Before WeWork’s failed IPO, much of the criticism of the coworking and flexible office business model focused on the challenges that coworking operators would likely face in a recession, when clients could easily end short-term memberships to conserve cash.
By contrast, since WeWork and other coworking firms were often on the cutting edge of open-office design and were emulated by tenants in traditional leases, their dense office layouts were more likely to be identified as an asset than a liability. The COVID-19 crisis is now testing each of these assumptions, as coworking operators make difficult decisions to keep their members and employees safe while also keeping their businesses running.
The open office design of many coworking and flexible office spaces can allow viruses to spread more easily than traditional office layouts, as Konrad Putzier noted in the Wall Street Journal. Without walls or a cubicle divider, droplets from a sneeze or cough can spread farther. Offices that use unassigned desks – a common practice in coworking – can also make it easier for a virus to spread as new desk occupants come into contact with infected surfaces. Putzier observed that some companies have opted for office layouts that encourage close contact between occupants to facilitate interaction. For example, WeWork has intentionally narrowed office corridors so that workers are more likely to physically run into each other.
In the face of the novel coronavirus outbreak, these design features are now a cause for concern. Amy Feldman and Samantha Sharf, writing for Forbes, reported that “workers are avoiding WeWork like, well, the plague.” Although the company has temporarily closed locations for cleaning when members or staff have become infected, it is otherwise keeping its offices open. WeWork has stopped providing members with breakfast and barista services, has suspended events at its locations and is allowing employees to work from home.
Despite these measures, however, Feldman and Sharf reported that member attendance has declined sharply at its locations. This decline may threaten the company’s viability, given its recent liquidity problems and indications that SoftBank is backing away from buying out WeWork’s shareholders.
Threatened by Subleases
In addition to member concerns about infection risks at coworking facilities, these spaces may also be vulnerable to growing competition from more traditional subleases. Tenant representation firm Hughes Marino reported a 14 percent increase in available sublease space from January 1 to March 13. Jason Hughes, the firm’s chairman, CEO and owner, and David Marino, the executive vice president, said they expect that traditional office leases will struggle to compete with subleases offered at below-market rates by tenants that have older multiyear leases, especially since many of these spaces are already furnished and technologically equipped, making them more attractive for companies interested in minimizing capital investment.
Commercial real estate professionals have long speculated that an increase in subleases during a recession could pose a threat to coworking firms’ viability. Subleased space competes directly with coworking and flexible office spaces, as both options appeal to firms interested in short-term commitments for furnished space. But coworking operators generally charge their members more on a per-square-foot basis than they would pay for a traditional lease, let alone a below-market sublease.
As Serendipity Labs CEO John Arenas noted in June, flexible office operators who rent entire offices or floors to enterprise clients are particularly at risk of competition from subleases, as these clients are well positioned to take advantage of large sublease opportunities that become available.
Adapting to Change
Coworking and flexible office operators are taking a variety of steps to respond to the coronavirus outbreak. Although WeWork remains largely open, Bloomberg reported that the Wing has closed all of its facilities and Convene has closed more than half of its locations. Washingtonian reported that coworking operators in the Washington, D.C., area are taking measures to protect members from the virus, such as providing members with hand sanitizer and disinfectant, increasing cleaning, replacing bulk food with individually-wrapped snacks, allowing employees to work remotely and asking sick members to remain home.
Writing for NTX INNO, Kevin Cummings observed local coworking operators, such as Capital Factory, Work Suites and Common Desk, taking additional steps to limit the spread of COVID-19. These include restricting non-essential business travel, limiting member guests, terminating sick members who fail to self-quarantine, and offering a range of virtual services such as virtual offices and digital happy hours. Both Common Desk and Work Suites also allow members to use private offices that have not been rented out. Common Desk has removed chairs from its common spaces to allow members to distance themselves from each other.
Jamie Russo, executive director of the Global Workspace Association (GWA), advised in Everything Coworking that in addition to having plans in place to improve hygiene and cleanliness, coworking operators need to have effective communication policies and develop contingency plans in case they need to close. She observed that operators are taking steps such as putting together procedures to disinfect an entire location when an infection is detected and closing spaces to new member tours. She also noted that to mitigate impacts to short-term cash flow, some operators are asking those who want to cancel their memberships if they will instead accept a voucher or credit for later use.
It remains to be seen whether disruptions associated with the coronavirus will affect coworking more or less severely than the rest of the office market. Some in the industry, such as Jean-Yves Huwart, are optimistic that coworking can thrive after the virus passes. In an article for Work Design Magazine, Huwart speculated that if companies become accustomed to staff working from home, they may see less value in returning to traditional centralized work arrangements and may be more open to distributed work models that include coworking.
In the same article, GWA’s Russo noted that coworking spaces will nonetheless need to adapt to shifting member expectations in the wake of the coronavirus. She said that future members will likely expect a higher standard of cleanliness. Operators may also need to reduce the density of their spaces to appeal to prospective members who may be reticent to join facilities with dense layouts.
As NAIOP Research Director, Shawn Moura manages the NAIOP Research Foundation research committee and day-to-day operations of the Foundation’s research projects.