Boston Properties has posted nearly $100 million in losses connected to coworking leases, even as other firms place big bets on the sector’s return, post-pandemic.

Have some of the nation’s savviest real estate investors and executives completely lost their collective marbles?  

The office market is in the tank, emptier than it has ever been before, with only 10 percent of tenants actively using their spaces. 

Pre-pandemic, that would have been the vacancy rate. 

So, what are these top dogs doing? CBRE, Newmark Group and others are pumping millions into coworking firms, some of which were reeling even before COVID-19 and have taken it on the chin since them 

CBRE is plunking down $200 million for just over a third of Industrious, while Newmark taking over bankrupt Knotel in a $20 million debtor–in–possession deal. 

And that’s not counting the many smaller investors pitching in millions more to other, smaller coworking players like locally-based Workbar. 

The moves come as segment-defining WeWork struggles to stay afloat, while other players in the once booming sector have given up the ghost and declared filed for bankruptcy protection from their creditors. 

Yet is it also possible that CBRE and Newark are truly onto something here? 

Investors like CBRE and Newmark are making a bet that is as risky as it is simple: They are wagering all on the belief the end of the pandemic will not only trigger a rebound in the battered office market, but in the even harder hit coworking segment. 

Justin Stewart, Industrious’ president, recently told Bisnow that occupancy in the company’s coworking spaces have been on the upswing since August after hitting bottom over the summer. 

Stewart said February brought an additional pickup in activity with some tenants starting to come back to the company’s coworking spaces. 

Brokers at Colliers International in Boston have also been getting calls over the winter from prospective tenants, including small firms that would be candidates for coworking space, about getting back into market and hunting for new digs. 

The timing is particularly meaningful. January and February are the low point of the year in commercial real estate in Boston as the New England winter reaches its own, dark nadir. 

“We have been hearing from folks, especially in the last two months,” said Aaron Jodka, capital markets research director at Colliers. “People want to get back out … there’s pent-up demand for life as we knew it.” 

Flexible Offices Flood Market 

If there turns out to be surge back into office space as the pandemic finally winds down – cross our fingers – in the summer or fall, there will be no shortage of coworking space for tenants to kick the tires on. 

As much as half of all coworking space across the country is now on the market, available for lease, The Wall Street Journal recently reported, citing industry executives. 

In Washington, D.C., WeWork has closed several locations, with hundreds of thousands of square feet of coworking space flooding the market. 

Similar figures are not available for Boston, but empty coworking space is likely a significant factor in a record amount of sublease space that has hit the market, totaling 3.3 million square feet as of the end of last year, according to Colliers. 

Moreover, WeWork has reportedly slashed rental prices by 10 percent across the country, a number that rises to 15 to 20 percent in number of cities, including Boston, according to Curbed. 

But while the figures look grim, setbacks, if you can survive them, can be worth their weight in gold for the lessons learned. 

A Better Model? 

After a tough 2019 and disastrous 2020, at least some big real estate players apparently believe they have a better grasp on how to run a profitable coworking business. 

After all, WeWork was the poster child of what not to do, pretending to be a tech company even as it cut foolishly expensive deals with landlords. 

The company gobbled up huge amounts of pricey office space in towers from Boston to San Francisco, betting it could lease them out for even more money by packing in hordes of small firms and remote workers. 

It was a model that would probably only have worked during a roaring market when rents were surging, and it has come crashing down in the wake of the pandemic. 

Industrious and Knotel are pushing forward with a new model, one that is based on cooperation and partnerships with landlords, who actually know the market. 

And there is a shift away from pure coworking space, with a new focus on providing flex space for companies large and small. 

The aim is to provide options for companies as they restructure their workplaces in the wake of the pandemic, with plans to add satellite offices for workers who may be splitting their time between a home office and a traditional workplace. 

BXP Waves Caution Flag 

Maybe CBRE, Newmark and other investors pumping money into the coworking-turned-flexible office market will truly hit gold. 

That said, some investors, chief among them Boston Properties, have had enough. 

BXP recently took a $60 million write-off on Dock 72 in Brooklyn, a big office complex one-third of which WeWork leased. 

The office giant also took a second, $38 million charge after writing off all rental income from tenants in the coworking sector. 

Scott Van Voorhis

While BXP may do flex deals on its own, it will not be doing any more deals with coworking companies, Doug Linde, the company’s president, told analysts. 

“I think it makes it clear that we don’t have a lot of appetite for doing these leases with other people on a going-forward basis,” Linde said. 

So, good luck to the latest wave of co-office investors. 

For if BXP’s decision to pull back from the sector is not a very serious cautionary note, then I don’t know what is. 

Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.