Flex Office Space Is in Flux. Should Its Operators Worry?

They say no, but recent casualties in the market — including the closure of startup Daybase — expose the approach’s weaknesses

reprints


By this time, coworking startup daybase should have had three locations — at least — all in the New York area. That is, if you listened to its founder.

Joel Steinhaus, Daybase CEO, told Commercial Observer in January of 2022 that he was just days away from opening its first coworking location on Washington Street in Hoboken. Two more were to follow, one in Harrison in New York’s Westchester County and the other in Westfield, N.J., an affluent suburban commuter rail town in Union County.

SEE ALSO: Rising Stars in Real Estate

The Westfield location never opened. The Hoboken location shuttered in December, according to a hyperlocal website called Hoboken Girl. The Harrison location opened, then closed, also in December. Steinhaus said the closings were “a function of the capital markets (having) shifted really dramatically really quickly.”

Daybase was based on the trendy proposition that, as people emerged from COVID-related lockdowns, they were going to want to work yet avoid a long commute as much as they could. This augured for workspaces in the nabe — places that maybe you could walk to, or drive to and avoid getting on a train, thus getting you out of the house, but taking only a fraction of the headache to get to.

To Steinhaus, the idea was correct, but the capital markets made the cost of following through on that idea prohibitive.

“There’s absolute demand,” he told CO at the end of April. “What people want is more freedom and flexibility and choice over where and when they work. What that means is there is absolutely a market demand for workspace that is more consumable by the individual and close to home.”

But what there isn’t — or what became prohibitive after interest rates rocketed higher starting last spring — was unlimited capital to make the Daybase idea happen. People didn’t want a bare-bones table where they could set down their laptop and log on to Wi-Fi and have phone service and a pot of coffee. What they wanted was all that, plus the comforts of home. And that requires a sharing of the cost of maintaining the space between flexible space entrepreneurs and property owners whose space the flex operators are improving, Steinhaus said.

Given what the customers demand, “the table stakes of the product need to be enterprise-grade,” he said. “We learned that, absolutely, people gravitated toward our product because it was enterprise-grade, it was professional. It mattered what the space looked like. Regardless, if we all are going to introduce a level of flexibility into the built environment, all of the buildout of space for any coworking operator, the capital intensity of having to build out physical space, to be sustainable, requires partnership with the asset owners.”

He declined to say what Daybase’s burn rate was. As of May 1, there were zero Daybase locations. 

In at least one case, the landlord is taking it upon itself to provide the improvement. Eric Menkes, a partner in the New York-based real estate law firm Adler & Stachenfeld, said one of his clients is an office landlord who operates his own coworking facility for startups too new and experimental to commit to any actual workspace long-term, even though the landlord loses money operating it — a loss leader, in other words. 

“They see it as a necessary part of the commercial office business,” Menkes said, “to accommodate our existing tenant base, which might need some additional space, and as a way to foster relationships with potential new clients.”

Yes, there’s been a pandemic, and folks are working from home more on their laptops, or from an office closer to their homes, which might be a coworking location. Yes, there has been a banking crisis, and seed money for new ventures has been drying up. Yes, folks might look a little askance at the prospect of slapping laptops down on a table next to a complete stranger whose medical history they don’t know. Yes, the biggest name in coworking, WeWork (WE), has crashed and burned, and even the more sober WeWork 2.0 is having problems — witness the letter it received in April from the New York Stock Exchange demanding to know why its shares have been closing below $1 lately, with the possibility of delisting looming.

To Menkes and others, some of whom are CEOs and executives in the coworking business, coworking remains a compelling idea that just makes too much sense to go away.

What the data shows is that coworking certainly hit a large speed bump about the same time as the peak of the pandemic. According to a report by brokerage CBRE (CBRE), flexible office supply hit a peak in the first half of 2019, before the pandemic, with just over 90 million square feet in the U.S. and Canada and a market penetration of 2 percent. In the first half of 2022, the latest time segment in the report, that was down to about 78 million square feet and a market penetration of about 1.7 percent.

In Manhattan, per CBRE, flex space peaked in 2020 at 16.5 million square feet, but fell to 12.2 million in the first quarter of 2023, which is actually a small jump over 2022’s 11.8 million.

Now the market’s living through a time when customers — the companies that used central business district offices to ply their trades — are still working through the question of just how much office space they need. That bodes well for flexible, short-term space providers.

“I would say it’s relatively clear that a lot of the changes in the past two years have played to the benefit of the flex industry,” said Jamie Hodari, co-founder and CEO of Industrious, one of the big newer names in the coworking space.  

Established real estate services firms also see a future for flex office in the years to come. CBRE has plowed $330 million into Industrious and taken a 40 percent stake in the company, starting in 2021. Newmark (NMRK) in 2021 acquired Knotel, a coworking space provider that had gone bankrupt. Cushman & Wakefield invested $150 million in WeWork, also in 2021.

Matthew Himmelsbach, a managing director in Newmark’s Miami office and a corporate expert on the coworking and flex industry, declined to talk about Knotel, but he described Newmark as “bullish” on the space.

“We are seeing an increasing amount of demand moving to flex,” Himmelsbach said. “We are expecting it to be a much larger part of the industry.”

While it would be a mistake to dismiss the NYSE’s letter to WeWork, the plan by new CEO Sandeep Mathrani is to transform the company into a service provider responsive to the needs of corporations as they exist today, not five years ago, said Peter Greenspan, the company’s global head of real estate. Greenspan said WeWork will still be here in one year, two years — whatever it takes to build a more responsive model — and beyond.

“The future of office space is flexibility, as this generation of workers decides how they want to work and the way they work best,” Greenspan said. “It may take many years, but during that transition our company is very well situated.”

According to WeWork spokeswoman Annabelle Davis, the company has 622 locations in 34 countries and 731,000 workstations. But the company’s future is office as a service, Greenspan said, with a range that might include providing space within a WeWork location, a competitor’s location, or providing a digital connection similar to a Zoom call, thereby allowing people to work wherever they are. This is where the market is going, he said, rather than a company guessing what its space needs might be 15 years from now.

The idea of a company having its own offices, and which can only modernize itself by moving into “swing space” while its offices are remodeled, “that’s an antiquated idea of the public perception of what we are,” he said. “What we are today is a company that controls some incredible real estate, has built out some functional spaces that are energetic, that cover a lot of amenities, has that special sauce so that when you walk into work, you feel connected, you feel energized, you want to collaborate. And then of course the most important part of it is the ability to connect it all digitally and globally.”

Most office buildings are owned by one owner and a separate lender, Greenspan noted. WeWork’s goal is to connect all that together on behalf of its clients.

For Industrious, which says it has more than 160 locations in 65 cities in the U.S. and abroad, this moment of corporate flux is a godsend to the flex industry. “Therefore, providers that allow them to try something out for a year, a year and a half, and see if it’s working, are in high demand,” Hodari said. “And then, maybe even more importantly, the desire to come in to work a few days a week rather than five days a week is almost across the U.S. at this point. And the desire is to have some local workplace options.”

Industrious is trying to accommodate that desire for companies looking for temporary offices closer to where its employees live, he said.

“When a company’s workplace strategy is pretty uniform and simple, long-term leasing is an appropriate solution,” Hodari said. “But as it becomes more complex, quirkier and weirder, for lack of a better term, then companies often find that the more complex things get, the easier it is to use a workplace platform like Industrious or WeWork.”

At Convene, a company that provides event space, manages amenities on behalf of landlords, and provides coworking space, these times have been a boon, said Ryan Simonetti, Convene CEO and co-founder. The company has 23 locations in six cities, according to its website.

“The good thing for companies like Convene is, one, most companies realize they don’t need as much real estate moving forward, yet the pressure on them to deliver a great experience and encourage people to come back to the office is and continues to be extremely high,” Simonetti said. “That bodes well for more outsourcing, and we’re seeing that.”

But COVID-related lockdowns radically hurt Convene’s business. It laid off a fifth of its staff, it let go of its chief design officer, and in 2020 it closed all of its then-32 U.S. locations. Its issues continued into this year, as it laid off 54 workers in New York and closed its Chicago location, as CO reported at the time

Over the last year, Simonetti said, there’s been a 50 percent rise in demand for workplace product. He said Convene is past pre-COVID levels of occupancy. It’s also seen a 68 percent increase in demand for meeting and event space.

“I keep saying the future of the workspace is a meeting space,” Simonetti said.“The world is a more uncertain place,” he added, noting the three black swan events within 36 months of COVID, Russia’s invasion of Ukraine and the banking crisis. “Talk to the CEO of any company, big or small, the more agility you have and flexibility you have, and the more you can scale up and down your costs, the better you sleep at night.”

So will there be a Daybase 2.0?

“I believe there will be a version of what we were doing in multifamily developments across the country,” Steinhaus said. “I’m not going to say what our future plans are now. We don’t really know, is the truth. It’s hard to speculate, but what I can tell you is there’s a clear demand for it.”