- The coronavirus pandemic is reshaping how employers are thinking about their real-estate needs, in particular the use of flex-office companies like WeWork.
- Ten real-estate experts, from landlords to employers, highlighted how the industry is set to evolve in the face of the pandemic.
- In the short term, operators will feel a pinch as employees stay home, and some companies will likely go out of business or consolidate.
- In the long term, though, the flex-space industry may see an uptick from employers who don’t want to commit to traditional, long-term leases and who want more outsourced office management.
- Visit Business Insider’s homepage for more stories.
Millions of workers suddenly forced out of the office are discovering that they can work from home – and in some cases that they want to work from anywhere but home.
The coronavirus pandemic and its unintended mass work-from-home experiment promises to reshape the offices to which many employees will eventually return. Employers making real-estate decisions now are weighing how to safely bring their employees back, and, bigger picture, exactly how and where they’ll have offices in the coming months and years.
Before the pandemic, flexible-office companies like WeWork made up a growing sliver of real estate – 2.3% of leasable space in the US as of the first quarter of 2020, according to JLL research, and the sector has grown an average of 23% per year since 2010.
Now, insiders predict a short-term pinch for the industry, as employees fear returning to dense floors and some of the small businesses that relied on these spaces cut headcount. But in the long term, 10 real estate experts, from employers to landlords, said they expect flexible offices to be an even more critical component of real estate as companies hesitate to lock in long-term leases and rethink their real estate footprints – but not every provider will survive.
“This was like a nuclear bomb into flexible office. It temporarily blew it up,” said Saeid Garebaglow, who plans real estate for Japanese financial services company MUFG and previously worked in WeWork’s enterprise division. “From the strategy side, it’s still a tool in the toolbox … That strategy is not going to change.”
Garebaglow, who works out of New York, said signing a short-term contract with a flex-office provider like WeWork would be a better deal right now than a traditional 10-year office lease, since so much about the market could change quickly, from rent prices to employer demand.
But he cautioned he would add a clause to any contract specifying that if a flex-office provider doesn’t fulfill the contract, the landlord would take over the space.
One glimpse into the future for the US comes from how Asian companies, which are about a month or two ahead of the US in dealing with the virus, have transitioned.
David Wong, the CEO of Hong Kong-based flex-space booking platform Booqed said that after a first wave of cancellations, he received a wave of interest from companies looking to flex office to cut real-estate costs and for business continuity planning.
Companies directed their employees to various locations, minimizing risk to a team if a teammate got sick. But now that Singapore is again under lockdown, he’s seen a second wave of demand falling. In China, meanwhile, some cities are open and starting to pick up, while others are still quiet.
“It’s definitely not going to be a V-shaped recovery,” he said. “I’m starting to wonder if it’s a U shape, or a series of W’s: two steps forward, then another cluster of infections and people draw back.”
The US is still, at minimum, weeks away from any timeline for white-collar workers’ return to the office. In one clue about the outlook, Facebook canceled events until June 2021, Mark Zuckerberg said Thursday.
In the midst of this uncertainty, here’s how the flex-office industry could evolve in the coming months:
Short-term pinch: ‘This is the day of reckoning’
The worst, economically, is still yet to come, as companies continue cutting headcount and employers struggle to think about paying rent for offices they’re not using in May and beyond. As CEO of coworking software company Proximity, which processes bookings, Josh Freed saw transaction volume drop 40% across about 600 coworking brands in the first week of April.
“That’s a huge cliff. That just happened immediately and I think we’re only about halfway there. I think we’re going to be somewhere in the 60, 70, 80% range before we start to find a floor,” he said.
Scott Harper, a senior vice president with brokerage Colliers, said he’s seen most flex space users ask for rent relief completely for three to six months. He said flex-space square footage in San Francisco could drop by half in six months, as demand falls away.
Broadly, flexible-office companies that were overleveraged or had too much space could struggle. Private-equity companies are already circling for distressed opportunities.
“Who has the cash reserves to emerge from this? There’ll be fewer of them, but those that survive will be stronger” Harper said.
Charlie Morris, the practice leader in flexible office solutions at Avison Young, said private-equity firms and landlords still understand the importance of flexible space.
“We’ve not heard one doubt the viability of flex. We’ve seen them doubt the viability of deals to date, and the partners,” he said.
As Business Insider detailed last year, the flexible-office space was already trending towards a shakeout, with a high potential for operators to either merge or close as the market crowded with a slew of venture-backed companies expanding rapidly. This crisis may be the impetus for that shakeout.
Bill Bennett, CEO of Chicago-based company Novel Coworking, said clients aren’t willing to sign long-term contracts. He thinks the virus is accelerating both the growing acceptance of work from home and a demand trend he’s spotted in recent months: clients want office suites and private offices, not a traditional coworking seat in an open office. Bennett doesn’t expect every company to survive, particularly when some were on shaky ground heading into the crisis.
The major flex-office providers have already been hit hard by layoffs and furloughs: 435 total employees have been impacted among Convene, Industrious, and Knotel, and cuts are reportedly coming at WeWork. But staff reductions won’t be enough to salvage some balance sheets.
“This is the day of reckoning. I’m expecting that more than half of venture-backed coworking companies will not make it through the year,” Bennett said. “Most of these landlords will win. It’s a big game of chicken right now … most [coworking companies] will go through bankruptcy and restructure. Many will not reappear, and some will stick around as a much smaller version of themselves.”
Medium term: changes from operators to floor-plans
Restructuring isn’t necessarily a death sentence. After the dot-com bubble burst, Regus (now IWG) sold off 58% of its UK business and its US business filed for Chapter 11 bankruptcy protection in 2003. Regus was able to exit Chapter 11 within a year after cutting costs, and repurchased its UK business in 2006. Before the coronavirus, IWG was operating more than 3,000 locations globally – WeWork has 800 – and its stock price had soared.
As some flex-space operators walk away from space – Knotel could give back 20% of its portfolio, largely in New York – landlords are already thinking about how to rework those floors. Some will take on the space themselves, an easier proposition now that most tenants don’t need to be sold on the value of flexible space and software like Proximity has made management easier. Others will bring in another operator like Industrious, which has long partnered with landlords, rather than just leasing space from them, like WeWork.
For landlords, the choice comes down to two main factors: their own ability to run an operations-heavy hospitality business, and the cost of bringing an operator in versus running on their own.
“For us, it’s a matter of cost,” Francis Greenburger, chairman and founder of office landlord Time Equities said. Time Equities has run its own flex space for decades, and has found it cheaper to operate on its own.
No matter the operator, post-coronavirus offices will look much different than the open, dense plans popularized by WeWork, with hundreds of people on one floor sharing kitchens and couches, where they work almost shoulder-to-shoulder.
Xinhua/Pei Xin via Getty Images
A CB Insight report from January 2019 found that the WeWork locations allotted, on average, about 50 square feet per person, compared to an industry average of 250 square feet per person. Some of the common areas could be repurposed to private offices – but that takes capital landlords and flex-office companies may not have.
When reached for comment for this story, WeWork pointed to a brochure it sent to brokers earlier this month.
WeWork is planning more cleaning and taking out some seating in offices and common spaces, among other changes the company highlighted in the brochure.
Another flexible-office company, Industrious, is convening a group of architects, public-health experts, engineers, and real-estate experts to develop a new framework that goes beyond more frequent cleaning, CEO Jamie Hodari said. One small part of that solution could include lights to indicate when someone exited a phone booth, indicating the need to clean it.
“Companies that are focused on ‘how do we stay regulatorily compliant’ are missing the mark,” Hodari said, predicting that companies without office managers or outsourced managers to oversee more rigorous cleaning could struggle in the post-coronavirus era. But the extra preparation and management layers come at a cost, just as companies are cutting expenses and headcount.
“We might not make a lot of money in this period,” Hodari said.
The costs for flex operators will be similar to those at traditional offices, Despina Katsikakis, Cushman & Wakefield’s head of occupier business performance said, as companies will have to invest in better air filtration systems, infrared cameras that monitor workers’ temperatures, and switching to entirely prepackaged foods.
Of course, the people who work in flexible-office spaces will need to trust that heightened standards of cleanliness are actually being followed. Wong, the CEO of Booqed, spoke of a client in Malaysia that had doubled the amount of cleaning it was doing, but found that their customers wanted access to cleaning supplies so they could ensure the space was cleaned.
“The message that we (the operator) were double-cleaning wasn’t landing,” Wong said. “People wanted alcohol to spray their own space.”
Long term: ‘Work from home just got a decade shot in the arm’
Katsikakis highlighted another change for flex-office operators besides the cleaning regime: location. The big-name flex office operators have focused on major cities – WeWork has no locations in Milwaukee, for example – but Katsikakis said companies may find more regional opportunities, helped by the accelerating wave of distress in retail real estate.
“They’re rethinking underused retail locations for that (flexible working), which could be a really interesting shift for shopping center operators,” she said.
Freed, Proximity’s CEO, said he’s talking to employers about shifting their teams out of dense cities like New York and San Francisco, as they view concentrating their staff together in those centers as a risk.
Now, they’re looking to perhaps maintain their own headquarters while sending staff to work in more satellite offices that they prefer to manage via outsourcing. Employees will also drive some of the demand as they seek to reduce long commutes and move out of big, expensive cities, now that they know many of their jobs can be done well remotely.
“As a workforce we can do better, and that is distributed teams in less-centralized, geographically-distributed, smaller groups. That will be balanced between work from home, work from headquarters, and work from something in between,'” Freed said. “Work from home just got a decade shot in the arm.”
This period of remote work is also moving employers to reconsider their need to have senior leaders in an expensive urban headquarters, accelerating a trend already in play for firms like asset manager AB, which is moving much of its staff to Nashville.
“Even for myself, if you were a senior director or above, our strong preference [before the pandemic] would be that you worked in New York,” Industrious CEO Hodari said. “I already know coming out of this that if we found a great chief marketing officer or VP of people in Houston or Chicago, we’d hire them. I can already tell in our own business we’ll be much more comfortable with a distributed model coming out of this and I think that’ll be true for 90% of businesses.”
There’s precedent for long-term change, even at real estate’s glacial pace of change: coworking, though the concept existed for years, became popularized out of the last recession, when a new wave of tech entrepreneurs needed a different kind of real estate that was more flexible for growing companies.
“Now is the time to install flexible 2.0,” Morris from Avison Young said.”What we know as coworking today was born out of the last recession, and it scaled out of the last recession.”
The second generation of flexible space is still forming out of this crisis, but Morris said that a major factor will be an increase in demand for flexible space, as companies decentralize their offices
This vision is shared by many who counsel companies on flexible space.
“That trend we’ve seen over the last 5 years- companies adopting a more liquid portfolio- that will only continue,” Benn Munn, JLL’s global flex-space lead, said.
Wong from Booqed is already seeing that vision playing out.
He’s heard of one client company in Singapore that’s drastically increasing the amount of flexible space that it’s renting so that it can adapt to changing conditions in the different geographies it operates in, and choosing multiple flex-office companies so there is no single point of failure if one company’s space closes or is temporarily closed because of a coronavirus case
“(The company said) We don’t just want a team in WeWork, we want a team in every coworking company out there,” Wong said.
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