The coworking industry was melting down prior to the coronavirus. The disruptive business model is retreating from some of its 2019 excesses and perhaps finding its place as a tool in the broader real estate strategy of occupiers both small and large
by Dave McKenna, Editor CREB on July 8, 2020
Much of what we thought about the future of coworking is proving to be completely wrong according to a recent study in which JLL makes six predictions for coworking in 2020 and beyond. The coworking phenomenon grew at a 22% annual rate for ten years, but was already decelerating in 2019 prior to the pandemic. The market’s judgement on WeWork and the subsequent implosion of its IPO was a sign of the fundamental over heating that was occurring in the new business model. The rush to coworking was a bubble which is bursting in slow motion with the collapse of high-flying WeWork and the realities of Covid-19.
Total coworking leasing peaked in Q1 2019 with 6.4 million square feet leased in that period. Over half of the space was leased by a single operator – WeWork. By Q4 of 2019 the total leasing had collapsed to 903k square feet – zero square feet leased by WeWork.
According to JLL, there are nearly 1,000 coworking vendors in the U.S. attempting to make sense of the business model. But the inherent risk of short-term leases is limiting investor interest in funding the experiment.
In a retreat from the heady days of 2019 and a time when no one had heard of coronavirus, the average deal size has shrunk by 38% and the focus is reverting back to cheaper, lower-end properties rather than the swanky class-A product the industry was hyperventilating over last year.
However, there are some signs of life in the coworking model. A number of asset holders are using the flex space option as an amenity to attract growing employers who then “graduate” into larger, conventional long-term leases. Also, corporate occupiers now represent 40% of the coworking leases and the effects of covid-19 are likely to increase the Fortune 500 demand for agile workspace for a workforce that is likely to remain somewhat more remote than pre-pandemic.