mr.  Vazquez said.

Landlords are now taking steps that include being uncharacteristically open with one another. An “owners council” that includes Hines,Brookfield Asset Management Inc., Blackstone Group LP, RXR and British Land has quietly started to meet to discuss the threat of technological change and how they might join forces to deal with it, according to people familiar with the matter.

A major topic is the threat posed from co-working. “We’re all trying to explore this brave new world together,” said Hines’s Mr. Kuntz.

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