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WeWork Loves San Francisco

CoStar Market Insights: Footprint Rises to Nearly 1 Percent of Total Inventory
May 14, 2018
WeWork recently signed San Francisco’s largest lease of the year at 430 California St. The entire building lease grows the co-working provider’s footprint in the city to 1.2 million square feet.

Co-working has exploded in San Francisco, with new providers such as Canopy and Spaces joining WeWork and longstanding Regus. More than 50 buildings in the city now offer small to mid-sized tenants creative co-work office space on flexible lease terms, far more than in the East Bay or Silicon Valley.

WeWork debuted in San Francisco in 2011, a year after its launch in New York City’s SoHo district. Initially leasing a 27,000-square-foot mid-rise building, at 156 2nd St. in the South Financial District, its pace of expansion has increased over time. Now the city’s largest co-working space provider, WeWork inked leases for five new locations in 2017 and has already secured two more large office spaces since the start of the year--77,000 square feet at 353 Sacramento St. in addition to 279,000 square feet at 430 California St.

Some building owners have been thrilled to add co-working space, noticing how tech tenants and start-ups are attracted to the energy it fosters. Additionally, co-working providers have been willing to pay premium rental rates--WeWork’s lease at 353 Sacramento St. was reportedly signed at $71 per square foot.

Other landlords perceive WeWork as an untested company and question its ability to meet long-term lease commitments, particularly if a recession were to hit. WeWork leases space as single-purpose entities, limiting financial exposure to the parent company. From an operational perspective, co-working space tends to amplify building wear and tear due to high worker density. Elevators running at capacity often must stop on each co-work floor, which can diminish ease of access to upper floors, particularly in high-rise buildings.

Business model concerns have led many to question the private valuation of WeWork, which at $20 billion, is higher than San Francisco’s largest landlord and owner of three local WeWork buildings, Boston Properties. Wall Street recently exhibited trepidation--pricing of the company’s bonds, which successfully raised $702 million on April 25th, traded at 93 cents on the dollar in the secondary market as of May 8th.

Drafting on the industry’s success, however, some landlords are exploring their own ability to operate co-working space directly. While high build-out costs will remain a limiting factor, future technological advances could ease the burden of administrative work required to operate such facilities.

As landlords and tenants alike explore the emerging world of co-working, office market dynamics are under disruption. At a minimum, co-working providers such as WeWork are competing with Bay Area tech tenants to secure large-size blocks of space--a segment of the market that is already in limited supply.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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