Some office experts predicted that the pandemic would destroy co-working operations—at least until a vaccine is available, because people would not feel safe working in close proximity to strangers and the concept may not be financially viable, given current occupancy limits.
But while some co-working operators are likely to fail in the current market, others may thrive as they fill niches created by the pandemic and/or offer office users a flexible alternative during a time of tremendous uncertainty.
This is because the pandemic has changed the nature of the workplace for office workers, forcing companies to become more agile and making them averse to long-term lease commitments. With uncertainty about where work will be performed in the short- and long-term, notes Washington, D.C.-based Scott Homa, senior director of office research with real estate services firm JLL, “Employers don’t want to be tethered to traditional lease agreements, which is transforming office real estate from a fixed asset to an on-demand or space-as-a-service product. Landlords that adapt to this change and meet consumer demands will be the ones that preserve and grow occupancy.”
The sustainability of co-working operators in this environment depends on each organization’s financial status and business structure, Homa adds.
Co-working owner-operators that buy assets at a low basis and offer short-term leases remain durable in uncertain times because they aren’t subject to long-term leases at above-market rates. Operators with a franchise model may also do well in a post-COVID-19 environment, because this strategy can accelerate growth, while transferring the risk to franchisees.
Likewise, platforms that focus on management agreements with traditional landlords, providing them with a share of profits in exchange for flexible terms, should be able to avoid high fixed costs, Homa notes.
In the meantime, co-working operators will have to conform to occupancy limits and other safety standards set by federal, state and local health officials, according to Chicago-based Joe Learner, vice chairman, director and Midwest region lead with real estate services firm Savills and a specialist in structuring complex leasing transactions.
Those operators with management agreements in place may remain viable under limited occupancy requirements because they’re sharing the downside with landlords, Learner notes. The landlords may enter these partnerships for reasons other than the profit motive—for example, because the partnership enables the landlord to establish relationships with growing startups, which are potential tenants, or provide co-working as an additional service to building tenants, he says.
Learner adds that co-working operators with locations near residential neighborhoods or in suburban communities are poised to benefit from companies establishing work outposts near where large numbers of their employees live. In the current environment, some employees, especially those with small children at home or those living with multiple roommates, may prefer to work outside their homes, but may not want to commute into the city during a pandemic.
In his view, employers might be willing to pay a premium for space in co-working facilities because it can save them from making a huge capital outlay to establish their own remote work centers, and shared space rents include furnishings, good technology, utilities and support staff like receptionists.
Based on the above criteria, NREI reviews the outlooks for some major existing co-working operators.
