The Coworking Model
Coworking space is quickly growing into a significant portion of tenant demand in commercial office real estate, providing entrepreneuers and independent contractors refuge from loud, crowded coffee shops. Over 3,700 coworking spaces are already operating in the US and Europe and it is projected that 37,000 will be in operation worldwide by 2018. Two trends are dramatically fueling the shift in the workforce toward self-employment: the growth of the Millennial generation as a share of the population, and new technology that continues to arm entrepreneurs with tools to work independently. Surprisingly though, a survey by CBRE reports that millennials only account for 25 percent of the coworking workforce and 63 percent are between 31 and 50 years old, suggesting that the coworking model sustainably supports a variety of industries and points in one's career.
WeWork is the standard bearer of the coworking model with their national and international expansion, but the market is large enough for niche competitors: Impact Hub caters to workers in social justice, non-profits, community-oriented businesses and they have 81 locations around the world, including in SF and Oakland. Covo SF is a coworking provider that seeks to truly combine work and play by blending the line of office space / coffee house / pub and adding special printing and libraries for architects and structural engineers. Capital 360 Cafes act as both bank branches and open office cafes. There are many more examples and new concepts being created all the time.
What about investment opportunities for landlords to build space for coworking tenants? There is no doubt that the coworking tenant demand will continue to grow, with its customized spaces and flexible month-to-month contracts. But for the same reasons, it raises concerns for landlords: Coworking operators commit to long-term obligations with building landlords -- in many cases a 10 year lease. While the coworking operator leases out memberships to individuals on a month-to-month basis, who can cancel their membership at any time, the operator is obligated to pay rent to a landlord on a long term lease. In other words, coworking operators have the potential to receive less income, while their fixed lease expense remains the same. Well-aware of this issue, operators sign leases with risk-taking building landlords using a special purpose entity that can be bankrupted, relieving them of their obligations; thus, the landlord's income is no less uncertain as that of the coworking operator. It a sound business today, but the coworking business will be particularly sensitive to the swings of the economy with less-than-credit tenants.
SF and Silicon Valley Hit Limit; East Bay Benefits
Unsurprisingly, San Francisco and Silicon Valley hit its upper bound in pricing and rents, primarily in residential housing due to venture capital funds realizing they were themselves the greatest fool and decided to be more selective with their investments. Thousands of apartment units are coming online in San Francisco, with even more coming in 2017, and many of them are offering 1 month concessions to get them occupied. Median housing prices in San Francisco dropped from their all-time high of $1.3 million in April to $1.13 million in May, with the most inventory on the market since 2011.
Meanwhile, rents and pricing in the East Bay have continued to grow. 2nd quarter statistics are not yet available, but I confidently expect to see data showing a rise in rental rates; I'll report back with these stats next month. I predicted over one year ago that East Bay would grow while SF reached its peak in what I called the "great evening-out" -- yes, I know it's easy to say now, and no one believes me. The disparity between Oakland and San Francisco, even with the corrections today, is just too great, making Oakland and incredible buying opportunity. Class A commerical office sells for $800 to $1000 per square foot in San Francisco, while comparable product sells for $350 to $450 in Oakland. We are seeing the Brooklynization of Oakland, and it's still continuing to play out.
Interest Rates at All-Time Lows
The financial markets overreacted to Brexit and continue to exaggerate London's demise as a global financial center. Though there is still much political uncertainty, global trade will not fundamentally deteriorate overnight in Europe. Nevertheless, investors retreated to safety in US bonds and treasuries, further depressing interest rates to all-time low territory. The 10 year treasury rate briefly hit 1.385%. Refer to the chart below -- we thought interest rates hit bottom in 2013 and yet here we are again. At present, investors and landlords in the US will benefit from the low cost of borrowing many borrowers race to refinance at even lower rates. In the medium term, however, low rates will contribute to inflating asset prices across all investment types, and to be sure, though we have been saying this for a while, interest rates will not stay this low forever.
OMC Lofts Renovations
Old Mother's Cookies is making wonderful progress. Three more units were renovated with new bathroom and kitchen finishes and were on the rental market for just under a week before signing new leases.
Oakland Real Estate News