WeWork’s bankruptcy puts claims of a co-working revolution to the test

In its heyday a few years ago, WeWork said it would reinvent offices. But the company never created a sustainable business or changed the way most people worked.

Offering flexible office space on short-term leases to individuals and businesses, a model WeWork hoped to take mainstream, remains a niche in commercial real estate despite the billions of dollars the company and others have invested in the approach. Flexible office space accounts for less than 2 percent of all office space in the top 20 U.S. markets, according to Cushman & Wakefield, close to its pre-pandemic share.

WeWork filed for bankruptcy protection this week in an effort to quickly slim down its portfolio of office spaces. The company wants to immediately cancel more than seventy rental contracts, and more may follow. Other co-working companies could adopt some of these locations, but some office building owners said they didn’t expect this approach would ever cover more than a small portion of their business.

Many employers are cutting back on office space because employees can’t come in five days a week after getting used to working remotely or on a hybrid schedule. Office vacancy rates are at their highest levels in decades, with much space available for subletting, often at a deep discount to pre-pandemic rents. WeWork’s bankruptcy will only worsen the situation by leaving landlords with more space to fill.

Michael Emory, the founder of Allied, a real estate investment trust that owns office buildings in Canada’s largest cities, said there will always be flexible office providers, offering space for smaller companies to operate without signing long leases. But he said it would never make up a third of all office space, as JLL, a real estate services firm, predicted before the pandemic by 2030.

“There was no way this was going to happen,” Mr. Emory said.

He said office landlords would continue to offer space to co-working companies in some buildings as they attract tenants who could grow and want to rent their own space in the future.

David O’Reilly, the CEO of Howard Hughes Corporation, a developer that focuses on large projects that often include homes and offices, said co-working is a nice amenity for some tenants, but it wouldn’t easily take over the commercial real estate business . small chance.

“If co-working takes up a disproportionate share of the building, they become directly competitive with the landlord,” he said. Howard Hughes has two leases at WeWork and Mr O’Reilly said he was in discussions with other co-working providers about taking over the space.

Still, some co-working executives said they expected to do much better than WeWork because they were pursuing a different business model. WeWork leased millions of square feet from landlords, hoping to rake in enough revenue from its customers to cover costs. But that never happened, resulting in billions of dollars in losses.

Other co-working companies say they don’t rent out their space, but instead operate offices for a flat fee or a cut of profits. Coworking companies that use this model are less likely to collapse, but it could also mean they earn less in good times.

“By sharing the profits with the landlords, we can do a lot more,” says Mark Dixon, the CEO of IWG, one of the first companies to offer flexible office space in many locations and which operates several brands. including Regus.

IWG may get a third of the profits on a co-working space it doesn’t rent, while the landlord gets the remaining two-thirds. While IWG may be making less money, the company doesn’t have to borrow to finance large rental obligations, something that has become more difficult as banks have withdrawn from the commercial real estate industry.

Mr Dixon added that co-working should do well in the era of hybrid work, with employers looking for flexible and shorter leases that give them enough space for some employees to be in the office every day. They can also gather larger groups of employees for meetings and have smaller offices in places where they were not previously present.

“They realize they don’t have to have everyone working from separate buildings to get work done,” he said. “You do need to bring them together regularly, but not every day.”

IWG signed agreements to open more than 600 new locations around the world in the first nine months of the year, many in smaller U.S. cities and towns. At the end of September it had 3,455 locations, compared to 3,323 a year earlier.

Jamie Hodari, the CEO and co-founder of Industrious, a New York co-working firm that works closely with landlords, is also optimistic. His company’s revenue has grown nearly 40 percent this year, he said, about double what he expected. And he said Industrious, which has 187 locations, up from 85 at the end of 2019, has nearly tripled its revenue since before the pandemic.

“It is a time of huge demand,” Mr Hodari said.

And John Arenas, the CEO of Serendipity Labs, a flexible office space company focused on suburban markets, said demand has grown in recent months as many companies began to solidify their plans for a return to the office.

Some of his customers tell him, “I just need a place where people can meet, collaborate, meet each other, drop by and feel like there’s a hospitality element to it.” Serendipity Labs has 34 locations, and Mr. Arenas predicts it will reach about 50 in the first quarter of next year. This year it took over a former WeWork location near Grand Central Terminal.

Stijn Van Nieuwerburgh, a real estate professor at Columbia Business School, agreed that sharing office space has a strong appeal for employers. He said he was “a big proponent of co-working.”

But he added that many office building owners would most likely offer their own co-working spaces to tenants, reducing or eliminating the need for companies like WeWork. He said some building owners would operate office buildings more like hotels, with individuals and companies signing short-term leases directly with the landlords.

“There’s nothing special about WeWork that Related or Vornado couldn’t replicate,” he said, referring to two major commercial real estate companies. “I don’t think co-working is completely dead,” Mr Van Nieuwerburgh added. “In fact, the disappearance of WeWork opens up an opportunity for landlords to take over that space.”

Julie Creswell, Matthew Haag And Gregory Schmidt reporting contributed.