WeWork’s IPO valuation woes aren’t a reflection of the robust outlook for flexible commercial office space, a market which has plenty of runway left.
The commercial office flex space market currently comprises less than 2% of leased office space and has plenty of room to grow, according to experts.
This week, Adam Neumann, resigned as CEO of WeWork and became non-executive chairman. At press time the IPO has been indefinitely postponed. Neumann stepped down due to pressure from board members and investors.
Flexible office space is expected to reach 30% of the total office market by 2030, according to research by commercial real estate services firm, JLL.
“WeWork’s IPO is far from an indictment of the flex space business model,” says Jonathan Wasserstrum CEO and co-founder of SquareFoot a New York City-based commercial real estate start-up that streamlines the office leasing process.
“Undoubtedly, the model works. It works for Convene, Industrious, Knotel and many others. It’s interesting to watch everybody have an opinion on WeWork’s valuation. While there is a genuine question about how much WeWork should be worth, it matters for the current investors of WeWork, but not for the industry overall,” Wasserstrum said in an interview with Connected Real Estate Magazine.
Founded in 2012, SquareFoot has closed more than 1200 transactions by using proprietary technology and brokerage teams to modernize the leasing process from initial search to lease to signing.
According to Wasserstrum, the number one requirement among commercial flex office tenants is digital connectivity.
“Everybody wants high-quality internet. It’s the non-negotiable holy grail,” Wasserstrum said.
While larger corporate tenants may be looking for smart building technologies that improve workplace productivity such as temperature and access control and space planning, most firms with 100- 200 employees just want great internet, shorter-term leases, and better options.
Another emerging trend in the flex office sector is the incubator model or the grouping of office tenants in industry verticals that have specific requirements and needs.
For example, clients in industries like tech, design, finance, and healthcare have precise office space requirements and requests for providing space which accommodates the needs of vendors across their specific product or service supply chains is becoming more common.
“We are currently working on a coworking incubator for hedge funds. A hedge fund doesn’t want to work out of a WeWork. They want very high-end security requirements that don’t exist in the market,” said Wasserstrum.
“Similarly, ALMA is a coworking space for mental health professionals, psychiatrists, and psychologists. It’s the type of use that a lot of landlords haven’t liked because the average practitioner doesn’t need an office five days a week. SquareFoot can provide these options,” he added.
Wasserstrum said that based on the learnings from the company’s 1200 plus transactions and real-time feedback, there’s a dearth of property options in the marketplace for flex office space seekers.
“We keep getting I’m interested in shorter-term leases, but I don’t like what available in the market,” said Wasserstrum.
For this reason, the company designed its latest offering FLEX by SquareFoot which increases the availability of shorter-term options for office space seekers.
Through FLEX the company procures office space under a longer-term lease and then offers it to clients at a shorter duration. For example, the company may sign a 5-10 year lease in a desirable location and then provide it to clients seeking 1-3 year lease terms.
As SquareFoot’s customers grow, the FLEX uses its roster of prospective clients and properties help customers find a new office space that meets their needs.
The FLEX product also enables customers to opt-in or out of other requirements such as furniture, IT services, office management, and community managers.
When asked how SquareFoot mitigates the long-term risk of signing leases for more than double the terms of their clients, Wasserstrum says it’s no different than anyone who buys an office building under a series calculated assumption.
“I look at it the same way any real estate investor looks at the process. As economic trends influence what will happen with leasing, we change our underlying assumptions,” he said.
Wasserstrum said the company also mitigates risks by carefully assessing factors such as supply and demand curves related to the availability of space in each market and the ease and accessibility to capital.