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The Co-Working Sector Is Bouncing Back

Some real estate experts predicted the demise of co-working when COVID-19 arrived. The opposite is happening.

 

In the spring of 2020, as countries around the world went into lockdowns and social distancing measures were being implemented everywhere, many people predicted the death of co-working (along with the end of cities, offices, malls, shaking hands and riding the subway). But as COVID-19 outbreaks spiked and waned and multiple effective vaccines arrived on the market, it’s becoming clear co-working has staying power. In 2021, both of the world’s largest co-working operators—WeWork and IWG—have been reporting upticks in occupancies and new desk sales approaching pre-pandemic levels.

WeWork, which seemed at death’s door last year, reported 98,000 new desk sales, equating to 5.9 million sq. ft. of office space, in the second quarter of 2021. Total occupancy rose to 52 percent from 48 percent in the first quarter. With 40,000 new memberships scheduled to go into effect by year-end, total occupancy is forecast to rise to 57 percent. The firm ended the quarter with revenue at $593 million. It also entered into a strategic partnership with real estate services firm Cushman & Wakefield, which would integrate WeWork’s workspaces into the firm’s global occupier portfolio.

The company also plans to finally go public on Oct. 21, through a merger with the SPAC BowX Acquisition. The company will be listed on New York Stock Exchange. The deal, which is subject to shareholder approval, comes two years after WeWork’s failed IPO attempt.

Switzerland-based IWG plc, formerly known as Regus, a company that operates 10 flexible office brands worldwide, reported strong sales in June 2021, with occupancy at 69 percent and revenue increasing in the second quarter by 3.4 percent compared to the first quarter, to roughly $1.3 billion. The co-working giant has entered a joint venture with Hong Kong-based Hysan Real Estate to operate flexible office facilities in Hong Kong and the Bay Area, and also added 84 new locations and 17 new franchise agreements across 10 countries, with commitments for an additional 64 franchise locations.

Not all flexible office operators survived the pandemic, however. Knotel, which had a valuation of $1.6 billion a year ago, was one of the biggest to fall. The firm field for bankruptcy protection in March and was acquired by real estate services firm Newmark and a private investor with roughly $100 million in new capital.

Overall, however, growing demand for lease flexibility in the office sector is having a positive impact on the co-working segment of the market, according to Scott Homa, senior vice president and director of U.S. office research with real estate services firm JLL. He notes that office tenants are increasingly requesting expansion, contraction and termination options in leases and are favoring short duration commitments as they await greater clarity in business conditions and workplace strategies.

“Given this shift in tenant preferences, many flexible space operators are reporting sharp increases in sales, with overall inquiries now surpassing pre-pandemic levels,” Homa says.

Office demand overall is shifting to flexible formats. After the disruption caused by the pandemic, many office occupiers view flexibility as a great amenity, according to Homa. “Pandemic-related uncertainty, changes in employee preferences and tenants’ increased need for agility are driving a surge in interest for flexible space options,” he adds.

Overall transaction activity in the co-working sector remains in the recovery phase and has slowed temporarily in the third quarter as employers delay a return to the office due to the Delta variant of the virus. But the immediate outlook for flexible office space is bright, according to Mark Gilbreath, founder and CEO of LiquidSpace, one of the sector’s players.

As the pandemic forces employers to make difficult decisions on remote work options, hybrid schedules and “work-near-home” programs, flexibility promises to be a critical element of long-term corporate real estate strategies, agrees Homa. The shift to work-from-home during the pandemic is likely to spur multi-pronged approaches to portfolio strategy that will increase the usage of flexible space in tandem with broader changes in remote work, workforce mobility and space design.

“Large employers are becoming more vocal about their plans to support remote and hybrid workplace strategies for their employees,” says Gilbreath, noting that a diverse array of companies, including LinkedIn, Twitter, Spotify, Shopify, ADP and the General Services Administration (GSA) have declared intentions to support remote work. GSA recently awarded contracts to five co-working providers and platforms, including WeWork, Expansive, The Yard, Deskpass and LiquidSpace.

Homa adds that other companies, such as Standard Chartered and NTT, are announcing enterprise-wide arrangements to provide flexible workspaces to employees, offering greater autonomy over when and where individuals work. “Such programs are likely to become more commonplace across the globe as companies ease their workforces back into the office, while offering solutions to mitigate the negative impact of long commutes and suboptimal conditions of working from home,” he notes.

JLL research shows that the hottest co-working markets in the U.S. right now include North Austin in Texas, Cherry Creek North in Denver and other emerging innovation areas that are benefitting from tech sector demand. New York City is also experiencing a bounceback, with quarter-over-quarter demand for co-working spaces up 83 percent, according to search aggregator Upsuite.

At the same time, office landlords are incorporating flexibility and hospitality services into their portfolios to adapt to changing occupier preferences. According to Home, doing so helps drive foot traffic, incubate lease prospects and provide an extra amenity to existing tenants.

The entry of institutional office landlords into the sector represents the newest wave of space options in the flexible office market, according to Gilbreath. He cites recent entrants including KBS Real Estate Investment Trust, BentallGreenOak, Boxer Property, Granite Commercial Property Ltd. and EQ Office. To date, corporate adoption of flexible office arrangements has remained limited, according to Homa. He notes that in JLL occupier surveys, only three percent of respondents reported utilization of flexible office options for more than 10 percent of their total office footprint.

As a result of the pandemic, however, Homa predicts an acceleration in flexible space options over the long term. In JLL’s mid-2020 survey, for example, 29 percent of respondents foresaw an increase in flex space usage, but by mid-2021, 41 percent said they believed their use of flexible space would increase.

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