We’re About To Find Out How Durable The Coworking Business Model Is

Coworking providers burst into the office sector over the past few years, but the spread of the novel coronavirus could throttle the nascent industry, as the crisis forces flexible office workers to abandon once-vibrant workplaces.

Flexible offices were envisioned as communities where a new form of work could thrive, one where startups and smaller businesses could share the kind of splendid amenities once reserved for major corporations, with short-term leases that didn’t tie them down to traditional spaces. That has left the industry vulnerable.

“We’re so flexible that many of our members can get out of their leases with a 30-day notice,” Global Workspace Association Executive Director Jamie Russo said.

Her coworking industry trade group is still analyzing what impact that is having on its member companies, and she expects to form a clearer picture in the coming weeks.

“At this point our focus is to help our members through the next 30 days and then the next 60 days,” she said. 

Every coworking firm must now make tough choices on where to limit operations, or shut down completely. Even tougher choices may lie ahead. COVID-19, the disease caused by the novel coronavirus, appears considerably more lethal than similar pandemics of the recent past, and the disruptions it causes may extend far longer than anticipated just a short time ago, forcing coworking firms to devise new long-term strategies to hold their communities together.  

Without stronger attempts to actively suppress the new virus, the U.S. could suffer up to 2.2 million deaths, according to a study released Monday by London’s Imperial College. The severity of the threat lit a fire under many state governors, including New York’s Andrew Cuomo and Illinois’ J.B. Pritzker, who over the past week all shuttered schools, bars and restaurants. California Gov. Gavin Newsom said Tuesday schools there could stay closed the rest of the school year. The Centers for Disease Control and Prevention has urged people not to partake in gatherings larger than 50 people through May 11, and the Trump administration is recommending avoiding gatherings of more than 10 people.

“I think the country has gotten on board that, at least for the foreseeable future, they should not be going into public places,” Industrious co-founder and CEO Jamie Hodari said.

Industrious, a coworking firm with offices in 50 cities, has already launched a suite of services that Hodari said will keep its members connected to each other through virtual communities. That’s an absolute necessity, he said, as most people are unaccustomed to working permanently at home, even though many modern office workers typically work from home one day per week.

“That’s a lot different from having your salesperson work at home for six straight weeks,” he said. “People really need a community. We all seem to rely on interacting with others and need human contact at work.”

It’s too early to say with any certainty what will happen to coworking providers, which, according to a 2019 CBRE report, occupied 71M SF in the top 40 U.S. markets. Coworking was expected to expand to 600M SF by 2030, or about 13% of total U.S office space. But the weeks and months ahead should show whether providers’ ambitious goals can still be met.

“This is test No. 2. Test No. 1 happened last year with the failure of the WeWork IPO,” Braddock Commercial Real Estate Solutions President and CEO Christopher Campagna said.

His Alexandria, Virginia-based firm develops coworking spaces in partnership with flexible office operator 25N Coworking. 

“We’re going to find out how durable this business model is.”

It’s unavoidable that all office providers, including coworking firms, in areas hit by the virus will suffer in some way as business districts empty out, he added.

“We want to be a part of the solution, and not part of the problem, so we’ve shut down all of our communal spaces, and that means gyms, meeting rooms, shared kitchens and all open workspaces. If you have a private office, we’re leasing it to you, so it’s your personal decision as to whether you come in and use the space.”

“That’s a really good first step, but we won’t know until later if it’s sufficient,” said Ellen MacEachen, associate professor at the University of Waterloo’s School of Public Health. “The science is not clear on how long the coronavirus can live on a surface, it could be between 24 and 72 hours, so in an open space that a lot of people are sharing, there is a lot of potential to facilitate its spread.”

Convene announced Monday it would temporarily close 17 locations across the country, including offices in New York City, Los Angeles, Chicago, Philadelphia and Washington, D.C. Industrious closed one location in Irvine, California, as well as Industrious SoHo West in New York City, and decided all of its community managers would work remotely after overstocking each location with supplies for members who still choose to work there. WeWork announced over the past week that it was suspending all member events, implementing a work-from-home policy for its employees, and closing four California locations, along with one in Pennsylvania and another in Texas.  

In doing so, the firms are following recent guidelines issued by a variety of state, municipal and federal agencies, including the CDC and the Occupational Safety and Health Administration. OSHA recommends employers switch to telecommuting if possible, among many other measures, including stringent cleaning protocols, although its guidelines don’t explicitly call for companies to close private offices.

“That could change tomorrow, and they could start saying, ‘shut it all down,’” Campagna said.

MacEachen said that might be necessary. Even private offices are filled with high-touch zones, and with this particular virus’s staying power still unknown, the best course may be to err on the side of caution, she said.

“There are still many opportunities for the virus to transmit, so a private office, while better than an open one, is not quite the same as staying in your home and not leaving,” she said.

Whatever actions are taken in the next few days and weeks, based on what he has seen so far, Campagna remains confident the coworking industry will get through this rough patch.

“Our members are not giving us any pushback, everyone is rolling with it at the moment, so I don’t think it’s going to be a massive bloodbath,” he said.

Campagna does think it likely providers will see individual entrepreneurs who occupy perhaps a single desk start dropping out once they get new home offices set up. But the small to midsized businesses occupying big chunks of space generally have longer leases, making them more likely to wait out the emergency. 

If the coworking industry has a weak point, Campagna said it’s WeWork, the pioneering firm that dazzled the market for years as it grew to 779 locations worldwide and 662,000 members. Its business model, which led the firm to sign long-term deals for massive spaces even though a hefty proportion of its members have month-to-month leases they can easily ditch, leaves it vulnerable to a downturn.

The economy is already on the verge of a severe downturn, if not already in a recession. U.S. Treasury Secretary Steve Mnuchin told Republican senators this week the nation could soon see an unemployment rate of 20%, a Republican Senate source told CNN. The Wall Street Journal reported Wednesday that SoftBank Group, WeWork’s most important financial backer, may back out of a planned $3B bailout, although its sources cited ongoing federal investigations of the coworking company, rather than fears about the coronavirus.

“The pandemic is going to put even more pressure on WeWork,” Campagna said.

Other providers, such as Convene, are better set to weather the storm, he said. Convene follows a different model than WeWork, one that places more emphasis on forming partnerships with landlords, who see its workspaces and amenities as benefits for all tenants in their buildings, benefits tenants will expect to access again when they return.

“Flexible providers like that will survive because their landlords won’t allow them to fail.”

Whatever grim challenges flexible workspaces face this year, both Russo and Campagna said over the long term, the retreat of so many workers to their home offices will eventually provide the industry with a major boost.

Many CEOs remain skeptical that working from home leads to productivity, Campagna said, but if worker output stays steady or even increases, that mentality should change.

“Companies will get more comfortable with people working remotely once they find out that employees can be productive even if they are not right under your roof at corporate headquarters.”

Remote workers won’t want to stay remote for long, he added.

“My instinct is that they will want to be part of a community. The industry has discovered over the past five or six years that a lot of our new membership is driven by work-from-home people.”  

Russo also runs Enerspace, a 6K SF coworking space in Palo Alto, California, that was shut when officials in the seven-county region mandated everyone had to shelter in place, but said she looks forward to the day when the fears of COVID-19 fade out.

“All the folks at home are going to come rushing into coworking spaces where they won’t have to deal with their kids anymore.”