Will Coworking Space Affect Office Appraisals?

coworkingHow is the growing popularity of coworking space—office space shared, usually temporarily, by different individuals and organizations—going to affect the commercial appraisal industry? The question is much asked, but answers are hard to find—mainly because they’re still being formulated.

At present, it appears that the use of office space for this purpose won’t affect property values much, so long as someone is paying the rent on that space. In many cases, that space is leased to, or owned by, a company that specializes in the management of coworking space—and that entity is obliged to pay for it, whether or not the space is rented to sub-lessees. Probably, appraisers will need to pay attention to this matter only if they specialize in office properties in heavily populated urban areas.

Such buildings are typically traded by large-scale property owners such as REITs, institutions, full-service real estate companies, and high-net-worth individuals. These investors usually have in-house appraisers and ready access to capital. The role of the appraiser, with regard to their properties, is considerably different from appraising single-family homes or smaller suburban commercial buildings.

Coworking space might well affect the way individual appraisers do business. As this sort of space becomes more readily available, some appraisers might find that they appreciate the energy of such a workplace, and will choose to rent space there rather than working out of their homes or a permanent office. Some appraisal companies could conceivably find coworking space more cost-effective than maintaining a dedicated workplace. We can expect to see considerable variation, market to market.

Shared office spaces are gaining appeal with entrepreneurs, startup companies, and employees of larger companies who find it more convenient to work away from headquarters—and this could influence the way commercial property owners value and price their space. Nearly 15,000 coworking spaces currently exist, worldwide, having grown by approximately 200 percent in the past five years. They’re especially popular in the largest international cities in the U.S., Western Europe, and the Asia-Pacific region.

The growth of coworking space is due largely to the fact that today’s technology allows many workers to work from just about anywhere. It’s partly also a reaction to high office rents in most major markets. Coworking space, which can be rented by the hour, day, week, month, or year and provides access to basic office facilities, often represents a cost-effective solution—especially to a company that might consist of three or four people who need considerable face-time with each other. Such space can be plain or fancy, bare-bones or service-oriented.

Typically, coworking space is owned, or leased long-term, by a company with a business model that looks quite a lot like any other owner of commercial office space. These spaces can range from open-plan offices where the space is “hoteled”—that is, you drop in whenever you need to, pay an hourly or daily rent, and sit wherever there’s space—to dedicated offices or even executive suites that might be rented for a term of years.

Alley, one of these companies, opened its first location in Manhattan’s Midtown South in 2011, at which time 90 percent of its space was filled with open desks. More recently, Alley opened a location where 90 percent of the space consists of dedicated desks and private offices. Regus, for another example, works mainly with startups and consultants who want Class A space with a full menu of conveniences. WeWork leases office space wholesale, then sublets it to “members,” of which it has more than 25,000 in 18 cities worldwide.

Executive suites represent the highest end of coworking space. There, the tenant typically has access to a full range of office equipment, and perhaps a kitchen, without having to sign a multi-year lease (although a security deposit is typically required). But many workers prefer a low-end arrangement, where they can network and exchange ideas with people from different industries—and maybe cook up a joint venture or two.

For the property owner who might have a sudden and significant vacancy, turning it into coworking space often serves as a temporary stop-gap. Leasing that space to a company that specializes in coworking space might prove a permanent solution. An owner who is contemplating the latter course needs to examine the credit and the business model of that company—not the credentials of those who might end up actually using the space. Of course, it’s always a good idea to investigate the demographics of the neighborhood, to determine whether demand for such space exists nearby.

How is this type of space likely to affect the value of the building, and how will it affect the way an appraiser looks at that building?

As to the former question, these coworking spaces don’t seem to be significantly harming property values. As long as the space is rented, and the owner is getting an acceptable return, these buildings are likely to trade at good prices. Their value might even increase, if the traffic from these transient workers positively impacts other tenants in the building and nearby, such as restaurants or dry cleaners.

Appraisers will probably look at a building that contains coworking space in the same manner as any other office building. If that space is leased, with little likelihood of turnover or default, it’s just another office tenant. If the building’s owner is renting out coworking space directly, that might change matters somewhat. However, it will still me a matter of, “Are the tenants paying their bills?” Of course, appraisers may one day have more information about the reliability of coworking spaces in terms of their income production.

As for whether an individual appraiser or an appraisal firm would want to use coworking space, themselves, it might be an ideal arrangement for at least some appraisers—especially entrepreneurial types who are interested in building a bigger network and looking for outside-the-box opportunities.

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Article written by Joseph Dobrian. Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at [email protected].

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