The recent decline of WeWork has raised many questions locally, from within the Proximity Network and across the industry. Will there be new hurdles to funding coworking spaces? How are landlords responding? Are WeWork’s troubles a sign of a more significant trend?
While WeWork’s future is uncertain, it’s clear coworking is thriving in thousands of communities around the world. Proximity believes our industry is resilient and will continue growing to meet the needs of an increasingly mobile workforce.
This week with the help of Gianni R. LaBarba, Managing Director of Mohr Partners, and Jerome Chang, Founder of Blankspaces, Proximity CEO Josh Freed discussed what our industry looks like after WeWork. Here are the key takeaways from the conversation that coworking space owners and managers can keep in mind as you consider WeWork’s impact on your community and our industry.
WeWork’s decline does not reflect the current state of a diverse coworking industry.
As a single operator, WeWork holds less than one-third of the industry market share. The coworking industry is diversified with approximately one-third to one-half of spaces operating independently, and the remaining portion made up of larger corporate operators including Regus, Industrious, and Knotel.
Corporate operators, including WeWork, are primarily focused on coworking space locations in top-tier cities with dense populations and a selection of Class A office buildings. However, the Proximity Network is experiencing the growth of new customers at an 8:1 ratio of independent coworking spaces to corporate operators. These spaces are frequently in mid-size cities, suburbs, or rural areas. These coworking spaces are also catalysts for broader change in their communities, including economic diversification and the generation of more entrepreneurial activity.
Within the Proximity Network, many independent spaces are experiencing growth and operating profitably with a lean approach to leasing, buildout, and operating costs when compared with the cost-intensive growth model of WeWork.
Market demands will continue to dictate real estate trends in coworking and flexible space.
Coworking demand is driven by the needs of the workforce, not by real estate pricing or trends. As the workforce continues to become more flexible and distributed, commercial real estate leasing models and flexible space options continue to be shaped by the needs of modern companies and individual workers.
40% of the workforce currently works remotely in some capacity, and our panelists believe the coworking industry has not yet experienced the full impact of this shift to flexible work. Panelists also think many employers haven’t responded quickly enough to this demand, and companies that are not remote-enabled will struggle to recruit and retain talent as employees expect at least some flexible work as a standard benefit.
For companies considering a move to more flexible space, recent changes in accounting regulations (FASB 842) create incentives for businesses to consider short-term leases over traditional, long-term commitments. Rather than recording long-term contracts and office equipment as balance sheet liabilities, companies can leverage flexible options provided by coworking spaces and reduce overhead.
Landlords are increasingly likely to enter coworking directly.
As coworking has become more mature and commonplace, panelists are seeing an increased number of landlords who are directly pursuing coworking as a means to fill vacant space. Building owners are also seizing opportunities to improve margins that would otherwise pass to coworking space operators.
Larger tenants who base their office(s) within coworking spaces consequently have concerns about relocation and business disruption in the event their coworking space folds. These concerns present an opportunity for landlords who are willing to negotiate shorter-term leases with tenants who prefer the coworking space model.
Healthy, connected communities remain a differentiator in coworking.
With more landlords entering coworking, competition in the market is expected to increase. However, landlords without coworking experience will likely struggle to create a culture and manage spaces in a way that supports everyday member needs. Our panelists believe landlord-lead coworking will not be successful without a committed operator and a community-driven motive. A great location and sound design are always member considerations, but members will ultimately choose and stick with a community that provides both business connections and social support.
Some markets could be impacted by a WeWork consolidation, but now may not be the best time to enter into new leases to counter increased market availability.
WeWork reported this week it will receive a capital influx from Softbank, but the company’s financial future and sustainability remain uncertain. If WeWork closes locations or doesn’t move forward with the planned completion of new sites, these markets will see a significant supply increase. If square footage becomes available in WeWork’s markets, lease pricing will drop and create an opportunity to secure favorable rates.
Panelists believe real estate is currently at a peak in pricing in many markets across the country. Entering a new lease now presents the risk of locking in a high market price in the event of an overall market downturn, but panelists expect the demand for coworking to remain high even in the event of an economic recession.
Coworking and the flexible workspace industry are built on collaboration and will keep moving forward.
Large operators like WeWork notwithstanding, the coworking industry is incredibly resilient in the face of economic shakeups and individual failures. Among independent coworking spaces, an incredible amount of work is occurring to create community hubs, foster new business connections, support entrepreneurs, and provide a professional community for remote workers.
Proximity is proud to be a part of this industry’s growth and will continue to support coworking space owners and operators every day in making your spaces successful.
Proximity CEO Josh Freed will also speak on the future of flexible space at the PERE America conference on October 29 in New York. The event panel includes Jamie Hodari, Co-Founder and CEO of Industrious and Andrew Kupiec, CEO of Hana.
Missed the Impact of We discussion? Watch it here.