Competitors Eye Space Abandoned By WeWork As Coworking Seeks New Normal

WeWork’s bankruptcy filing last week rippled through property and financial markets as landlords braced for the potential impact of the coworking giant pulling out of leases and their corresponding office spaces.

But with an initial round of 69 leases the company wants out of, the broader coworking industry that WeWork revolutionized in better days could shift as other providers step into the void.

“We've taken over a dozen-plus WeWorks already,” Industrious Chief Operating Officer Liz Simon said in reference to deals her company executed in recent years as WeWork sought to improve its balance sheet. “Those won't be the last time that we do. So far they've rejected 70 [leases] and some of them are places we'd love to be operating. And we expect there to be more to come.”

IWG CEO Mark Dixon told CoStar last week that his company had also taken some WeWork spaces and was likely to do more of the same.

However, the future of coworking and its footprint in a struggling office market is still in flux, with conflicting market forces weighing on different parts of the industry.

“The jury's still out on what coworking is going to look like for the next decade-plus,” said Obermayer Chairman David Nasatir, who leads the firm's distressed commercial real estate group.

“I don't know when the dust is gonna settle on that — maybe this year, or it may take another year or so but there clearly is a shift in the marketplace,” Nasatir said.

As of March, coworking space totals about 113M SF, or 1.67% of total U.S. office space, according to CoworkingCafe, which tracks the market. That total has grown almost tenfold since 2010 when WeWork began.

A large number of leases will expire in the coming few years, putting a lot of square footage onto the market, Nasatir said. Some of that space will represent opportunities for landlords to create coworking space, but it isn't clear yet how much, because the demand for coworking in the future isn't entirely clear. Still, fewer people coming into the office may or may translate into more demand for space elsewhere, such as in coworking spaces.

“The question you ask yourself is, if someone is working two or three days in the office, what's going to happen with that office the other two or three days?”

One strong possibility is an increase in hoteling, where workers share space across a week in which none of them are in the office every day, Nasatir said. That is less of a coworking model.

“The other concept is really more of a coworking environment, where businesses just lease out space for a portion of the week,” Nasatir said. “That's all they need. They want the team there every day with everybody on Tuesday and Wednesday, but on Thursday and Friday, everyone's working from home.”

“The demand for flexible work is higher than we've ever seen as a company, and that's pretty consistent across most of the other operators in this space,” Simon said.

More specifically, tenants are demanding flexibility in leases, and landlords are coming around, according to a CBRE report in August. CBRE has made major investments in Industrious in recent years.

“Tenants are looking for landlords to provide flexible options that allow them to quickly expand or contract their office space as business conditions dictate and office attendance rates shift,” the report noted — the essence of the coworking model, in other words.

Business formation will be a key component in keeping demand for coworking healthy, according to Paolo Catania, founder of MetSpace, which operates two coworking spaces and is looking to open more.

“What I'm seeing is that every year there are more entrepreneurs starting up their own little business, a lot of startups,” Catania told Bisnow. “And studies show that in the next seven years, that's going to increase even more.”

The Census Bureau reports that business formations consistently numbered a little less than 25,000 nationwide each month during the years before the pandemic. After a steep drop early in the pandemic, that total has bounced up to around 30,000 a month, which the bureau projects will remain the case through next year at least.

Those entrepreneurs are going to need office space somewhere, especially as they grow, Catania said, and that will offer opportunities for coworking operations, including smaller ones.

“Most properties have space for an area with flexible solutions,” Catania said. “I see that as a pro for a building. There are companies that are going to downsize and companies that are going to grow. Why not keep those tenants in your building?”

Some of that space operated by WeWork will be taken over by other operators like Industrious or others, and some will be operated by the landlords, Simon said. Landlords will also turn to experienced partners to help them run their own coworking space.

“Flex is still a relatively small percentage of the overall commercial real estate industry,” Simon said. “I think it will grow. It's got to be a tool in the toolbox of landlords in thinking about what to do with all this space.”

Simon cites WeWork's model as a weakness that hobbled the company, which had roughly 85% of revenue going toward fixed costs, which was essentially unsustainable. The bankruptcy is going to enable the company to shed much of those costs, however.

“I think it'll come out of the reorganization pretty strong,” Simon said regarding WeWork. “Sounds like they've managed to reach some favorable, at least preliminary, sorts of restructuring terms with their creditors.” 

"WeWork wants to see the entire commercial real estate industry succeed and we’re happy to hear when spaces we’ve formerly operated are released," a WeWork spokesperson told Bisnow by email.

The shared office model isn't dead, but markets may need less of it, Crescit Capital Strategies CEO Joe Iacono said. The model is now for those who are hybrid and need the flexibility of shared space for the times they do want to be in an office.

“We will likely settle into a hybrid work schedule, with the amount of in-office time varying based on industry,” Iacono said. “The pendulum swung far towards remote work and will swing back to a hybrid model, but not completely back to pre-pandemic levels."

Yet the transition may be difficult. Many of the spaces will require significant capital expenditures to upgrade and make them attractive to new tenants in the face of much lower rents and anemic demand, Iacono said.

“In business centers like New York City, where WeWork accounts for 60% of the shared office space market, this has added a ton of salt to the wound, in the face of soft office demand,” Iacono said.

“Landlords are highly incentivized to work with WeWork to restructure leases where possible, given the overall state of the office market," Iacono said. "Occupied is almost always better than vacant.”