Manhattan's co-working trend ramping up to bubble status

The co-working trend in Manhattan could be the next “real estate bubble,” as rivals scramble to compete with Manhattan-based start-up WeWork. Based in 25 countries globally and valued at $16bn, its success has prompted a rash of start-ups to offer co-working spaces in the city. “It’s absolutely unprecedented,” said Ken McCarthy of real estate services firm Cushman & Wakefield. Analysts claim there is “enough room to grow” in New York city due to expanding employment opportunities in the tech and media sectors.

“It’s absolutely unprecedented,” Ken McCarthy, Cushman’s chief economist, said of the industry’s growth. “This is a business that is attracting a very large demographic to a new and different work environment.”

Co-working companies follow the same basic formula as WeWork, which has tapped into millennials’ desire for hip, amenity-filled spaces that foster collaboration. The offices feature both open, communal workspaces and enclosed, private offices. In addition to desks and cubicles, there are seats at a communal table and even small enclosed spaces. Most important, there are flexible leases that allow tenants to grow or contract.

Behind the rush toward co-working spaces is the growth of the freelance economy and the venture capital flowing into local startups that are the sector’s target market. Venture funding in New York increased 49% from 2014 to 2015 to reach $7 billion, according to research firm CB Insights. Meanwhile, there are 4.7 million freelancers in the New York metro region, according to a 2015 report commissioned by the Freelancers Union and Upwork.

Jason Bram, an economist for the Federal Reserve Bank of New York, says there’s still plenty of room for co-working spaces to grow in New York City because employment in the fields most likely to use shared space—tech, advertising, media and internet—is expanding by more than 10% a year.

Of course, not every startup will survive. And when they fail they could take their co-working landlord with them.

“As with many other startup ideas that get hot—think daily deals or food delivery—a bunch of new entrants rush in,” CB Insights CEO Anand Sanwal said. “Many will fail. The ones that succeed are definitely going to benefit from a trend toward startups and independent contractors. That rising tide lifts the few winners.”

Just how lucrative is owning a co-working space? French-born Christophe Garnier found a 5,000 square–foot space in 2013 near Union Square that was bargain-priced at less than $40 a foot annually, or around $17,000 a month. He named it Spark Labs, rented out desks to friends and grew it into a New York foothold for international tech and media startups that pay around $500 per person per month. Around 120 members from 30 companies and 15 countries are now based there—about a fifth of them Americans looking to forge overseas connections. Garnier pulls in an estimated $40,000 a month in rent from them. A startup veteran, he draws additional revenue by helping with marketing pitches, investor presentations and business strategy. His second Spark location—20,000 square feet—near Bryant Park, is in the works.

The growth in co-working spaces has sparked intense competition. Cheni Yerushalmi founded Sunshine Suites in 2001, well before co-working became a craze. He built the company up to four locations, including a roughly 36,000-square-foot flagship space on Desbrosses Street in Tribeca. But then WeWork came along.

“And we became less desirable because we had limited windows and a lack of natural light,” Yerushalmi said. “It was hard to compete against them, and although we could fill the space to a point, we weren’t retaining tenants at the same rate as previously.” In 2013, Yerushalmi closed the Desbrosses location.