In its heyday a few years ago, WeWork said it would reinvent offices. But the company never created a sustainable business or changed the way most people worked.
The business of offering flexible office space on short-term leases to individuals and businesses, a model WeWork hoped to make mainstream, remains a niche in commercial real estate despite the billions of dollars the company and others have invested in this approach. Flexible office space represents less than 2% of all office space in the 20 largest U.S. markets, close to its share before the pandemic, according to Cushman & Wakefield.
WeWork filed for bankruptcy protection this week in an effort to quickly pare down its office space portfolio. The company wants to give up more than 70 leases now, and perhaps more will follow. Other coworking companies may take over some of these locations, but some office building owners said they didn’t expect this approach to ever account for more than a small portion of their business.
Many employers are reducing office space as workers no longer work five days a week after becoming accustomed to working remotely or on a hybrid schedule. Office vacancies are at their highest level in decades, with plenty of space available for subleasing, often at deeply discounted prices compared to rents prevailing before the pandemic. WeWork’s bankruptcy will only make the situation worse by leaving owners with more space to fill.
Michael Emory, the founder of Allied, a real estate investment trust that owns office buildings in Canada’s largest cities, said flexible office providers will always exist, providing space for smaller companies to operate without signing long leases . But he said it will never account for a third of all office space, as JLL, a real estate services firm, had predicted before the pandemic struck in 2030.
“There wasn’t the slightest chance of that happening,” Mr. Emory said.
He said office landlords would continue to offer space to co-working companies in some buildings because they attract tenants who may grow and want to rent their space in the future.
David O’Reilly, chief executive of Howard Hughes Holdings, a developer focused on large developments that often include homes and offices, said co-working is a nice amenity for some tenants, but he wouldn’t take over commercial real estate from one side. long shot.
“When coworking becomes a disproportionate part of the building, it becomes directly competitive with the owner,” he said. Howard Hughes has two leases with WeWork and Mr O’Reilly said he was talking to other coworking providers about taking over the space.
However, some coworking executives said they expected to do much better than WeWork because they were pursuing a different business model. WeWork has leased millions of square feet from landlords, hoping to get enough revenue from its customers to cover its costs. But that never happened, leading to multibillion-dollar losses.
Other co-working companies say they do not rent their spaces, but operate offices for a fee or at a cut of profits. Coworking companies that use this model are less likely to fail, but that can also mean they make less money when times are good.
“By sharing the profits with the owners, it allows us to do so much more,” said Mark Dixon, chief executive of IWG, which was one of the first companies to offer flexible office space in many locations and which operates several brands. including Regus.
IWG might get one-third of the profit on a coworking space it doesn’t rent, while the owner gets the other two-thirds. While IWG may earn less, the company doesn’t have to take out loans to finance large leasing commitments, which has become more difficult as banks have pulled out of the commercial real estate business.
Dixon added that co-working should work well in the era of hybrid work, when employers are looking for flexible, shorter leases that give them enough space for some employees to be in the office every day. They can also accommodate larger groups of workers for meetings and have smaller offices in places they weren’t previously located.
“They realize that you don’t have to have everyone working from individual buildings to get the job done,” he said. “You need to bring them together regularly, but not every day.”
IWG has signed agreements to open more than 600 new locations around the world in the first nine months of the year, many of them in small cities and towns across the United States. It had 3,455 locations at the end of September, up from 3,323 the previous year.
Jamie Hodari, CEO and co-founder of Industrious, a New York co-working company that works closely with owners, is similarly optimistic. His company’s revenue has grown nearly 40% this year, he said, more or less double what he expected. And he said Industrious, which has 187 locations, up from 85 at the end of 2019, has nearly tripled its revenue since before the pandemic.
“It’s a time of enormous demand,” Hodari said.
And John Arenas, CEO of Serendipity Labs, a flexible office space company that focuses on suburban markets, said demand has grown in recent months as many companies have begun to solidify their return-to-office plans.
Some of his customers tell him, “I just need to have a place where people can touch down, collaborate, meet, drop by and feel like there’s an element of hospitality.” Serendipity Labs has 34 locations, and Arenas expects it will have about 50 in the first quarter of next year. This year he took over a former WeWork location near Grand Central Terminal.
Stijn Van Nieuwerburgh, professor of real estate law at Columbia Business School, agrees that sharing office space has a strong appeal for employers. He said he is “a big supporter of co-working”.
But he added that many office building owners would most likely offer their own co-working spaces to tenants, reducing or eliminating the need for companies like WeWork. He said some building owners would begin operating office buildings more like hotels, with individuals and companies signing short-term leases directly with the owners.
“There’s nothing special about WeWork that Related or Vornado can’t replicate,” he said, referring to two large commercial real estate firms. “I don’t think coworking is dead at all,” Van Nieuwerburgh added. “Indeed, the demise of WeWork opens a window of opportunity for owners to occupy that space.”
Julie Creswell, Matthew Haag AND Gregory Schmidt contributed to the reporting.
