As Traditional Office Recovery Falters, Coworking Firms Continue To Bounce Back

Rising Covid-19 cases and hospitalizations dashed hopes of a robust return to the office by Labor Day, and the rapid intensification of the disease has seen Houston employers push off a large-scale return, mirroring the actions of national and international firms.

Coworking operators say that uncertainty has benefited their business model. Multiple operators told Bisnow they have seen significant gains in occupancy continue through the summer, with many small-to-midsized firms still choosing flexible office options and shorter leases.

“I think a number of those companies would have just simply gone into traditional long-term space. And the uncertainty is bringing them to us,” Common Desk CEO Nick Clark said.

Office occupancy levels in the Houston metro have been trending downward since late July, reflecting the delta variant’s impact on businesses and employees. Kastle Systems data showed that as of Sept. 8, office occupancy across Houston was 45.4%, falling from a peak of about 50% the week of July 24.

Houston still has a higher rate of occupancy than any other city tracked by Kastle, followed closely by Austin and Dallas. Texas’ early reopening efforts have been credited with a speedy economic recovery within the state over the past six months. 

Yet office brokers and experts said during a Bisnow event in early September that although traditional office leasing activity ramped up during the spring and early summer months, things have slowed recently, reflecting the reluctance of decision-makers to pull the trigger. 

That pullback isn’t affecting flexible office and coworking firms in the same way, according to Clark. He said Common Desk began to see a major surge in demand during the second quarter of 2021, which has continued through the third quarter, helping the firm expand in the Houston market. 

Common Desk’s Houston locations saw tour traffic increase by 30% in the second quarter compared with the prior three-month period, while revenue across the firm’s Houston portfolio has increased by 60% since May. The firm’s newest Houston location at The Ion opened in mid-August at 40% occupied.

Three locations are now open in Houston, and two more locations are in the process of being built out, with more planned. Common Desk was founded in the Dallas-Fort Worth area, where it has 12 locations, and also operates three locations in Austin.

“We were really worried about [the delta variant], but we haven't seen any material effect up to this point. Numbers continue to trend upwards from a tour traffic standpoint, which is a good sign for us,” Clark said.

Coworking and flexible office models primarily tend to serve individual entrepreneurs or firms of up to about 20 people. Those types of users usually have a smaller budget and require more short-term flexibility around size and price than traditional office users — and during a pandemic, that flexibility has become more valuable than ever.

Coworking juggernaut WeWork said that in Houston, the firm has also been experiencing strong upward growth. Locally, the firm’s All Access bookings were up by 70% in August compared with March. The All Access product, launched in 2020, gives members access to any of WeWork’s locations around the world for a flat monthly rate. WeWork’s On Demand product bookings were also up 72% in August, compared with March. 

Overall, September has been WeWork’s strongest month for occupancy, the firm added. As of Sept. 13, growth was up 14% month-over-month. WeWork operates four locations in Houston, totaling 273.3K SF.

“Across the board, we've seen more and more companies and individuals in Houston embracing flexible space, even — and especially — as the pandemic has forced some companies to rethink their return to office plans,” WeWork Senior Territory Vice President Quendrida Whitmore said in an email.

Whitmore noted that during the pandemic, occupancy numbers across the firm's entire portfolio have aligned with broader trends, such as rising vaccination rates. But while lofty expectations around office usage after Labor Day may have fizzled for traditional office, WeWork hasn't experienced a drop off.

"While some companies who originally planned on a post-Labor Day return to office delayed that date until later this fall, September has still seen growth thus far," Whitmore said.

The delta variant doesn’t appear to have harmed the recovery of coworking firms in Houston, but it’s still unclear if they have enjoyed significant gains at the expense of traditional office landlords. Clark said that it was too early to tell if there’s a trend of large-scale businesses deliberately opting to sign short-term coworking leases.

“Our portfolio doesn't have a ton of exposure to bigger enterprise suites. I think the delay on the corporate America side of things, it certainly hasn't hurt us. [But] if it's helped us, I don't really know, unfortunately. It's just a little too soon to tell,” Clark said.

Texas-based WorkSuites has four coworking locations in Houston, as well as 17 in the Dallas-Fort Worth area. Senior Director, Brand and Products Tosha Bontrager said WorkSuites does cater to small-to-midsized businesses, and since the beginning of summer, her firm has seen more companies sign up for space. 

The most common lease length for WorkSuites is a year, but more firms are opting to sign three- or six-month leases because of the widespread uncertainty around delta and future pandemic disruptions, Bontrager said.

“Everyone's kind of afraid to commit for any long period of time," he said. "And I know a year is not long by normal standards, but three and six are more popular now than they were in the past."

Bontrager said he's been surprised by the number of firms that have opted to lease flexible office space for only a few months because they’re waiting for traditional office space to be built out.

“We have a lot of companies that are signing with us temporarily," he said, adding some are opting to go month-to-month or signing three-month leases while they wait.

Clark said his firm has seen a few instances of that, but most users are looking for longer lease terms. He noted that because of the way that Common Desk structures agreements with landlords, the firm is often negotiating deals that will eventually help its landlord partners land a long-term deal elsewhere in the building.

“The landlord is able to entice them to the building. They need that temporary space. And so we can solve that for them very easily while they're waiting for their long-term space to be built out,” Clark said.

Bontrager and Clark said that they don’t expect the delta variant to have any significant impact on demand, and both WorkSuites and Common Desk are moving ahead with expansion plans in the greater Houston area.

“I think what Covid has done, and especially as Covid has lingered, it's just simply given more companies a chance to sit and think and strategize, and realize that maybe that five- to 10-year lease term isn't necessary,” Clark said.

Clark noted that as more supply hits the Houston market, businesses are going to look at turnkey sites as an attractive alternative to long-term office leases.

“It feels like companies, even stable companies — the world is moving so quickly that it's really hard for them to project exactly what their office needs are going to look like three years from now,” Clark said.

UPDATE, SEPT. 14, 5 P.M. CT: This story has been updated to include additional comments from WeWork’s Quendrida Whitmore.