Flexible office space providers struggled to hold on to clients during the COVID-19 pandemic as many companies moved to remote work models. As the pandemic subsides, they could find themselves with the opposite problem—too much demand, The Wall Street Journal reports.
At the height of the pandemic, co-working office space providers saw one of their greatest strengths, the ability to offer short-term, flexible lease terms, become a glaring weakness. Tenants could exit those flexible leases in favor of working from home easily. The flexible office space exodus negatively impacted industry giants like WeWork, which reportedly saw its global occupancy rate fall to 47% at the end of last year, according to Financial Times. WeWork also lost $3.2 billion, but now looks like it is on the road to recovery as the company plans to go public.
Flexible office space providers like WeWork and IWG responded to their pandemic-caused financial woes by limiting spending and decreasing their real estate footprints. On the other hand, traditional landlords weathered the storm thanks to their long-term leases that tenants were locked into. SL Green and London-based Derwent London managed to collect more than 90% of rent owed last year, even though most of their tenants were working remotely. Another operator, Industrious sold a 35% stake to CBRE recently. Co-working is hot and getting hotter.
Tables are turning for flex office space providers
The rising trend of remote work during the COVID-19 pandemic looked to spell the end for co-working space providers. The grim outlook has not scared off investors, however. In just the last few months, several companies have put their faith in the fact that the flexible office space industry will rebound. IWG, which owns Regus, recently purchased a stake in The Wing, a women-focused co-working startup. Meanwhile, flexible office space provider The Yard recently announced it’s converting a defunct Courtyard by Marriott hotel in New York into co-working space. This month, Newmark celebrated a court’s decision to approve its acquisition of flex office space provider Knotel, which recently filed for bankruptcy.
Many companies are still trying to figure out their best course of action for bringing their employees back to the office post-pandemic. That’s good news for flexible office providers; companies will be hesitant to sign long-term leases before they decide if they want to adopt a hybrid work model, stick with telework or have everyone come back to the office full-time. It’s more likely companies will turn to the co-working space until they have a plan in place. In fact, Real estate analytics firm Green Street believes that flexible leases will increase from approximately 2% of office space in the United States today to approximately 10% by the end of the decade, The Wall Street Journal reports.
Whether the actual flexible office providers or just the industry itself comes out on top remains to be seen. That will depend on which new working arrangement is the most prominent following the pandemic. For example, Google is looking at a “hub and spoke” model where it maintains a central office along with smaller satellite locations. The model compliments IWG’s strengths. The company recently signed a deal with Standard Chartered Group that lets the bank’s workers use IWG’s locations around the world.
Why Co-Working, post pandemic?
What is the attraction to Co-Working? It’s flexible, it has a ton of amenities that come with these locations (like great connectivity and security) and people can have human contact. A home run for most of these workers, who are tired of working from home.
Another option for companies is to have a large main office and allow employees to use a hybrid work model where they divide their time between the office and their homes. Traditional landlords who decide to operate under this model will have to come up with some enticing benefits to offset the flexible lease terms co-working companies offer. If the flexible office space industry rebounds and pulls market share from established landlords, expect the competition for tenants to intensify.
Joe Dyton can be reached at firstname.lastname@example.org.