WEWORK FLOPPED. HAVE FLEXIBLE OFFICES? / THE WALL STREEET JOURNAL

WeWork Flopped. Have Flexible Offices?

Co-working spaces are designed for tech startups, not downsizing corporate tenants

By Carol Ryan

A WeWork co-working space in Shanghai in March. PHOTO: CFOTO/ZUMA PRESS

Flexible working isn’t turning out to be the boon for flexible-office providers that it might seem.

WeWork WEWKQ 91.96%increase; green up pointing triangle co-founder Adam Neumann lamented this week that the company he used to run failed to take advantage of “a product that is more relevant today than ever before.” 

Although he didn’t mention his own role in WeWork’s downfall, he has a point. 

Demand for flexibility is strong as companies try to strike a balance between the traditional office and letting employees work at home.

But co-working spaces that tout flexibility are struggling even more than traditional landlords in the postpandemic office market.

WeWork’s offices in the U.S. and Canada were only 69% full earlier this year. 

The company will now use the bankruptcy process to break leases with some landlords to improve this number. 

Its main rival IWG, also known as Regus, doesn’t disclose how full its American locations are, but says the rate is roughly similar to the company’s 74% global average. 

That leaves both businesses well below the U.S. national average occupancy rate of around 83%.

Co-working never really took off in earnest in the U.S., although WeWork and IWG have a big presence in major cities like New York and San Francisco. 

Flexible office providers have a small 1.6% share of the North American office market, according to CBRE data. 

This has shrunk from a peak of 2% before the pandemic, as WeWork has been closing its weakest locations.

One reason why the sector remains small is that WeWork and IWG’s offices mainly appeal to startups, particularly in the tech sector. 

Big companies do sometimes use co-working space—if they are opening a regional hub, say—but never took to it in big numbers.

Since the pandemic, demand from some smaller clients hasn’t returned. 

Venture cash isn’t flowing as freely into the tech sector as it was, and staff can write code remotely. 

“Now a lot of these companies are working from home, so the main drivers of the business are not as strong,” says Cedrik Lachance, director of research at Green Street. 

Co-working providers also face stiff competition from corporate tenants that are flooding the market with unwanted space. 

The U.S. vacancy rate was 18.4% in the third quarter, according to CBRE. 

Of this, 2.6 percentage points was sublet floor space released by existing occupiers. 

Small companies looking for an office now have more options, forcing co-working-space providers to look elsewhere for growth.

IWG, whose share price is trading close to a 10-year low, thinks management contracts with landlords are the answer. 

Under these partnerships, it earns a fee from property owners who pay the company to spruce up their buildings and lease them out. 

Big landlords understand that they now have to offer flexibility to be competitive. 

That may mean giving long-term tenants access to overflow, co-working space and extra meeting rooms on days when their permanent workplace is particularly busy. 

This model is ideal for IWG, which signed 200 of these deals in the third quarter. 

The company spends the landlord’s money on office refurbishments rather than its own, and doesn’t have to commit to long leases anymore. 

One of investors’ major bugbears with co-working companies is that they offer tenants short-term, easy-to-break leases—albeit at a steep premium—but sign long-term contracts themselves that leave them on the hook for rents even if the space is empty.

Big institutional investors like insurance companies also seem to like the setup. 

They aren’t used to intensively managing the day-to-day running of their properties. 

In the past, owners could passively collect rent once a tenant had moved in on a long-term contract. 

Now that vacancy rates have risen to record highs, a more hands-on approach is needed. 

The real winner in the postpandemic office shakeout is turning out to be top-notch, so-called prime buildings. 

Companies are cutting space when their leases expire: The average floor space in new rent deals has shrunk by 28% compared with norms before the pandemic, according to CBRE. 

But corporate tenants want space in the best buildings in the best locations to lure their employees back to the office, and are prepared to commit for it. 

Prime rents and lease lengths have been steady over the past three years.

Flexibility is the new buzzword in office markets, but today’s co-working spaces are set up for tech startups instead of downsizing corporate tenants. 

Flexible office providers will need to flex too.