Will COVID-19 be the death of coworking spaces?
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Will COVID-19 be the death of coworking spaces?
As restrictions on movement and nonessential work take hold across the country, coworking spaces have become ghost towns. These spaces — unlike traditional offices that can require five- or 10-year terms — mostly operate on short-term leases, making it easier for tenants to walk away and leaving office-sharing companies unable to pay landlords.
“With the spaces now inaccessible, many [cowork] tenants are stopping rent payments even if their lease agreements don’t include a fully articulated force majeure clause,” said Alex F. Cohen, a real estate advisor with Compass in New York City. (A force majeure clause removes liability for unavoidable catastrophes, like the current pandemic, and restricts parties from fulfilling contractual obligations.)
“At the end of the current crisis, given, at least short-term, severe economic uncertainty, I expect new and renewed commitments to coworking space to be dramatically off original forecasts.”
Coworking spaces have contributed to inflated rents in many cities because they account for so much of the real estate space. According to a report by Cantor Fitzgerald, companies like WeWork and Industrious have lowered office vacancy rates while raising rent costs in many cities.
Take WeWork: With almost 9 million square feet of space, WeWork is the largest tenant in New York City, noted Adam Henick, co-founder of Current Real Estate Advisors. If even half that space is left vacant, it’s very difficult for the commercial real estate market to absorb it — especially during an economic downtown — which could result in decreased office rents.
Even before the pandemic, there had been a slowdown in office-sharing, Henick said. Last fall, there was heightened scrutiny of the business model after WeWork canceled its initial public offering.
“Since WeWork’s pre-IPO debacle, there was real weakness in the segment and this was already impacting the psychology of the office leasing market, despite very favorable economic conditions,” Cohen said.
These effects weren’t just felt in the Manhattan market. The market for shared office space was becoming oversaturated in Boulder, Colorado, according to Laura Frenkel, a commercial real estate broker for Market Real Estate, a commercial real estate firm in the city.
“There are so many options and not enough startup tenants to fill them,” she says. As companies grow, they move out of coworking space and rent office space, Frenkel added, cheaper than a shared office though requiring a long-term lease.
Cohen in New York City said that shared-office companies overexpanded in the largest markets in the last 24 months, particularly the fastest growing players. Even before the pandemic, there was a 50% vacancy rate at Knotel locations that opened in 2019, he said. In fact, some of the larger companies, including WeWork, were beginning to pivot their business model to rent to larger, established companies between six and 12 employees, rather than focusing on single entrepreneurs, he said. However, even these leases were for 12 months or less.
“The coworking model hasn’t been around to witness an economic shock,” Henick said.
Real estate brokers suggest that the characteristics tenants love most about the shared office model — flexible, short-term leases and relaxed working environments — could be the ones that lead to its downfall.
Individuals can rent desks or small offices with no upfront capital and easily walk away because they aren’t spending $100,000 for build-out, furnishings, nor are they signing years-long leases, Henick said. Their only penalty might be a month’s deposit.
Even after the pandemic, the market for shared office space might remain soft, brokers say. Before this crisis, employees were beginning to question whether working in an open office plan was efficient, said Peter L. Curry, a partner at New York law firm Farrell Fritz. Add to that concern the possible health risks of being crammed together in office and that could have a substantial effect on the business model, he says.
“This could be a blow to the expansion of the ‘WeWork’ business model,” Curry said. “There will always be a need [for coworking space] but not to the extent that it was being leased and presented to the public.”
Now that people are becoming more cognitive of personal hygiene, they may want to shift away from densely shared office space; the concept of the “hot desk,” where people randomly sit at a different desk each day, is likely to be less appealing, Henick noted.
In order to survive, office-sharing companies will need to adjust the business model and continue their pivot toward attracting larger, more established businesses. If economic uncertainty affects hiring and growth plans, established companies might use shared office space to lower real estate costs, Henick said. A company that’s reluctant to commit to 200,000 square feet may, for example, take a long-term lease for 170,000 square feet and rent 30,000 square feet of flexible office space.
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