WeWork is in trouble.
It’s no secret that the New York-based coworking company publicly retracted its quest for an initial public offering on the New York Stock Exchange earlier this month. And parent We Co. co-founder Adam Neumann in September was let go. The company is now in the midst of re-organizing its money-losing business model that’s been kept afloat by monetary infusions from Japanese investor SoftBank Group Corp. – $10 billion to date and another $5 billion on the way, according to a Bloomberg report.
At press time, SoftBank also announced that it will acquire WeWork. Despite a rash of doom-and-gloom media coverage questioning the viability of the coworking model, CBRE Group contends in a trend report released this month that the structural shift to office flexibility has become permanent and that real estate markets are not threatened by it.
“Coworking is here to stay,” said Kurt Strasmann, executive managing director of CBRE’s Orange County and Inland Empire Operations as well as CBRE’s Southern California functional industrial & logistics market leader. “It’ll be really interesting to see what will happen in the next six months.”
The reasons why coworking could outlive WeWork are varied. According to the CBRE report, titled “Let’s Talk About Flex: The U.S. Flexible Office Market in 2019,” flex office space will remain a durable trend because penetration levels are modest. Less than 2 percent of total U.S. office inventory is dedicated to flexible office space and there are only a handful of submarkets that have more than 5 million square feet of total office inventory with a flex-penetration rate of 5 percent or more.
The report also cites a diversified operator base, wherein approximately one-third of the flexible office space in the U.S. is provided by WeWork. Nine other operators account for 35 percent of total flexible office space. The remaining 32 percent is shared among 690 other operators.
In an office market where demand remains strong and broad-based, the past year saw traditional (non-flex-operator) tenants leasing, on average, 55 million square feet per quarter, while flexible office space accounted for only 6.5 percent of all leasing activity nationally in 2019’s first quarter, compared with 26 percent of leasing activity directly to technology companies.
In such markets as Manhattan, where on average less than 2 percent of a building owner’s portfolio has been devoted to coworking, landlords have been conservative in leasing to flexible operators.
Strasmann told the Business Journal that coworking is “bigger than one or two companies. It’ll go through its up and downs.”
Continued Strasmann: “There’s been a shift and I do believe that coworking is a sector now. And it’s a big driver on the office side for all markets
Market data provider Statista estimates that more than 1 million people in the U.S. will work out of flexible office space by 2022.
“There is enough demand to meet the existing supply of flexible office space and we see that continuing,” the CBRE report stated.
Rebound or bust?
There has been no word of WeWork re-negotiating any of its recent San Fernando Valley leases, but it has occurred elsewhere.
In the Valley market, the company earlier this year announced leases for 40,371 square feet across two floors at 5161 Lankershim in North Hollywood; 52,875 square feet across three floors at LNR Warner Center IV in Woodland Hills at 21255 Burbank Blvd.; and an additional four floors at The Tower at 3900 W. Alameda St. in Burbank.
An Oct. 16 CoStar Group report noted that WeWork was set to move into an under-construction 36-story Seattle building called Third & Lenora, but backed out of the deal. Building owner Martin Selig Real Estate, and We Co. sent a joint statement Oct. 15 confirming the dissolution of the plan to CoStar.
“As part of WeWork’s commitment to refocus on its core business, WeWork and Martin Selig Real Estate have mutually agreed to not move forward with the planned WeWork-WeLive Belltown Seattle project at Third and Lenora,” the statement read. “WeWork and Martin Selig Real Estate look forward to continuing to work together.”
According to a CoStar Group article, WeWork has re-dedicated itself to slowing its expansion and shedding non-core businesses and divisions as potential investors have eyeballed its reported billions of dollars in losses and failure to provide a clear path to profitability, something that has eluded the company since its 2010 founding.
Despite the difficulties, WeWork’s top brass insist that there is a future for the company.
“WeWork’s core business is strong and we are focused on strategic expansion and profitability,” reads a company statement. “Consistent with this strategy, we will continue to enter new lease agreements but expect the pace to slow in the quarters to come.”
Alluding to the WeWork situation, CBRE’s Strasmann admitted that current events in coworking threaten to “put some things on pause.”
However, he believes the market will weather this storm.
“The fundamentals (of coworking) make a lot of sense for a lot of companies,” Strasmann said. “It has proven that there are some direct benefits to that. It’s also the environment that these coworking operators are going into.”
Strasmann said that coworking, which tends to thrive in “more progressive office buildings” has become a favored work experience because of the more collaborative environment and the outdoor amenities such addresses tend to foster. Best of all, he added, are the flexible terms, regarding the number of desks and number of months or years a company can occupy the space.
“You can commit to a year or two years. You can scale up or down,” he said.
While leasing out coworking space is not ostensibly a cheaper solution in terms of dollars per square foot, it is overall cheaper for a company because there is no building involved.
In addition, he said, “there’s a lot of talk of consolidation” among coworking companies.
However, in some markets, such as Seattle, WeWork’s failure would greatly impact and possibly disrupt the office market. In an ominous sign, WeWork has become a predominant office-leaser in the Emerald City. The Puget Sound Business Journal put the amount of WeWork office space in the region at about 1.45 million square feet — only behind tech giant Google and just north of leading coffee chain Starbucks Corp.
Surpassing J.P. Morgan Chase in 2018, WeWork is also the largest office tenant in New York City, where it holds 9 million square feet at more than 100 locations in Manhattan.
Yet according to a City Lab report, if WeWork goes under in Manhattan, it may not have an overall effect on commercial real estate. Ultimately, WeWork did not invent and does not hold a patent on the coworking concept, so if the company were to tank, competing companies as well as building landlords would continue to create flexible offices – provided it proves profitable.