Are Coworking Operators Like WeWork a Threat or an Ally for Commercial Landlords?

A recent blog post published in Finance & Commerce entitled “Landlords, rivals push back against WeWork” expresses concerns from some landlords and their brokers that WeWork is stepping on their turf.

The article is interesting, and I thought it would be worthwhile for me to highlight some partial agreement with the author’s analysis, while sharing some divergent and expanded views as well on the evolving nature of Landlord/Operator relationships.

WeWork Window Sign San Francisco 201 Spear Street

  1. A new $42 bln valuation for WeWork.
    This is the highest number I have come across so far and a mind-blowing reflection of WeWork’s disruptive nature, as seen by WeWork’s investors. We could be a bit skeptical of that number until we can review the (private) agreement for the last capital infusion by SoftBank. Restrictions and conditions applied to WeWork on capital repayments, conversion options, and other features in the deal may considerably lower any nominal valuation. But no matter the exact number, that valuation remains gigantic, and way out of range of the multiples experienced by publicly traded companies in the sector. Clearly SoftBank is comfortable with the progress made by the company as they keep on funding. Clearly WeWork, and by extension, the entire coworking industry, is perceived as a disruptive force in the traditional commercial real estate world.

2.   Landlords’ Attitude is changing.
“More than a dozen real estate and banking executives interviewed by Bloomberg expressed misgivings about working with the start-up,” says the Finance & Commerce article – well, maybe, but let’s not forget that for one dozen skeptics, you have several dozens of landlords who are raising their hands to attract WeWork in their buildings, even though WeWork has, in many cases, replaced the fat Letters of Credit or Security deposits of the past with meaningless guarantees for the first 6 months or 12 months of rent. It’s not difficult to guarantee the first year of rent… when 9+ months of it is free! If landlords’ attitudes have changed, it is that WeWork, and the entire coworking industry, is being more actively sought after by landlords throughout the country than it ever has. A dozen skeptics won’t stop this powerful wave.

3. Reduced Collateral in Leases.
We can also point out that the considerable drop in security collateral experienced by landlords with coworking players in the last few years does not put their project necessarily in a more fragile financial situation. The best collateral of a coworking operation is the operation itself, with hundreds of members sending recurring payments every month which won’t disappear, because their business identity is tied to that location. There is more than meets the eye than an apparent threat to the financial stability of these collateral-less transactions.

Lease Agreement CloudVO Blog WeWork and Landlords

4.   Debunking the myth of Corporate Guarantees.
Corporate guarantees can be very dangerous for landlords by giving a sense of false security. They were the reason why Regus filed for Chapter 11 in 2002, by creating a domino effect due to growth that was too aggressive in the Western US during the dot-com boom of the late nineties. The majority of their assets were performing well, but a series of imprudent leases, with corporate guarantees, at the peak of the market created a domino effect that affected all landlords. Under Chapter 11, Regus could attempt to restructure all of their leases, including with well performing locations. That did not help the Regus landlords in any way, corporate guarantee in hand or not. What saved them were other flexible space operators taking over the locations vacated by Regus.

That is how Pacific Workplaces (Pac) experienced its initial growth 15 years ago, by taking over a former Regus franchise location in Walnut Creek, California when they failed on their rent obligations. The Landlord in the end did not need the collateral, corporate guarantees, or personal guarantees that Pac would not offer (at the time Pac had only 2 existing locations). They cared that a knowledgeable operator would optimize the operation and pay market rent. That approach served them well. Two lease renewals and two lease expansions later, Pacific Workplaces Walnut Creek has never failed on its rent obligation, has become the largest tenant in the building, all to the delight of happy asset managers!

CloudVO Sister Company Pacific Workplaces Walnut Creek new coworking space and lounge

Formerly a Regus/HQ, Pacific Workplaces acquired its location in Walnut Creek, CA in 2004.  The location just completed a successful space refresh and offers all shared workspace options including coworking memberships, virtual office plans, private offices, and meeting rooms.

 

  1. Disruption of the tenant-landlord-broker relationships.
    “It’s more about disrupting the relationship of tenants to landlord, of tenants to brokers, of brokers to landlords,” writes the author in the Finance & Commerce article. There is much truth in that statement. WeWork is understandably in the spotlight, but the entire coworking industry is a threat to brokers in that it dis-intermediates the function of a broker for small space requirements, an increasingly large section of the market. The demand is meeting the supply online. For example, 85% of the leads of Pacific Workplaces, a California-based coworking operator with 18 locations, come from online channels, and only 1% come from traditional brokers. Online leads can originate from the operator’s own digital marketing efforts and from resellers and marketplace providers like CloudVO or Liquidspace, who are successful disrupting the role of traditional brokers, in part due to the more transparent nature of their online transactions, a refreshing approach, in contrast to the chronic opacity of traditional commercial real estate transactions. On the Enterprise segment of the market, companies with a large network of locations like Regus, WeWork or CloudVO have their own corporate account infrastructure that relies a lot less on traditional brokers and feeds off of what was once the brokerage word reserved territory.

6.  WeWork and Coworking Operators a threat to Landlords?
That is what the author of the Finance & Commerce piece argues. I think the truth is more subtle than laid out in that article. First, as a buyer of commercial buildings, it seems to me that WeWork is a beneficial player for the owners of assets they purchase, in that WeWork was the highest bidder. Otherwise the owner would presumably not have sold. Second, the trends towards mobility, the consumerization of the workplace, the continued decrease in corporate footprint per employee, are all threats to landlords in that the need for traditional commercial space is shrinking. Coworking and other forms of flexible office spaces are enabling these trends, but the threat to landlord is the trend, not the flexible office space operators. In fact, Coworking operators are natural partners for landlords to take advantage of that new secular trend. Managing coworking spaces is an entirely different profession than property management. Just as hotel landlords bring in franchise operators to manage the hotel (and don’t try to do it themselves), commercial office landlords need professional coworking operators to manage that new exploding demand.

Written by  Laurent Dhollande, CEO of CloudVO and Pacific Workplaces


About CloudVO

CloudVO is the umbrella brand of Cloud Officing Corp., headquartered in San Francisco, California. CloudVO’s mission is to provide comprehensive virtual office, coworking and meeting room solutions to professionals under a Workplace-as-a-Service™ model. CloudVO grants preferential access to day offices, coworking space, and professional meeting rooms in 700 locations worldwide for distributed workers on a subscription or a pay-per-use basis.

Nextspace Coworking Acquisition by Pacific Workplaces: Why? How? And Lessons Learned.

Laurent, CloudVO and Pacific Workplaces CEO, recently shared Pacific Workplaces’ experience with the recent acquisition of NextSpace Coworking locations in a presentation to Coworking Europe in Dublin, Ireland. That presentation led to much discussion, interest, and requests for slides by coworking operators that did not have a chance to make it to the Dublin conference.

Laurent accepted to record the presentation after the event, and make it available for viewing through our blog, thinking that the slides alone fell a bit short to understand his responses to the questions he had been asked to address:

  • What drove the acquisition?
  • Why Pacific Workplaces refer to it as a merger?
  • What were the motivations behind the acquisitions?
  • What were the challenges
  • Lessons learned

What attracted much attention to this merger/acquisition was that the companies came from very different directions in the shared office industry.

NextSpace is a legendary name in the open coworking industry, with charismatic co-founders that attracted the spotlights as leaders of the coworking movement in the last decade. To this day, people come from all over the world to see how coworking is being done at NextSpace Santa Cruz and NextSpace Berkeley. In the last few weeks alone co-founder Ryan Coonerty hosted delegations from China and Japan of folks wanting to learn about how the best of coworking was being done.

Our partner (and CloudVO’s sister company) Pacific Workplaces, which at its inception came from a serviced office concept, has attracted its own spotlights from the industry, thanks to its methodical building of a highly performant portfolio of flexible office spaces, it’s success with virtual offices, and its own leaders highly respected profile in the coworking and flexible office space industry.


About CloudVO ™

CloudVO   is the umbrella brand of Cloud Officing Corp, headquartered in San Francisco, California. CloudVO’s mission is to provide comprehensive virtual office, coworking and meeting room solutions to professionals under a Workplace-as-a-Service™ model. CloudVO operates the  CloudMeetingRooms.com  and  CloudVirtualOffice.com  e-commerce sites and grants preferential access to day offices, coworking space, and professional meeting rooms at close to 600 locations worldwide for distributed workers on a subscription or a pay-per-use basis.

About Pacific Workplaces

(Pac) manages 19 shared office space locations, mostly in California, that offer a wide range of part-time and full-time office space, including virtual offices, private offices, open coworking, and mini-suites, with curated communities of professionals who help each other be successful in their respective enterprises. Members have access to furnished offices, hot desks, meeting rooms, VoIP telephony, unified messaging, phone answering services, IT support, admin support, online legal library, and to our CloudTouchdown network of day offices and meeting spaces with over 650 locations worldwide, under a subscription or a pay-per-use hosted model   Pac refers to as Workplace-as-a-Service.™ Pac partners with landlords to develop and operate coworking and other types of shared office spaces. The  Pac model responds to trends toward a more distributed workforce, increased flexibility, sustainability, the desire to join professional communities, with a growing demand from professionals associated with small and large firms alike.  All   Pac centers are operated by PBC Management LLC under the Pacific Workplaces, Enerspace Coworking, and Nextspace Coworking brands.

 

 

State of CA Gives Formal Blessing on Virtual Office for Solo Attorneys

The CA State Bar has weighed in on licensed solo practitioners wishing to establish a virtual law office.

California Virtual Law OfficeThe CA State Bar has weighed in on licensed solo practitioners wishing to establish a virtual law office (VLO) also referred to as: digital law, online law, eLawyering and Law Firm 2.0. VLO, as a term, in general refers to “the delivery of and payment for legal services exclusively or nearly exclusively through the law firms portal on a website.”

We received a copy of the CA State Bar’s Committee on Professional Responsibility and Conduct’s findings on this issue.  Very interesting!

The Committee’s findings included the following discussion:

“As a result of ever increasing innovations in technology, the world has moved significantly toward internet communications – through email, chats, blogs, social networking sites and message boards.  The legal services industry has not been untouched by they innovations and the use of technology, including the internet, is becoming more common and even necessary, in the provision of legal services.  Consistent with this trend, and with the benefits of convenience, flexibility, and cost reduction, the provision of legal services via a VLO has started to emerge as an increasingly viable vehicle in which to deliver accessible and affordable legal services to the general public.“ Formal Opinion No. 2012-184

For those in the workspace industry in CA this is great news to further enhance our already fantastic relationship with those business that provide legal services.  In fact, we have seen recently the introduction of Attorney specific work places that provide cubicles for attorneys rather than the traditional corner window office, many of us imagine this subset of clientele requires.   As workspace providers we need to stay current with the technology options that will make us even better partners with VLO attorneys.

We have seen other states recently, Virginia comes to mind, that have found that the attorneys must practice in an office setting.  I suspect there are others as well that prefer to mandate a more traditional approach, but it will be interesting to see if the ‘benefits of convenience, flexibility and cost reduction’ that CA recognizes, doesn’t draw other states to the same conclusion; that embracing technology rather than the ‘old ways’ will ultimately provide a better consumer experience for those needing legal counsel. Join our Workplace-as-a-Service™ LinkedIN Discussion Group for more data-driven discussions with our community of workspace providers, one chewable data-bite at a time.

CloudVO™ Analysis Team