Prior to the pandemic, coworking facilities were often lauded as a model for the “future workplace.” Third-party providers offered trendy, flexible, highly curated space alternatives — and they were gobbling up a massive amount of square footage in the race for market share. Can operators regain momentum, or has COVID-19 permanently altered user demand for flexible workspace?
The flexible office market — aka coworking — represents a fraction of the overall office market. However, its rapid growth before the pandemic was tough to ignore. According to a 2020 research report published by JLL, the global flexible space market has grown by an average of 25 percent since 2014, with the top 20 markets across three regions recording a combined flex inventory of around 204 million square feet. That expansion, both in the U.S. and globally, was propelled by a growing list of corporate users that included Google, Microsoft, and Bank of America. Additionally, JLL predicted that flexible space could account for 30 percent of the market by 2030.
Yet views are mixed on how COVID-19 has altered the course of that trajectory. Some see significant challenges ahead in the near term. “Coworking is definitely down now. It will come back, but it will likely never be the same,” says T. Bradley Fulkerson, III, CCIM, a senior managing director and head of tenant advisory services at Transwestern in Atlanta. The old model of working elbow to elbow, regardless of whether it was with fellow employees or people from a multitude of cohabitating firms, is a tough sell in a post-pandemic market, he adds. Tenants want more space and are more focused on health, safety, flexibility, and hygiene.
Disruption from the pandemic has forced some shakeout, closures, and pruning of underperforming locations. A U.S. affiliate of Regus filed for Chapter 11 bankruptcy in 2020, while Newmark acquired Knotel in 2021 after that firm filed for bankruptcy earlier in the year. In some cases, former coworking spaces have been acquired by competitors or converted to single-tenant space.
Others, including coworking providers themselves, are seeing a resurgence in demand that has been fueled by uncertainty and a desire by workers to find alternative remote workspace outside of their homes.
“The pandemic accelerated the future of work, especially the need for flexible office solutions,” says Peter Greenspan, global head of real estate at WeWork. As a result of COVID-19, companies took a new approach to analyzing their real estate portfolio, and some have realized that, moving forward, they will need less traditional office space and instead more flexible, scalable real estate options, he adds.
The fundamental shift to remote working created a lasting impact on the way both businesses and landlords think about flexibility — and space that facilitates flexible work — within their portfolios, adds Greenspan. An example of this is a recent deal WeWork signed with Ivanhoé Cambridge to provide its tenants at Place Ville Marie in Montreal with an innovative flexible workspace solution. Ivanhoé Cambridge is converting an 11,000-sf space on the 29th floor of the office tower to a community workspace designed to foster collaboration and creativity. The space, which will be powered by WeWork, is set to open in this spring. According to Greenspan, this partnership reflects WeWork's ability to help landlords innovate and evolve their spaces to meet the needs of today's changing workforce.
Disruption Drives Demand
One of the key selling points for coworking spaces before the pandemic was its flexibility — and that is more in demand than ever. “I think coworking spaces will flourish for the next couple of years, and the reason is that companies are still trying to assess what just happened, how much space they really need, and where they need it,” says Soozi Jones Walker, CCIM, president of Commercial Executives Real Estate Services in Las Vegas. Some businesses are apt to turn to coworking space as an interim solution while they figure out what their space needs will be going forward, she adds.
CBRE released its 2021 Global Occupancy Insights report that shows that more than half of respondents said they are using some form of flexible space to rethink their workplace and real estate strategies as the world shifts to more flexible work models. In addition, 43 percent of survey respondents said that their use of coworking office space will increase as their office footprints change in the face of this new work model.
“The pandemic has turned this entire business around for us,” says Daniel Levison, CCIM, CEO of CRE Holdings in Atlanta. Levison has cofounded multiple companies, including Atlanta Investment Properties, Commercial Property Consultants, and SharedSpace, a coworking business. Prior to the pandemic, SharedSpace operated in three locations in Georgia. “Quite frankly, we were struggling,” says Levison. The coworking facilities, each roughly 12,000 sf, were competing for users amid a proliferation of third-party facilities while trying to balance the costs associated with the amenities and freebies that users had come to expect.
SharedSpace closed its location in Augusta, Ga., following the onset of the pandemic to help conserve capital as demand from users plummeted. However, the start of 2021 brought an explosion of activity at its two remaining locations. For example, occupancy at its Dunwoody location jumped from 15 percent to 90 percent, and the company reopened its Augusta location in fall 2021.
The pandemic also has changed the business model for SharedSpace and helped to improve its profitability. It has cut out many of the extras that had become the norm in coworking spaces, like nap rooms and free beer, wine, and snacks. Going forward, the simplified business model focuses on what people want and need, which is flexible office space with high-speed, reliable internet, notes Levison. SharedSpace has also eliminated its one-day drop-ins and now has a minimum three-month membership requirement, which also allowed SharedSpace to reduce on-site staff.
Embracing Coworking Amid COVID-19
Coworking facilities are attracting both returning users and newcomers. “There is a good segment of the population that used coworking before the pandemic that is going back to it,” says Michael Marsh, CCIM, JD, MBA, an associate vice president at Colliers International in Phoenix. There also is a growing segment of users that is turning to coworking as a bit of a stop-gap measure. Perhaps they didn't sign a lease renewal because of COVID-19 and now need a quick, turnkey space option. New groups are also entering the market that are hesitant to make a long-term lease commitment in case of more disruption ahead. “The flexibility comes at a cost, but there is some value for groups that want to be more flexible in case COVID-19 starts impacting things again,” says Marsh.
Nearly two years into the pandemic, demand also is coming from people who want or need to get out of their homes for a variety of reasons, whether it is lack of adequate workspace, poor internet connectivity, or noise and distractions — or that they simply need more interaction with others. According to JLL's 2021 Shaping Human Experience report, 66 percent of workers want the ability to alternate between different places of work post-pandemic. Of those surveyed, 40 percent would like the option to work from a third-party place, such as a coffee shop or a coworking space.
Most SharedSpace members are entrepreneurs and small businesses who want and need professional workspace and reliable internet. Some businesses are looking for satellite locations to give employees living in the suburbs an alternative workplace or meeting option for teams without having to come to the main office, especially if their main office is in a large urban area.
“I don't think any of us truly know how this pandemic is going to affect the office environment with companies taking more or less square footage,” says Levison. “But we are seeing more larger companies taking space, which we think is primarily because of this hub-and-spoke concept.”
Retooling Business Models
Coworking facilities may emerge from the pandemic with a new look and a new way to service clients. “While the concept is good, I think the model is going to be different, and the tenants are looking for different things now,” says Walker. Prior to the pandemic, it had become a services war. Coworking facilities were offering workspace with perks such as an on-site chef and evening cocktail parties. “That was fun, but ultimately, it's still a place to work,” says Walker.
Walker expects to see major changes as coworking facilities reopen. Certainly, health and safety will be front and center with new cleaning protocols and buffet lines that are replaced by prepackaged foods. Technology is going to be the name of the game. Users want flexible workspace that offers tech such as high-speed internet and the latest tech for things such as reservation systems. Many people will be drawn to coworking because they want to reconnect with others. Coworking facilities will need to foster a community, and for some providers, that will create an opportunity to develop specialty facilities, like those that cater to tech or professionals such as attorneys. “Coworking spaces used to be generalists. In the successful coworking spaces in the future, we will see more specialty to create the synergy so that they can provide the services for that subsector user,” says Walker.
Coworking providers have prioritized health and safety by increasing cleaning and sanitation, promoting social distancing, and improving HVAC systems. For example, WeWork has installed approximately 3,700 air-quality sensors in its buildings across the U.S. and Europe over the past year to track, verify, and proactively manage air quality performance across a range of designs, outdoor conditions, and space-use scenarios.
“We've ensured these enhanced safety measures are visible by integrating more touchless elements for physical safety,” says Greenspan. WeWork also was quick to launch two new products, its pay-as-you-go on-demand offering and a monthly subscription-based all-access product. “Like virtually every business around the world, COVID-19 had an impact on our business, but it also created an unprecedented opportunity,” says Greenspan. “The pandemic accelerated our plans to further innovate and expand on our offerings in order to meet the moment for greater flexibility.”
WeWork has seen evidence of returning demand — and a growing appetite for flexible workspace — in its leasing activity. According to Greenspan, the company's gross sales in Manhattan in 3Q2021 were equivalent to 20 percent of the traditional office market leasing, even though its portfolio accounts for only about 1 percent of the total office stock in that market. The company has seen similar oversized trends in other major cities globally. In London, its gross sales accounted for 37 percent of office take-up and 13 percent of Paris's take-up, while its portfolio of space represents approximately 1 percent of stock in both of those markets.
Identifying Expansion Opportunities
Although coworking providers clearly pumped the brakes on some of the aggressive expansion that was occurring prior to the pandemic, growth is once again returning with new facilities. Last April, JLL opened Orchard Workspace, a new 50,000-sf flexible office and coworking space at Brookfield Properties' MetroTech in Brooklyn, N.Y. Health club operator Life Time Group Holdings Inc. also is set to open its ninth Life Time Work coworking facility in January with a location in Chicago.
Property owners also are looking at coworking as an opportunity to unlock value in underutilized space. In some cases, coworking is still viewed as a viable option to reposition surplus or underutilized space. For example, Hudson Bay Company announced in August that it was partnering with WeWork in the launch of SaksWorks. The new venture will deliver amenities at select department store locations that include work and meeting spaces, café and restaurant space, retail areas, and fitness studios that will be available to members. The initial five locations include its Saks Fifth Avenue New York flagship store and Brookfield Place in New York, as well as Saks Fifth Avenue stores in Manhasset, N.Y.; Greenwich, Conn.; and Eastchester, N.Y.
Some industry observers expect demand to rise for “near home” flexible space options, which could create more expansion opportunities in suburban and secondary markets in the future. However, coworking facilities also must deal with a new competitor — the home office.
“It's more socially acceptable for people to work out of the home,” notes Walker. To compete, coworking facilities are going to have to offer really great technology. They also need to offer flexibility, such as the ability to occupy a private office one day or work in a collaborative area another day,
Given the disruption still at play in the broader office market, it remains to be seen just how significantly COVID-19 will impact the flexible workspace market. What is clear is that the shift to remote and hybrid working is creating both challenges and opportunities. And space providers, both landlords and third-party firms, will need to adapt their space, services and amenities to attract a workforce that is in still in flux.