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HomeReal Estate NewsCommercialCOVID-19 puts co-working companies in retreat mode

COVID-19 puts co-working companies in retreat mode

Over the last several months, the COVID-19 pandemic has unearthed a lot of industries’ vulnerabilities—including the co-working space arena. Just a week or so before the health crisis really took disrupted things in the United States, Connected Real Estate Magazine acknowledged that even large real estate companies like Tishman Speyer were joining the co-working fray. It made sense at the time—companies were increasingly looking for more flexible lease terms and only wanted to pay for space they were actually using. A trend was rising.

Then COVID hit, and five months later, Connected raised the question, Is co-working working? According to The Wall Street Journal, the industry’s not working—at least not working as well as it was pre-pandemic. Some of the biggest co-working space providers in the world have been closing locations that are losing money. This includes IWG PLC, the world’s biggest co-working space company in terms of locations, which reported closing 32 locations in 2020 due to the pandemic. IWG Chief Executive Mark Dixon said the company plans to close about 100 more during the second half of the year.

Meanwhile, Knotel which sublets furnished office space to businesses, saw its revenue decrease by almost 20 percent in the second quarter. The company plans to drop 20 percent of its portfolio and has already bought out some of its current leases. WeWork was having financial problems before the pandemic and is ending leases around the world.

The co-working space industry’s remote work problem

It’s not surprising that the co-working space providers found a profitable niche in the commercial real estate owners. Their product matched a lot of tenants’ desires—nice office space with amenities and flexible lease, often as flexible as month to month. Additionally tenants weren’t forced to rent more floor space than they actually needed—a small, seven-person startup could simply rent seven desks in most cases.

The industry’s fortunes changed when the COVID-19 pandemic forced a lot of people to work from home. Co-working space companies that were once trendsetters are now becoming somewhat of a victim of a new trend—more businesses are opting to continue with the remote only model even after shelter-in-place restrictions are being lifted.

Flexible office space providers’ other issue is their floor plan. A lot of these spaces are tightly packed and don’t lend themselves to proper social distancing guidelines, making them unappealing to clients. That leaves companies with the option of removing seats, which in turn leads to decreased revenue. There’s also less demand for office space because of the layoffs and office closings that are occurring due to COVID-19.

Signs of hope for the co-working space industry

The number of co-working spaces that have closed recently is still low. Closures only made up 1.5 percent of the space that co-working companies occupy in the 20 largest U.S. markets, according to CBRE Group, Inc. The closure number has remained low in part because some companies have received rent relief and location closings don’t happen overnight, JLL Head of Office Research Scott Homa said. However, JLL forecasts that approximately 4,500 co-working locations will close or change operators.

Co-working space providers have also had success renegotiating lease terms for lower rent payments. Landlords have been willing the make deals because the lower rent beats the alternative—looking for a new tenant during a pandemic. Industry executives are also hopeful the remote work trend will translate to companies doing telework in co-working spaces instead of traditional offices with long-term leases. Another factor that might be on their side—people want to work somewhere besides their home after months of being at home.

“Many people are now just becoming comfortable with telework for the first time and figuring out all sorts of ways to make it smooth,” Forbes contributor Dean Stangler wrote in April. “That could mean more employees and employers become comfortable with it. But that doesn’t mean all those remote workers will work at home forever. After a couple of months of lockdown and working at home, my guess is that millions of people will be eager to work from somewhere else, anywhere else.”

Joe Dyton can be reached at joed@fifthgenmedia.com.

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