Tax abatements have been a great boost for the city residential real estate market and population base.
Will a new deal offsetting Philadelphia’s 3.48 percent to 3.91 percent city wage tax successfully lure innovative entrepreneurs and their employees to Center City to use furnished co-working office spaces where “members” can pay by the desk and the month?
Responding to a major hurdle it sees to Philly business growth, and itchy for fuller occupancy of its 150,000 square feet of available space in Center City and Northern Liberties, WeWork has just introduced a one-year, shared tax-subsidy deal “for start-ups and entrepreneurs moving into our four Philadelphia buildings,” said Dave McLaughlin, general manager for the company’s Eastern United States and Canadian locations.
And, yes, McLaughlin really does call WeWork “the Airbnb of co-working office space” as members can flit from “office to office, here and abroad, 24/7.” The venture’s sky-high $16 billion-plus valuation also earns comparisons.
While the payoff is roundabout, WeWorks’ local tax-relief plan aims to equalize the take-home earnings for urban employees relative to the larger check they would receive from a suburban gig without the onus of Philadelphia’s wage and Business and Income Receipts tax (BIRT).
“Even if they are happy with their current operations in the suburbs, many businesses would like to stick a toe in the water of the city, maybe with a skeleton crew or test project, to heighten their visibility, build relationships, and attract talents who won’t go for a suburban commute,” McLaughlin said. Also ripe for the deal, he added, are the “nearly one-third” of workers who live in the city and then waste a big part of their days reverse-commuting to the ’burbs.
“We believe more workers would actively press employers to move offices to the city if the take-home pay was the same,” agreed Center City District founding CEO Paul Levy. And with leadership by Mayor Kenney, the city has been pushing Harrisburg with some success for a constitutional amendment that would enable lowering the city wage tax and BIRT by raising the cap on business property assessments. If it is passed again by the state House and Senate in the spring of 2017 legislative session, the bill referred to as Joint Resolution 2016-3 may be placed on the ballot for voter consideration as soon as this fall.
Until then, WeWork offers a start. The well-funded worker space purveyor won’t literally reduce the city wage tax line item on workers’ pay stubs — “a huge back-end accounting challenge,” McLaughlin said.
Instead, the company plans to rebate $1,200 — half of the average $2,400 city wage tax bill per worker — as a prorated, monthly reduction on the client’s membership fees and space rental. The companies can then use that credit and an equal share from “our partner employers to make up with a salary increase” to equalize the tax.
WeWork has earmarked $1 million to support the one-year experiment, a first of its kind in the city, “because Philadelphia has been under-performing relative to our other markets,” the regional manager said. Occupancy locally is “about one-third overall, but our last space at 1900 Market Street just opened.” The other locations are 15th and Walnut, 1601 Market, and 1010 N. Hancock in Schmidt's Commons.
McLaughlin calculates that these discounts/rebates should be enough to help lure “800 new workers into the center of town” who will also “shop, eat, go to shows, find places to live.” And if the initial, token landings by clients large, like Microsoft, or small work out well, “it would encourage them to up their presence from five to 20 or more employees. That’s when the real payoff comes," Levy noted.
Philadelphia is now awash in 411,000 square feet of co-working office/incubator space available from two dozen vendors, according to Lauren Gilchrist, local director of research for real estate services and management giant JLL.
A new site map by the Center City District says that number will boom to more than 600,000 square feet with additions such as the very large 127,000-square-foot Cambridge Innovation Center at the University City Science Center. The spaces are as flexible in flavor as in size – from frat-house funky and garage-lab basic to boardroom elegant. Options range from floating desks to individual private offices to large, open spaces, accommodating dozens, with attached executive suites and access to conference rooms and event spaces.
JLL calculates the average monthly “per desk” rental cost in a coworker space is about $386. At WeWork, a floating lounge membership begins at $250, while a private, dedicated desk starts at $425.
“That’s several times what you’d pay for the same footage with a 10- or 15-year lease,” Gilchrist said. “But you get support services, sometimes the ability to use other offices. And if your business suddenly needs to grow or downsize, there are no lease concerns or subletting to worry about. Which makes paying the premium worthwhile.”