New coworking brands are going out of their way to differentiate themselves in an increasingly competitive industry emerging from the pandemic, seeking to avoid mistakes made by earlier providers of flexible office space such as WeWork.
The changes include offering coworking space beyond office towers in central business districts, making sure they sign only profitable leases — even if that means growing very slowly, avoiding the long and static agreements that previously dominated the market, and looking to offer more meeting and event space.
"People have a totally different way of working now," Julie Whelan, CBRE's global head of occupier thought leadership, told CoStar News. "The purpose of the office has changed, and while we continue to think there will be some end state to the return-to-office movement, I don't think that exists. I absolutely think the need for flexibility will continue into the long term."
The state of the coworking industry has come under the spotlight after high-profile provider WeWork, once valued at nearly $50 billion, warned last month in a Securities and Exchange Commission filing that its financial losses and negative cash flow "raise substantial doubt" about its ability to "continue as a going concern."
As New York-based WeWork scrambles to renegotiate leases and shore up its balance sheet, the company's role as an attention-grabbing operator in the coworking industry has led to questions about the economic viability of other flexible space providers. WeWork burst on the scene in 2010, growing rapidly in the following decade until corporate governance concerns led it to scrap an initial public offering and oust co-founder and CEO Adam Neumann before it went public and focused on cutting costs. This change of direction — and fortune — for WeWork was so dramatic it was made into an AppleTV+ miniseries.
Industry executives say the challenge for providers now, after the pandemic changed the office market, is to prove that coworking is not only viable but also well-positioned to tap the rising demand for flexible workspace with business models that are far more sustainable. For Israel-based Mindspace, a flexible space provider founded in 2014 focused on central business district locations, that means convincing landlords of the company’s potential growth as well as its profitability — and that it will be more careful than WeWork was in its first decade.
"Everything happening now with WeWork, especially because the brand is so recognizable, has put a challenge on the whole industry," Mindspace U.S. General Manager Shai Fogel told CoStar News. "Now we have to explain that, while WeWork's idea was amazing, and we all do kind of the same thing, it is just one company. The product is great, but they made a few wrong decisions. Just because one company fails doesn't mean they all will."
Shifting Work Patterns
Post-pandemic work schedules have evolved far beyond the previously typical 9-to-5 workday, leaving office tenants to rearrange their real estate footprints in an effort to accommodate the shifts in where and how their employees work. Some companies are increasingly turning to flexible office space as a way to fill gaps in their office portfolios, with 36% of respondents in a recent CBRE report saying flexible space now accounts for more than 10% of their total commercial footprints.
That's a sharp spike from the 19% in the prior year's survey who reported that flexible space would take over a larger portion of their office footprint. What's more, roughly half the respondents said they anticipate flexible space will make up at least 10% of their office portfolios within the next two years, a sign that demand for alternatives such as coworking options is unlikely to wane.
"We're seeing more organizations that are prioritizing buildings that have a flexible component in them and are prioritizing landlords that have a flexible sentiment toward what the future of their space will be," CBRE's Whelan said. "There is a growing portion of space where even the largest companies are realizing would be best suited to be flexible and less intensive on the real estate side. Companies have more options now that didn't exist before and will allow them to insert more flexibility into their portfolios."
The accelerating push to incorporate more flexible space into companies' real estate strategies has resulted in a global coworking market valued at more than $14 billion, according to data from Market Reports World, and forecast to grow annually at a compound rate of more than 15% through 2028.
To achieve that growth, however, the coworking industry needs more profitable agreements with landlords that can be resistant to swings in the economy, real estate professionals say.
For Industrious, the industry's expansion has bolstered its own pipeline as it prepares to add another roughly 25 locations before the end of this year to its global portfolio of more than 170 outposts. The New York-based company has carved out a niche at the upper end of the coworking market, focusing on locations in mixed-use areas on the outskirts of central business districts that fit into a broader ecosystem of restaurants, fitness studios, coffee shops and retailers.
To tap the pandemic-driven shift toward neighborhoods on the outskirts of downtown hubs "we changed our network strategy 18 months (to) two years ago after seeing exactly that," said Peri Demestihas, Industrious' senior director of real estate. A lot of towers in central business districts "just don't do it for people anymore, so our entire focus now is on those live-work-play areas. There are a ton of places where we're not, and a ton of opportunity to get to those places."
Slow Growth
Even with rising demand for their space, however, operators such as Industrious and Mindspace are taking a more measured approach to expanding their own portfolios, far different from the growth-at-any-cost mindset WeWork initially pursued to build out its brand.
For Mindspace, which has been profitable since 2019, Fogel said its slower growth rate has been a critical point in conversations it has with landlords as the operator tries to differentiate itself from WeWork's struggles.
"We are a company that is revenue-driven," he said. "Our locations pay for the next location, and before we know one is profitable, we won't start looking for another one. We always have opportunities, but we want to make sure we stay a sustainable company financially and operationally so we can actually grow. We want to have the right opportunity real estate wise, but also want to make sure we're meeting demand."
The Israeli-based operator, which recently opened locations in the New York City area and South Florida, is on track to add about five new outposts to its global portfolio of about 45 locations before the end of the year.
But it isn't just office space that companies are looking for.
Flexible meeting, event and gathering spaces have taken on a larger role in coworking operators' portfolios. The offerings can be an important differentiator aimed at helping them stand out among competitors.
Convene, the New York-based coworking operator founded in 2009, for example, tries to go beyond providing the typical coworking services to offer event planning, technology to bridge in-person and remote workers, corporate meeting space for smaller off-site gatherings or larger conferences. And that's in addition to the industry standard offerings of private workspaces with access to plenty of snacks.
"You can come to a Convene and we'll be able to help with any virtual, hybrid or physical meeting need," Convene President Amy Pooser told CoStar News. "Many clients use us to both have an actual office presence and also to support remote workers as they move around the country and the world. Maybe they shed real estate, reduced their real estate or have gone completely to a remote-work strategy, so they need a way to continue to help make their employees productive."
Landlords Join In
Providing flexible meeting and event space has also become increasingly appealing for landlords seeking to fill their buildings as well as appeal to tenants looking for access to that type of amenity without having to lease it as part of a long-term agreement.
Mindspace's Fogel said providing and managing flexible meeting space in the operator's locations has also helped in negotiations with landlords as the firm and other operators look to reach profit or revenue-share deals that are more economically feasible than the traditional lease structure upon which WeWork built its portfolio.
"We can be a host where we rent out event space in locations for things like training days or parties, but we can also help activate other tenants in the building with things like yoga, movie nights or other events that bring tenants into our spaces," Fogel said. "Landlords are always looking for a way to engage their tenants since it helps keep them in the building, and since there were a lot of companies that went fully remote during the pandemic, many of them don't have access to that kind of space anymore."
Nearly 40% of respondents in the CBRE flexible office industry report said their interest in alternative space was driven by a need to provide employees with meeting and collaboration space when needed. That could involve bringing on an operator such as Convene to help plan and host events, or it could mean taking advantage of space a building owner has set aside for tenants to use.
"The beauty of flex is that it can be used for a lot of different uses," CBRE's Whelan said. "Landlords value having coworking space and suites in their buildings, and the biggest shifts in the market lately have been among landlords and investors who are taking a closer look at flexibility now and believe in it more. Landlords think it's accretive to their bottom line, and that's where we have to go with this so that it's a win-win-win for landlords, tenants and operators."
Landlords across the country may have balked at the profit-share agreements coworking operators pitched during the early days of the pandemic, but with office vacancy rates and the demand for flexible space on the rise, those agreements have become more attractive as owners scramble to fill an unprecedented amount of available space.
Empty Offices
Office vacancy rates across the country have climbed since the start of the year to a record high of nearly 13.5%, according to CoStar data. Tenants have collectively offloaded more than 47 million square feet over the past nine months, and total occupancy has dropped to its lowest level since mid-2017.
"It's easier now to convince landlords that revenue-share agreements are far more preferable, and most landlords don't question why we don't do traditional leases anymore," Industrious' Demestihas said. "I can point to a portfolio with a lot of locations and our occupancy rate and prove our success in the market. That's a big advantage."
Even so, WeWork's bankruptcy warnings have rattled a market already on the brink of uncertainty. Landlords, especially those beholden to lenders and facing steep jumps in vacancy rates, are struggling to figure out how to underwrite coworking operators because those tenants don't provide the same level of stability that a typical lease agreement historically would.
"The office market in general is a tough place to transact now, so a lot of my problems are my landlord partners' problems, too," Demestihas said. "Sometimes they want to do these (revenue-share) deals but simply can't."
While the coworking industry has become increasingly diverse, most operators agree that in order to navigate the challenges plaguing today's office market, they have to abandon the approach WeWork used to build out its network and attempt to define the industry's future expansion.
Instead of opening locations at rapid-fire speed, companies such as Industrious and Mindspace are carefully studying local demographics before deciding to open in any particular market. Traditional lease deals that once locked operators into a long-term, cash-intensive agreement are no longer on the table — "they never work," Fogel said — and operators view their relationships with landlords as more of a partnership to help support the overall performance of any given building.
"There definitely is a question in the industry and a question around how there’s a very big name in the industry having a tough time," Demestihas said. "That’s going to create some confusion. But there are landlords that are smart and walking around locations that are full and busting at the seams, and saying, 'There’s something here.' They can see the performance with their own eyes. They do believe that coworking and flex is a big part of the industry, so there's still room for everyone to grow."