The Forces Determining the Fate of Flex Office Operators
By Chava Gourarie May 16, 2023 7:00 amreprints
Back when Power 100 came out in 2016, the coveted No. 10 spot on the list went to Adam Neumann and Miguel McKelvey, the co-founders of WeWork (WE).
That was their peak. They haven’t been ranked that high since, but they always had a place. Until now.
Careful students of Power 100 will note that there are no flex operators on this year’s list. How come?
It’s not necessarily fated that co-working and flex operators will be forever on the outs. In fact, there’s a good argument to be made that they’re made for this moment.
As the office ceases to provide a definite division between work and everything else, the definition of a workspace hasn’t solidified into something new — even three-plus years since COVID-19. People work from airport lounges, coffee shops, hotel rooms, hotel lobbies, Ubers, airplanes, their living rooms, and, of course, flexible workspaces.
Flexible office itself reflects the wide-ranging definition of workspace at the moment, given that it includes everything from hot-desking for a day, to a three-year lease for a 10-person private suite, to booking a conference room for a quarterly all-hands.
The rise of such a diffuse definition of work should indicate that flexible office operators have an advantage, but the overall loss of office occupancy and the normalizing of flexible and short-term leasing among even more conventional landlords muddy the picture.
Plus, flexible operators are exhibiting a range of results. While stalwart IWG is holding steady, bad boy WeWork is once again close to disaster, and upstart Industrious is spreading its wings. (Other would-be disruptors such as Daybase and Knotel are either kaput, as in the case of the former, or humbled, as in the case of the latter.)
Occupancy has largely returned to 2019 levels at WeWork and IWG. In the first quarter of 2023, WeWork reported 73 percent occupancy, just above its 72 percent at the end of 2019, though that was also its first quarterly drop in occupancy since the trough of 2020. IWG reported a similar 73.5 percent average for 2022, below but within range of its pre-pandemic rate of 79.1 percent.
However, WeWork has continued to lose money while shedding locations, and is barely hanging on to its listing on the New York Stock Exchange, as its stock trades below $1 per share. IWG, on the other hand, saw its stock price drop 20 percent since last year, but it’s climbed 10 percent since the start of the year. In this market, that’s not terrible.
That said, coworking companies weren’t rushing to lease more space. Real estate companies, including coworking companies, leased a total of 9.5 million square feet in 2022, according to JLL, down 68 percent from 2019. As of mid-2022, coworking occupied 78 million square feet in the United States and Canada, down from 90 million at its peak in 2019, for a market share of 1.7 percent, according to CBRE.
Besides the two biggest players, smaller companies have seen a variety of results, too. Event space company Convene laid off employees and closed its Chicago office, while Industrious, backed by CBRE, has been growing steadily, with about 150 locations in the United States. In 2022, the company signed 32 deals and opened 28 locations, with another 17 openings planned through 2024. Led by CEO and co-founder Jamie Hodari — a media-friendly sort who’s decidedly less flamboyant than WeWork’s fated co-founder Adam Neumann — Industrious defines itself as a management company rather than a landlord, and the majority of its deals are management contracts or revenue-sharing agreements rather than leases.
There will certainly continue to be a need for that kind of management as most landlords offer flexible space within their buildings in order to stay competitive.
A CBRE survey found that 61 percent of tech companies prefer a building with flex space in it, 94 percent have used said flex space, and 36 percent plan to double their use by next year. In professional services, 100 percent of companies said they were “experimenting” with flex, while in life sciences 44 percent plan to double their flex space by 2024. The numbers are similar across industries.
“There had to be a tipping point where lenders and underwriters of office buildings had to start accepting the fact that there needed to be built-in flexibility into offices — more like hospitality and hotels. And that’s what’s really shifting right now,” Laura Kozelouzek, founder and operator of Quest Workspaces and a decades-long veteran of flex space, told Commercial Observer in a March interview.
At the same time, there are no guarantees. A former WeWork executive named Joel Steinhaus started Daybase in early 2022 with the proposition that companies would want flex spaces in more suburban areas to draw employees reluctant to commute into city centers. One by one over the past year-plus, Daybase’s three spots closed.
The demand might’ve been there. The capital wasn’t.
“We learned that, absolutely, people gravitated toward our product because it was enterprise-grade, it was professional,” Steinhaus said in April. “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.”—Chava Gourarie