Coworking closures: new hope for flexible space market after cull
This WORKTECH Wednesday Briefing looks at a new report which explains how new coworking business models are emerging after large operators lost a fifth of all Northern American locations
The future of coworking and shared spaces has been uncertain over the past year. Even as an initial reflex to revert to more private individual space has subsided, it is clear that traditional coworking models have started to show their cracks. Coworking operators are now at a pivotal point where vulnerabilities in business models need to be identified and sustainable strategies put in place.
According to a new report by flexible workspace provider Upsuite, over 20 per cent of North American coworking locations have closed in just one year as a result of the global pandemic. The pandemic has exposed the risks of an industry fuelled by cheap investment capital – some of the world’s largest operators such as Breather and WeWork have suffered the most closures.
Swift action to future-proof
The Upsuite report presents the latest data in the field and offers a new path forward for the flexible working market. It found that, since March 2020, 700 coworking locations permanently closed in the top 30 North American cities. This represents more than 70,000 seats that are no longer available. This wasn’t a knee-jerk reaction; nearly two-thirds of these closures occurred since the start of December 2020 when an initial wait-and-see approach gave way to swift action by operators and real estate owners to future-proof portfolios.
‘High-growth operators will not sustain the future of the flexible space industry…’
Large, well-funded operators like Breather, Knotel, WeWork, and Serendipity Labs drove 75 per cent of coworking closures. The pandemic exposed business models that were not sustainable or resilient enough. The majority of failed locations were leased spaces, which is a large indicator that any future investment will need to rely on newer business models such as management agreements in order to be sustainable.
A new demand
While the data on coworking culling over the past year looks damning for the industry, hope is not lost. The pandemic has catalysed a workplace revolution centred on providing employee choice and flexibility. Despite location closures, there has been a 24 per cent increase in demand per location in North America from the beginning of 2021. In New York City alone, demand is up by 42 per cent.
So, the questions is not: is there a demand for coworking? Instead, it is: what kind of demand will return? Although flexible space was hard-hit during the pandemic, its premise of flexibility will ensure that the growing demand for agile portfolio strategy and employee mobility can fuel recovery throughout 2021. The Upsuite report states that ‘to meet demand and lead the market out of the crisis, future-proofed business models and innovative investors and owners must offset the outsized impact of vulnerable operators moving forward’.
The path forward
Flexibility for occupiers is now widely accepted as non-negotiable, but it comes with risks for owners and occupiers alike. New business models will shift towards management agreements, franchised owned locations, and owner-operated spaces to manage the risk-to-reward balance.
‘Occupiers expect landlords to offer flexibility as an amenity…’
Tenants emerging from the pandemic will need lease flexibility and employee mobility options which will be driven by the desire for smaller satellite offices. The pandemic proved that the flexible space market will not be dominated by large, well-funded players but instead shift in favour of smaller operators, franchises and owners. This means choice for consumers and complexity for owners.
The coworking industry is already purpose-built for flexibility and the new world of work. It has largely survived the pandemic, and it is here to stay. The full Upsuite report can be found here.
How WeWork is adapting
Despite WeWork being one of the largest coworking providers in the world, it has been far from safe during the pandemic. As the Upsuite report found, WeWork, among other large providers, suffered a significant number of closures in major cities in North America as Covid-19 struck. As a result, coworking giant has had to rethink its entire business model to survive.
Prabhdeep Singh, global head of marketplace at WeWork, spoke at WORKTECH’s 2021 Professional Services conference about the changing demand in the flexible space market and how WeWork is responding. Singh discussed the increased demand for flexibility and how WeWork has adapted its business model to be more sustainable and responsive in the future. Watch highlights from his presentation here: