At its peak a few years ago, WeWork said it would reinvent the office. But the company never created a sustainable business or changed the way most people worked.
The business of offering flexible office space on short-term leases to individuals and businesses, a model WeWork hoped to make mainstream, remains niche in commercial real estate despite the billions of dollars the company and others poured into it. this approach. Flexible office space represents less than 2 percent of all office space in the 20 largest U.S. markets, according to Cushman & Wakefield, close to its share before the pandemic.
WeWork filed for bankruptcy this week in an effort to quickly reduce its office space portfolio. The company wants to give up more than 70 leases immediately and possibly more in the future. Other coworking companies may take over some of those locations, but some office building owners said they didn’t expect this approach to account for more than a small portion of their business.
Many employers are downsizing their office space because workers aren’t coming in five days a week after getting used to working remotely or on a hybrid schedule. Office vacancies are at their highest level in decades, with plenty of space available for sublease, often at a deep discount to the rents that prevailed before the pandemic. WeWork’s bankruptcy will only worsen the situation by leaving owners 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 there would always be flexible office providers, providing space for smaller companies to operate without signing contracts. long lease. 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 not the slightest chance of that happening,” Emory said.
He said office landlords would continue to offer space to coworking companies in some buildings because they attracted tenants who might 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 that often include housing and offices, said co-working was a good option for some tenants but would not take over the real estate business. commercial for a long time. long shot.
“When coworking becomes a disproportionate part of the building, it becomes directly competitive with the landlord,” he said. Howard Hughes has two leases with WeWork and O’Reilly said he was talking to other coworking providers about taking over the space.
Still, some coworking executives said they expected to do much better than WeWork because they were following a different business model. WeWork leased millions of square feet to landlords, hoping to earn enough revenue from its customers to cover its costs. But that never happened, leading to multimillion-dollar losses.
Other coworking companies say they don’t rent their space, but instead operate offices for a flat fee or a share of the profits. Coworking companies that use this model are less likely to collapse, but it can also mean they earn less when times are good.
“Sharing profits with landlords 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 take one-third of the profits from a coworking space it doesn’t rent, while the owner gets the other two-thirds. While IWG might make less money, the company doesn’t have to borrow to finance large leasing commitments, something that has become more difficult as banks have pulled out of the commercial real estate business.
Dixon added that coworking should do well in the era of hybrid work, as employers look for shorter, flexible leases that give them enough space for some employees to be in the office every day. They can also convene larger groups of workers for meetings and have smaller offices in places they didn’t have before.
“They realize that they don’t all have to work from singular buildings to get the job done,” he said. “You need to meet them regularly, but not every day.”
IWG signed deals to open more than 600 new locations around the world in the first nine months of the year, many of them in smaller cities and towns across the United States. At the end of September it had 3,455 locations, compared to 3,323 the previous year.
Jamie Hodari, CEO and co-founder of Industrious, a New York co-working company that works closely with landlords, is equally optimistic. His company’s revenue has grown 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.
“It’s a time of enormous demand,” Hodari said.
And John Arenas, CEO of Serendipity Labs, a flexible office space company focusing on suburban markets, said demand had grown in recent months as many companies began to finalize their return-to-office plans. .
Some of his clients tell him: “I just need a place where people can land, collaborate, meet, visit each other and feel that there is an element of hospitality.” Serendipity Labs has 34 locations and Arenas predicts it will have approximately 50 by the first quarter of next year. This year, he took over a former WeWork location near Grand Central Terminal.
Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School, agreed that sharing office space had strong appeal for employers. He said he was “a big believer in working together.”
But he added that many office building owners will 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 managing office buildings more like hotels, and that individuals and businesses would sign 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,” Van Nieuwerburgh added. “In fact, the demise of WeWork opens a window of opportunity for landlords to take over that space.”
Julia Creswell, Matthew Haag and Gregory Schmidt contributed reports.