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Report on coworking highlights tough realities behind new workspaces

Growth is ahead, as well as tough challenges

Coworking behemoth WeWork earned a jaw-dropping $16 billion valuation, just as the coworking economy nationwide posted a stellar 10 percent growth rate last year. And new, more specialized spaces, including The Wing, a coworking hub for women, have opened, giving freelance workers more options than ever to find a comfortable place to be creative.

While the these new types of trendy workspaces have enjoyed impressive growth, it’s not all good news in the world of coworking. A new report by global planning, design, and architecture firm HOK, Coworking: A Corporate Real Estate Perspective, looks beyond the meteoric rise and offers a sober assessment of the coworking business. The overarching theme is: don’t believe the hype.

Authored by Kay Sargent, a senior principal and director of HOK’s WorkPlace practice, the report shows the upsides of the business, as well as the numerous commercial challenges and demographic shifts posing a threat to this fast-growing sector of the real estate world. Here are some insights, facts, and myths about shared workspaces, and why they remain a hot investment for many property owners.

The coworking market truly is primed to explode

The concept of coworking is far from new. Technically, the first coworking spaces—The Hat Factory and Citizen Space, both in San Francisco—were established in 2006. But the concept has become mainstream with the growth of companies such as WeWork, and growth in second-tier cities and emerging markets suggests meteoric growth may be ahead.

The hype around coworking may obscure how relatively small this sector of the commercial real estate market really is. Coworking represents less than 1 percent of the world’s office space. But that tiny percentage, which represents nearly 11,000 shared workspaces exist around the globe, is certain to grow, according to many experts.

Emergent Research predicts the number of coworking spaces globally will reach 26,000 by 2020, and membership numbers will top 3.8 million. A trend toward larger offices, an expansion of existing spaces, and better space utilization should all help fuel growth over the next few years.

Like it or not, coworkingand the contractor lifestyleis the future

Coworking appeals greatly to the freelance and contingent workforce, a great market to corner, according to some of the more eye-opening statistics in the report. Research from Princeton University suggests that all the net employment growth between 2005 and 2015 can be attributed to the contingent workforce, 55 percent of whom are independent contractors.

Another economic analysis, the Intuit 2020 Report, suggests that 80% of global corporations plan to significantly increase their use of contingent labor. There many be a hipness factor to the self-employed, but it’s also increasingly the source of new work in today’s gig economy.

It’s not all about entrepreneurs

Think the person next to you at the coworking hub, huddled over a laptop and chugging that cold brew, owns their own business or launched a startup? While many property owners play up the creative nature of their workspaces, and the bold, boundary-pushing workers they attract, stats suggest the small business economy has seen better days.

From 1994 to 2015, according to Bureau of Labor statistics, the U.S. unincorporated self-employment rate fell by more than 25 percent, a downward trend mirrored in major economies the world. While coworking spaces may seem to be magnets for a certain type of worker, they’re also reflections of bigger structural shifts in employment.

Property owners love how coworking can resurrect second-tier spaces

Encouraging young creatives may put a good spin on an owner’s decision to convert existing office space into a coworking hub. But often, it’s about adding excitement and putting a new spin on older properties that aren’t performing. The report suggests that converting is a great, and increasingly popular, option for hard-to-lease spaces.

According to stats obtained by Deskmag, 55 percent of new coworking locations were vacant six months or more before being converted, 45 percent are located in buildings more than 50 years old, and 90 percent of leases over the last two years have been in class B or C buildings.

But it’s still a tough business

Not all coworking spaces succeed. Only one in four are profitable, and 23 percent lose money. Servcorp, one of the giants of the industry, suggests in a recent annual report that it takes two to three years for a location to break even. Industry forecasts suggest these challenges may get even worse. Many coworking spaces and companies picked up steam over the last few years, when commercial real estate prices in urban centers hadn’t hit the post-recession peak they’re at now. That makes it harder or operators to sign advantageous long-term leases.

Coworking spaces also have to face the challenges of a changing millennial workforce. Some studies are starting to show a small but significant generational shift to the suburbs, suggesting a less urbanized workforce (60 percent of millennials expect to live in a detached single-family home five years from now). In addition, widely reported delays in homeownership may have an adverse impact on small business formation. Homes have traditionally been a prime source of collateral and savings, the initial capital that can help kickstart a small business.