The flexible office space industry hit a turbulent point in its history when giant WeWork filed for bankruptcy protection in the past month. Even with that upheaval, one new-to-the-scene coworking operator is looking to shake up the market further with an unusual strategy: owning its real estate.
Through a partnership formed by Denver-based development firm Koelbel & Co. and a longtime coworking executive, Work Simple has ambitious plans to acquire and revitalize older office buildings in smaller and more suburban office markets across the United States. The firm is targeting buildings in secondary or tertiary markets outside the top-tier population centers such as San Antonio rather than Dallas, or Omaha instead of Chicago.
Work Simple is skipping over popular coworking hot spots in favor of locales that can provide office space for people who could work from home but would rather avoid toiling at their dining room table and instead are seeking an alternative space a short drive away.
"Our No. 1 competitor is people's home office, and 90% of our customers don't work for someone else," Mark Hemmeter, a Work Simple partner who started the coworking and shared-office company Office Evolution two decades ago, told CoStar News. "We're looking for those 'zombie buildings,' or older, standalone office buildings with good parking and access. They don't have much of a purpose anymore and need to be changed into something new. We've got a great solution for them."
The new coworking concept comes with its fair share of risk, however, especially considering the unprecedented challenges facing office demand and the future of the commercial real estate industry. Financing property deals is challenging, and Work Simple has a limited window of time to secure the capital it needs to take advantage of low prices while reaching the scale the startup is hoping to achieve.
Unlike Work Simple, flexible office companies such as WeWork, Industrious, IWG and Convene have long favored securing locations through lease agreements or landlord partnerships to rapidly expand their portfolios of locations. In the case of WeWork, the New York-based firm signed hundreds of long-term office leases in prominent locations at the top of the market rental rates in the late 2010s. It then invested its own capital to spruce up the spaces and sublet them for as little as a month at a time, a strategy that ultimately contributed to its decision to file for Chapter 11 bankruptcy protection as it looks to reject nearly 70 underperforming leases.
While other flexible office space operators have avoided that high-overhead commitment, many still follow a similar playbook: find locations in urban, mixed-use areas and manage them through a profit or revenue-share agreement with the building's landlord, never through owning their own spaces.
That's changing, though, as companies including Switzerland-based IWG, the parent of coworking brands Regus, Spaces, HQ and Signature, is now targeting suburban and rural locations as part of a global expansion. Most of its 21 new spaces in Illinois are in suburban Chicago and smaller markets such as Peoria and Moline.
The Koelbel-Work Simple partnership, which was formed earlier this year, already has about 10 buildings under contract but plans to acquire far more in a race to expand its footprint and meet its goal of operating at least 50 locations before the end of the decade, said Hemmeter, who founded Office Evolution in 2003 and sold the franchise coworking company last year for an undisclosed sum.
"People tend to look at the coworking industry as monolithic, but it's much more like the hospitality business in that, at the end of the night, there are very different models with very different clients and very different capital structures," Hemmeter said. "The difference for us is that we want to target shared-office space in the suburbs and we want to own those buildings. Maybe they're distressed or maybe they're just older, but we're trying to take a structure that has failed and convert it into something people actually need."
Entering New Territory
While coworking operators face plenty of hurdles — depressed demand across the national office market to name just one — Work Simple is contending with a unique challenge: securing the financing it needs to increase its owned space at the pace it wants.
"Finding the buildings isn't the challenge, it's finding the financing to buy the buildings that's the challenge," Hemmeter said. "There are more buildings popping up that are distressed, but the capital markets are so challenged right now, and it's difficult. When you say 'office' around anybody, they don't want to get anywhere near it because they're so terrified about what's happening to the office market. Our office solution may be different than the traditional office solution, and while some people get it, 80% of the people say they don't care what it's called, they won't be touching anything related to office space."
Work Simple could scrape the funds together by relying on capital that Koelbel invests from its balance sheet, but Hemmeter said that to get to the desired scale, it needs to bring in other equity partners. The development firm is already trying to raise upward of $20 million to help fund Work Simple's acquisition goals, but the partnership knows it has an undetermined window of time to capitalize on the depressed valuations, mounting landlord distress and other current market difficulties before pricing gains momentum.
The company did not disclose how much of that fundraising effort has materialized.
For now, however, the national office market outlook in the near future remains grim.
Daily office attendance has hardly budged throughout this year, hovering around 50% in most major U.S. markets, according to a CoStar analysis. The combination of more flexible work schedules and global economic uncertainty has meant tenants are aiming to optimize their real estate footprints, often downsizing their spaces or offloading them altogether for the sake of increased efficiency and cost-saving measures.
So far this year, tenants have collectively handed back more than 60 million square feet of office space across the United States, according to CoStar data, or more than 180 million square feet since the start of 2020. The national vacancy rate has climbed to a record-high of 13.5%, and leasing volume has dropped by about 17% from its average in the late 2010s.
Capitalizing on Demand
All of that has collided to create a new office landscape that could work in favor of the flexible space industry, assuming it can capitalize on the demand operators believe is still there.
The state of the industry has been under the spotlight since WeWork, once valued at nearly $50 billion, lifted the hood on its financial turmoil with its decision to file for bankruptcy.
As WeWork seeks court approval to reject leases for dozens of its expensive, unprofitable locations, it is also in talks with hundreds of landlords to amend other lease agreements — the company's role as an attention-grabbing player has led to questions about the economic viability of other coworking space providers.
Industry executives say the challenge now after the pandemic changed the office market, is to prove that flexible space is not only viable but also well-positioned to grow with business models that are far more sustainable. For Israel-based Mindspace, a company founded in 2014 focused on central business district locations, that means convincing landlords of potential expansion as well as profitability — and that it will be more careful than WeWork was in its first decade.
For Industrious and IWG, that means cutting deals with landlords to take over a portion of an office property and providing coworking space that serves as a building-wide amenity.
Strategy aside, a number of operators are looking to tap into the demand that has been fueled by corporate employees' newfound flexibility but also their need to avoid the isolation that comes from working from home.
"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 global coworking market is now valued at more than $14 billion, according to data from Market Reports World, and is forecast to grow annually at a compound rate of more than 15% through 2028.
What's more, the aforementioned downsizing among companies across a range of industries, sizes and other factors has meant more office tenants are looking for greater flexibility in their own leased locations.
"An enormous number of customers are moving out of the long-term lease space into flexible office arrangements," Industrious founder Jamie Hodari said, adding the firm is enjoying the "strongest performance" in its history and sees "more demand for [flexible working spaces] right now than at any time in the last decade."
Industrious' revenue has tripled since 2019, Hodari said, and its current revenue growth rate is between 35% and 40%.
Targeting Smaller Markets
With most coworking operators' eyes focused on one area of the market, Work Simple is homing in on something else entirely.
With its plan to operate locations in secondary or tertiary markets, Hemmeter said the company's plan faces almost no competition since it focuses on an underserved, typically ignored population of customers.
"One of the traps any business can fall into is trying to make everyone happy or appealing to all users," he said. "About 90% of our targeted customer base doesn't work for someone else. While we might get some business from a Dell or Microsoft employee who moved to Idaho during the pandemic, that's not really the market we're after. We want the clients that live 10, maybe 15 minutes away and are looking to go somewhere that's easy to get to, serves good coffee, has plenty of professional amenities and private spaces to work, and helps them feel good about getting out of the house to see other people and meet other clients."
Future Work Simple locations will likely span about 40,000 square feet across only a couple of floors — "that's our sweet spot," Hemmeter said — and won't include the latest and greatest amenities that are expensive to maintain and oftentimes distracting. Instead, some properties might include a locker room, bicycle parking, or at its fanciest, an indoor golf simulator. All locations will include access to conference rooms and on-site support staff.
Once up and running, tenants and members will sign agreements for as short as a month-to-month basis or up to one year.
The Koelbel-Work Simple partnership is planning to spend between $100 and $250 per square foot to completely scrape the inside of the buildings upon acquisition and subdivide them into new small offices as well as conference rooms, kitchens, reception areas and other shared building spaces.
"The great property hunting will be over the next two years since so many buildings are in distress now," Hemmeter said. "We're ready and can build infrastructure quickly."