The co-working trend in Australia continues to gain traction as groups take larger office spaces in the form of entire buildings. This, however, could pose threats to office-tower landlords, experts said.
While the co-working phenomenon has been keeping vacancy rates low, co-working groups seemed to have gone too far too quickly by taking up huge spaces, said Michael Cook, group executive at Investa.
"The idea of WeWork or any other third space provider taking out 10,000 or 20,000 square metres is unproven at the moment, particularly in Australia. It might work in the US or Europe where you've got tenants with 100,000- or 200,000-square metre requirements, but it's not necessarily applicable to the Australian market," he told The Australian Financial Review.
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Co-working space provider WeWork will be leasing an entire 10-storey building in Sydney's Barangaroo, equivalent to over 10,000 square meters. It is also set to sign a lease for a whole tower at 55 Market Street. This 22,000-square meter space is the group's largest deal yet. WeWork is also planning to get a 15,000-square metre space in a Melbourne tower.
"In five years' time, if WeWork achieves the growth and profitability it is projecting, everyone will be happy. At the moment the covenant strength is a little bit questionable; however, some owners are prepared to take that risk," Cook said.
These large-scale deals could put landlords at huge risks, especially if groups are not able to make use of the spaces, said Kernel Property director Steve Urwin.
"If they can't fill the space, they can't pay the rent, which is why many of these co-working operators enter into each of these leases on a special purpose vehicle, which is a $2 company. So if one centre isn't doing well, they will allow it to fold, and they will walk away from it," he told AFR.
It appears that Sydney and Melbourne are already experiencing a supply glut of co-working spaces, Urwin said. However, looking at the other side of the coin, he said it does make sense for landlords to strike a deal with co-worker tenants to pass on the risk.
"Otherwise they would be staring down the barrel at deals not as good as these," he said.
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