“Will coworking survive this economic and social health crisis?” It’s a question that’s been asked in real estate circles since the early days of the COVID-19 pandemic, as federal, state, and local governments have forced corporate occupiers to adopt emergency work-from-home policies in response to the crisis. Coworking spaces across the country sit empty.
At a NAIOP Advantage Series webinar this week, Avison Young’s Michael Kloppenburg shared his perspective on the near- and long-term considerations for owners, occupiers and operators of coworking and flexible office space.
“Real estate professionals and the media have been waiting for an economic downturn to test the coworking business model for years,” Kloppenburg said. “No one could have predicted it would come this way – in the form of a global pandemic.”
The coworking industry grew substantially along with the protracted bull market, and it’s well documented that coworking was a primary driver of new office absorption across most major markets, especially over the last 3-5 years, Kloppenburg pointed out.
Coworking grew on average 26% per year from 2010-2018, and growth in 2019 was estimated to be 35% year over year before WeWork’s failed IPO.
However, recent news has been rife with reports of mass layoffs and furloughs of some of the biggest industry players, including WeWork, Knotel and Industrious. These companies are not alone, as many other coworking operators and traditional real estate firms have been forced to make the same difficult decision.
The question for operators of remaining open or closed has been heavily debated – those who stay open are criticized for not taking the crisis seriously, while those who close invite their client base to not pay their monthly fees, which further exacerbates the negative economic impact of the situation for the operator, Kloppenburg said.
Client retention is critical for coworking and flex space operators to sustain healthy operations. He’s seen a variety of strategies employed by coworking operators to maintain their occupancy levels. Rent relief requests have poured in from small to midsize businesses, prompting creative solutions like temporary discounts and contract negotiations.
“Due to the structure of most coworking deals with landlords, primarily long-term leases, and the short-term nature of their client agreements, there is significant cash-flow exposure,” Kloppenburg said. He said they’ve seen renegotiations happening as operators attempt to leverage this crisis to secure more favorable terms, or convert leases to management agreements on a case-by-case basis.
“I have seen amazing support from many of these operators, providing resources to small businesses. So far, in talking with my colleagues, retention has been better than expected,” Kloppenburg shared.
Like all businesses, coworking operators are using this time to think strategically to plan for the post COVID-19 environment. Operations will need to be modified, and space plans will need to be revisited for density and circulation. Some operators may be forced to renegotiate their leases or seek outside investment or debt to sustain their businesses, while others may be forced to close entirely.
However, “I am bullish on the underlying demand for flexible office space, regardless of the current crisis,” Kloppenburg said.
He predicts lease-term compression will continue in line with the faster-paced business cycles of today’s technology-driven economy, and the appetite for long-term, capital-intensive commitments will slow in the near-term as businesses recover. “While this trend is not new, it will probably be accentuated by the crisis,” he added.
Many professionals are attempting to prepare for what the workplace will look like in the future, but much depends on the psychology and behaviors of occupiers post COVID-19. “Owners will always strive to adapt their assets to changing tenant demands, so I expect landlords to respond in new and innovative ways,” leading to a better tenant experience and delivery models, Kloppenburg said. “Currently, there are more questions than answers swirling around. The reality is, no one know what will happen when we come out of this.”
Brielle Scott is Senior Communications Manager at NAIOP.