Green Street: ‘Co-working trend has legs’

Despite Brookfield’s failed IWG bid, more real estate companies are likely to partner with serviced-office providers, said the research and advisory firm’s head office analyst.

Brookfield Asset Management’s pursuit of the world’s biggest serviced-office group may now have collapsed, but the co-working space is expected to remain an attractive investment opportunity for private equity real estate firms, according to research and advisory firm Green Street Advisors.

Brookfield and private equity firm Onex made a series of offers for IWG, known for its Regus brand, beginning in January. After the Toronto-based partners’ third offer was rejected, they abandoned the deal earlier this month. A spokeswoman for Brookfield declined to comment, but PERE understands the firm would have invested through its private equity arm.

Brookfield is far from the only real estate company seeking to capitalize on the success of co-working giants such as New York-based WeWork, which launched a fund to become a real estate investor itself. In June, for example, Blackstone bought a majority stake in The Office Group using equity from its fifth European real estate fund for an undisclosed price. TOG’s 36 offices, mainly in London, provide flexible workspaces for over 15,000 members, with corporate clients including AOL, Dropbox and Santander.

“Companies like Blackstone and Brookfield seem to be making bets that the co-working trend has legs and they can profit from participating in its continued growth,” Jed Reagan, the head office analyst for Green Street Advisors, told PERE. “It is also hard to ignore WeWork’s $20 billion private market valuation, which is higher than many publicly traded office real estate companies that own much more space than WeWork leases.”

Traditional landlords may invest in co-working businesses as a hedge against the threat the trend poses to office ownership, he added. These private real estate players could become competitors to WeWork, but face obstacles including WeWork’s head start in expertise, cost efficiencies and brand presence.

“Acquiring an established co-working operator could be one avenue for doing this, but for most real estate companies, the tuition costs of starting a large co-working platform from scratch and trying to make a go of it is a dicey proposition that most will likely avoid,” Reagan said. “You’re likely to see more companies eyeing partnerships with co-working firms or other office service providers, similar to Brookfield’s deal with Convene.”

In 2016, Brookfield began investing in New York-based Convene, a flexible meeting space provider. Brookfield Property Partners, the firm’s listed real estate arm, has worked with Convene to install flexible work and meeting spaces at multiple properties.

As more companies enter the managed office space, Reagan notes that they add increase options for corporate business tenants, a major push for WeWork right now.

“This could be bad news for traditional office owners if more and more large companies are signing flexible leases with co-working firms rather than longer-term leases directly with a landlord,” he said. “Since co-working space tends to be much denser than traditional office space, on a per square foot per worker basis, it could hurt long-term office demand. It could also erode average office lease terms, hurt net operating income and increase capital expenditure needs in an already capital-intensive business.”

Other major private real estate players have preferred to install WeWork as a tenant rather than compete with other brands. Ivanhoé Cambridge, for example, owns buildings with WeWork locations in New York, Denver and other locations. Bill Tresham, Ivanhoé’s strategic advisor and former president, praised WeWork as a tenant but was wary of its real estate ambitions when he spoke at a conference in 2016.

“Better off that you go into these larger places where you have landlords with lots of capital,” Tresham said. “I’d say, ‘Don’t waste your money on real estate,’ because there are lots of people with real estate capital.”