At its peak a few years ago, WeWork announced plans to reinvent offices. But the company never created a sustainable business or changed the way most people worked.
Providing flexible, short-term rental office space 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. According to Cushman & Wakefield, 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.
WeWork filed for bankruptcy protection this week in an effort to quickly shrink its office space portfolio. The company wants to immediately relinquish more than 70 leases, and more could follow. Other coworking companies could take over some of these sites, but some office building owners said they don’t expect this approach to ever represent more than a small part of their business.
Many employers are reducing office space because workers aren’t going there five days a week after getting used to working remotely or on a hybrid schedule. Office vacancy rates are at their highest level in decades, with many spaces available for sublease, often at prices well below pre-pandemic rents. WeWork’s bankruptcy will only make the situation worse by leaving landlords with more space to occupy.
Michael Emory, founder of Allied, a real estate investment trust that owns office buildings in Canada’s largest cities, said flexible office providers will always exist, giving small businesses space to operate without signing up. long-term leases. But he said it would never account for a third of all office space, as JLL, a real estate services company, predicted before the pandemic would be the case in 2030.
“There was no chance of that happening,” Mr. Emory said.
He said office landlords would continue to offer space to coworking companies in some buildings because they attract tenants who are likely to grow and want to rent their own space in the future.
David O’Reilly, chief executive of Howard Hughes Corporation, a developer focused on large developments often including homes and offices, said coworking was a nice perk for some tenants but would not take over the business commercial real estate in one fell swoop. distant plan.
“When collaborative work takes a disproportionate share of the building, they become in direct competition with the owner,” he said. Howard Hughes has two leases with WeWork, and Mr. O’Reilly said he is talking with other coworking providers about taking over the space.
Still, 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 to landlords, hoping to earn enough revenue from its customers to cover its costs. But this never happened, resulting in billions of dollars in losses.
Other coworking companies say they don’t rent their spaces, but rather operate offices for a fixed fee or a cut of profits. Coworking businesses using this model are less likely to collapse, but it can also mean they earn less when times are good.
“By sharing profits with landlords, it allows us to do a lot 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 could get one-third of the profits on a coworking space it doesn’t rent, while the landlord would get the remaining two-thirds. Even though IWG makes less money, the company doesn’t need to borrow to finance large lease commitments, which has become more difficult because banks have pulled out of the commercial real estate business.
Dixon added that coworking should do 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 locations they didn’t have before.
“They realize that you don’t have to have everyone working in single buildings to get the job done,” he said. “We need to bring them together regularly, but not every day.”
IWG has signed deals to open more than 600 new locations around the world in the first nine months of the year, many of them in small U.S. cities. At the end of September, it had 3,455 locations, compared to 3,323 a year earlier.
Jamie Hodari, chief executive and co-founder of Industrious, a New York coworking company that works closely with landlords, is also optimistic. His company’s revenue is up nearly 40 percent this year, he said, about double what he expected. And he said Industrious, which has 187 locations, up from 85 at the end of 2019, had nearly tripled its revenue since before the pandemic.
“This is a time of enormous demand,” Mr. Hodari said.
And John Arenas, chief executive of Serendipity Labs, a flexible office space company that focuses on suburban markets, said demand has increased in recent months as many companies begin to sign their return to office plans. desk.
Some of his clients tell him, “I just need to have a place where people can land, collaborate, meet, come and feel like there’s an element of hospitality.” » Serendipity Labs has 34 sites, and Mr. Arenas expects there to be about 50 in the first quarter of next year. This year, it took over a former WeWork location near Grand Central Terminal.
Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School, agrees that sharing office space has strong appeal for employers. He said he was “a big proponent of coworking.”
But he added that many office building owners would most likely offer their own coworking spaces to tenants, reducing or eliminating the need for companies like WeWork. He said some building owners would begin running their office buildings like hotels, with individuals and businesses signing short-term leases directly with landlords.
“There’s nothing special about WeWork that Related or Vornado can’t replicate,” he said, referring to two large commercial real estate companies. “I don’t think coworking is dead at all,” added Mr. Van Nieuwerburgh. “In fact, the demise of WeWork opens a window of opportunity for landlords to take over this space.”
Julie Creswell, Matthew Haag And Gregory Schmidt reports contributed.
