IWG Iwg Plc

By Peter Grant 

Co-working is coming of age.

Some of the world's largest landlords, facing weak growth in traditional office rents and occupancies, are investing heavily in what until recently was viewed as a niche office business that catered primarily to technology startups and millennials.

A venture of Brookfield Asset Management and Onex Corp. is negotiating to buy IWG PLC, which has a market capitalization of GBP2.48 billion ($3.46 billion) and operates co-working facilities as well as more traditional offices for small and midsize businesses. On Saturday, the U.K.'s Takeover Panel extended the deadline for the venture to make an offer until Feb. 2. Brookfield declined to comment on the negotiations.

Meanwhile, Blackstone Group LP last year purchased the Office Group in a deal that valued the U.K.-based co-working provider at GBP500 million. Blackstone, Brookfield and Houston-based Hines also are exploring a wide range of deals with new shared-space firms like WeWork Cos., IWG, Industrious and Convene.

The new workplace trend "is certainly something we're spending a lot of time focusing on in our office space business," said Rob Harper, head of U.S. asset management at Blackstone's real estate group.

Co-working at its core is a new name for a business that has been around for decades. Firms simply lease big blocks of space from landlords and subdivide it for smaller tenants and provide a range of office services.

But as the economy began to recover after the 2008 recession, a new set of co-working companies led by WeWork found surging demand among young workers for densely packed spaces with hip designs and buzzy vibe.

The changes are permeating most dimensions of the traditional office space business, including lease terms and structure, building financing and even valuations.

Traditional office building investors are watching closely. So is the tech world, given WeWork's stratospheric $20 billion valuation.

The interest among major landlords is being fueled by the recognition that the co-working business has been one of the few bright spots in the office market during the economic recovery.

Overall, growth in the U.S. market has been much slower than in previous upcycles. Current occupancy in the top 50 markets is roughly 85%, according to research firm Green Street Advisors. It was close to 92% in 2000 and greater than 87% in 2007, Green Street said.

Co-working firms are one of the few sources of growing demand, a point stressed at an October investor presentation by Boston Properties Inc., one of the country's largest office real-estate investment trusts. The firms accounted for 30 million square feet of absorption during the current cycle, or 9.1% of the total, said Owen Thomas, Boston Properties' chief executive.

The firm has cut numerous leasing deals with WeWork. In one high-profile project, Boston Properties, WeWork and Rudin Development, currently are developing a 14-story building in the Brooklyn Navy Yard that will include a food hall, health center, open lawn conference center and access to a new ferry terminal.

"It's clearly an important trend in our business," said Mr. Thomas.

But it also poses headaches for building owners. Up until recently, firms like WeWork have attracted thousands of entrepreneurs and small firms to spaces in major office buildings that in the past didn't serve such tenants.

The co-working approach to office space, especially its focus on flexible and short-term commitments, is beginning to spill over into the more traditional office space businesses, however. Big companies are pressing landlords for space with a hipper vibe, more amenities and that can be expanded and contracted easily.

This will likely increase landlord costs for building out spaces. "If you want to attract and retain tenants, you've got to be a little bit more bling," said Jed Reagan, a Green Street analyst.

Also, because co-working generally uses less space per worker, occupancy likely will decline as big tenants begin to transition to more flexible spaces. If big tenants succeed in reducing lease lengths from the standard 10 or 15 year contracts to a few years, building owners are going to have a tougher time obtaining financing.

"If you're a landlord you have to feel somewhat threatened," said Matt Kopsky, a REIT analyst at financial-services firm Edward Jones.

Landlords are responding with a variety of strategies. Some of the biggest players are buying co-working and flexible-space businesses, like Blackstone did with the Office Group and Brookfield might do with IWG.

Owners also are exploring a wide range of business deals with firms like WeWork and Industrious. In some cases, landlords will simply lease space to co-working businesses. In other cases, landlords are cutting management agreements with co-working companies similar to the kind of deals that hotel owners may cut with hotel brands like Hilton or Marriott.

Brookfield Property Partners, a listed company controlled by Brookfield Asset Management, also has acquired a roughly 18% stake in Convene, which offers co-working spaces as well as on-demand meetings and conferences.

"We're keeping our options alive and open at this point and we've got many," said Ric Clark, chairman of Brookfield Property Partners.

--Eliot Brown contributed to the article.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

January 23, 2018 08:14 ET (13:14 GMT)

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