WASHINGTON, DC–A new report from Newmark Grubb Knight Frank confirmed the reasonable suspicion many have had that the sharing economy is having a significant disruptive effect on commercial real estate. In particular, offices and hotels, have experienced the most disruption, according to NGKF's analysis.

But the issue is more nuanced than that, a fact that NGKF readily admits. Office space-sharing companies, such as WeWork, are not automatically bad news for office landlords, Bethany Schneider, research manager and report co-author tells GlobeSt.com. “Many of the buildings where co-working offices are opening have been vacant for some time,” she noted.

But there are other scenarios as well. Will the co-working space attract valued corporate tenants that might otherwise have taken traditional office space? Will the co-working space even stay in the building in the longer-term? Neither possibility is a happy one to contemplate.

Vacant buildings Get a Second Life

Let's look at the vacant building scenario first, a clear win-win for all concerned.

A co-working investor might buy the property and rehab it, infusing more traffic into the submarket that benefitslocal retail and entertainment venues as well as other small businesses in the neighborhood.

One recent example is e-loft, which opened its first building in Alexandria, Va., this month.

The startup, owned by Novus Residences, a wholly owned subsidiary of Cafritz Interests, acquired the then vacant 4501 Ford Ave. last year and then renovated it into its current incarnation of 200 units ranging between 650 and 1,200 square feet, investing a total of $50 million in the acquisition and rehab. Rents start at $1,800 a month for a year lease.

Even if the co-working company is just a tenant, it brings vibrancy and a certain vibe to what might be a tired neighborhood. Vornado Property Trust put Crystal City, Va., on the map with its determination to remake the area into a tech enclave.

Also, as Schneider and co-author Sandy Paul, managing director of National Market Research, note in the report, having co-working providers in a building can be good for its long-term leasing potential, as many startups are likely to want to stay in the same location when they outgrow their co-working space. Chances are they can be persuaded to move into direct space in the same building.

When a Co-Working Tenant Moves On or Dies Off

Chances are also good, though, that the co-working company will move on after a few years. DeskMag's 2016 Co-Working forecast found that one in five spaces have moved at least once, and out of those that moved, almost every second of them did so because the old premises were simply too small. Only 7 percent of those respondents moved due to higher rents.

Indeed, co-working spaces can introduce all sorts of new factors that must be considered by landlords. The NGKF report also noted that there has been some concern about sustainability of the co-working business model and its ability to weather an economic downturn. “Since it has not yet been tested, owners should be careful not to overweight their portfolio with co-working tenants,” it said.

Competing Class B Buildings

Competing buildings in the vicinity, usually class B properties, have an entirely different set of concerns, starting with, most obviously, the competition. Granted, class B properties are experiencing a renaissance of sorts as some tenants decide to opt out of the trophy and Class A building rental rates, but in many markets such as Washington DC, Class B properties are dealing with higher vacancy rates and the threat of obsolescence.

A co-working space in the vicinity won't help matters, especially if a coveted larger tenant decides to rent space.

That is a growing trend in the co-working space, Revathi Greenwood, director of Research and Analysis at CBRE, tells GlobeSt.com, pointing to the DeskMag data. “Earlier it was thought that co-working was not affecting traditional leasing demand.

More recently, some analysis shows that as much as one-third of co-working space is being used by larger companies with the rest being true new demand.”

In fact, this is an emerging trend that should bother both nearby competing buildings and the co-working landlords.

Instant Insights /

When a Co-Working Provider Moves Into the Neighborhood

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