Is a Change Due in How Co-Working Space is Valued?

If a management company is subleasing office space out on a short-term basis, there are a lot of uncertainties about the durability of the income stream.

This plays into the valuation model, according to Lucas Rotter, CEO of appraisal software developer Valcre and a former appraiser for a wide range of asset types at Collier.

“They [appraisers] would view that space as owner-user, which they would apply market rent to,” Rotter says.

But, if a building has a co-working space tenant, like WeWork or Industrious, and the tenant is paying on time and fulfilling other lease obligations, appraisers treat the occupant like any other tenant.

“As an appraiser, they would look at that lease and say it’s a durable income stream,” Rotter says.

If there are any questions about the durability of the income stream, the appraiser may apply some different risk characteristics, according to Rotter. For instance, if the tenant is due to vacate soon, the appraiser can apply market rent.

Rotter thinks a change is coming in the way that coworking space is appraised. Given the drastic changes in the office sector, the valuation models need to evolve.

“I think it is ripe for disruption,” he says. “There’s obviously a pretty large need for it, especially as more and more coworking office spaces pop up. It’s almost like coworking space should be treated as a different asset class.”

That is because coworking space is a different animal. With co-working spaces, the risks are different. So the pricing should be different.

“Most of the time, it [coworking space] is being rented at a pretty high price per square foot, but you’ve got a higher vacancy and credit loss that you’re dealing with as well,” Rotter says.

Between Class A and Class B, for instance, there are different vacancies and market rents. “Class A office space is going to have different cap rates from Class B office space,” Rotter says. “I think that the coworking office spaces would have a different cap rate as well.”

While coworking suites can exist in Class A or Class B office space, the real variable that makes it different is the tenant’s ability to pay rent.

“It’s tough to know where that risk tolerance might fall,” Rotter says. 

Rotter says coworking has some comparisons to hotels. “This is the hotelification of office space,” he says. “With hotels, you’ve got a higher cap rate range than you typically do with office space. Specifically, it’s because the one-night leases are causing a higher risk tolerance.”

Even the spaces can look similar to what hotels offer. “A lot of these spaces are modeling themselves after hotels, obviously with their conference rooms,” Rotter says.