Will COVID-19 be the death of coworking spaces?

Coworking spaces have become ghost towns as limits on travel and non-essential work take hold throughout the world. These spaces — unlike typical offices that could need terms of five or ten years — operate mostly on short-term leases, making it easier for tenants to walk away and leave office-sharing companies who are unable to pay landlords.

In several cities, coworking spaces have helped to inflate rents as they compensate for so much of the real estate inventory. According to a report by Cantor Fitzgerald, companies such as WeWork and Industrious have lowered rates of office vacancy while raising cost of rent in many towns.

Take WeWork: WeWork is the largest tenant in New York City, with almost 9 million square feet of space, noted Adam Henick, co-founder of Current Real Estate Advisors. If even half of that space is left empty, absorbing it — particularly during an economic downtown — is very difficult for the commercial real estate market which could result in lower rents for offices.

Even before the pandemic, office-sharing had accelerated, Henick said. The business model was subject to increased scrutiny last fall after WeWork scrapped its initial public offering.

“Since WeWork’s pre-IPO debacle, there was a real weakness in the segment and this was already impacting the psychology of the office leasing market, despite very favorable economic conditions,” Cohen said.

Those impacts on the Manhattan market were not only felt. According to Laura Frenkel, a commercial real estate broker for Market Real Estate, a commercial real estate company based in the area, the demand for shared office space was becoming oversaturated in Boulder, Colorado.

“There are so many options and not enough startup tenants to fill them,” she says. As companies grow, they move out of coworking space and rent office space, Frenkel added, cheaper than a shared office though requiring a long-term lease.

Cohen in New York City said shared-office firms have overexpanded in the last 24 months in the biggest markets, particularly the fastest growing players. There was a 50 percent vacancy rate at Knotel locations right before the pandemic that began in 2019, he said. Indeed, some of the larger firms, including WeWork, began pivoting their business model to rent to larger, existing firms with between six and twelve employees, rather than concentrating on single entrepreneurs, he said. Even those leases had been for 12 months or less, however

“The coworking model hasn’t been around to witness an economic shock,” Henick said.

Real estate brokers say that tenants enjoy the aspects most about the shared office model — flexible, short-term leases and comfortable working environments — may be the ones that contribute to its downfall.

Individuals can rent desks or small offices with no upfront money, and walk away comfortably because they don't invest $100,000 on build-out, furnishings, or sign long-term leases, Henick said. Their sole penalty may be a deposit of a month.

The demand for shared office space could still remain sluggish even after the pandemic, brokers claim. Before this crisis, workers were beginning to doubt whether it was productive to operate in an open office layout, said Peter L. Curry, a partner at New York law firm Farrell Fritz. Add to that issue the possible health risks of being overcrowded in the workplace and this could have a huge effect on the business model, he says.

“This could be a blow to the expansion of the ‘WeWork’ business model,” Curry said. “There will always be a need [for coworking space] but not to the extent that it was being leased and presented to the public.”

The Wing, the female-focused co-working company in which WeWork previously had a stake, today announced it would lay off "nearly all" of its hourly workers and half of its corporate staff.

Now that people are more conscious about personal hygiene, they will want to move away from heavily shared office space; Henick noted that the idea of the "hot desk," where people sit randomly at a different desk each day, is likely to be less appealing.

To thrive, office-sharing firms will need to change the business model and continue to move towards attracting bigger, more developed firms. If economic uncertainty affects recruiting and growth plans, existing businesses may use shared office space to reduce the cost of real estate, Henick said. For example, a business that is reluctant to commit to 200,000 square feet that take up a 170,000 square feet long-term lease and rent 30,000 square feet of flexible office space.