After WeWork: Stacking up the coworking competition

Unlike the phoenix, the once mighty WeWork may not be able to rise from its ashes, but its competitors could. 

The company was forced to announce that “substantial doubt” exists over whether it can avoid bankruptcy, an event that would put its tenants, landlords and lenders at risk.

As a result, others in the coworking space have begun their victory lap. 

Ready to capitalize on the oversupply of offices spurred by remote work, operators of all sizes see office territory as ripe for the picking, but on their own terms.

“Someone will run WeWork spaces [if the company goes under] but we won’t be rushing to do it,” said Industrious CEO Jaimie Hodari. 

The nation’s third largest coworking firm, Industrious has taken on just 11 percent of space it has been offered by former WeWork landlords in recent years, Hodari said.

Players in the coworking space told The Real Deal they expect revenue growth of 30 to 40 percent this year, and to eventually boost their share of the office market from about 2 percent to 10 percent or more.

“It’s a choppy market,” said John Arenas, CEO of Serendipity Labs. “Some landlords are no longer looking for market rents. They just want to avoid offering big concessions.”

Flexible office providers, while often helping companies downsize their office footprint, can charge a premium by offering speed to market — no prolonged lease negotiations or lengthy build outs — and by doing administrative tasks like stocking the kitchen and bathroom.

But the locations of WeWork spaces is among the reasons why competitors say they won’t necessarily jump to fill them, especially in central business districts following a shift in office demand moving into residential neighborhoods.

Prime submarkets

The residential area of Crown Heights, Brooklyn, is among the top performing locations for Industrious, according to Hodari. “I would kill for a Cobble Hill office building,” he said, another residential area in Brooklyn. “A lot of our business is how to create spaces in places like that.”

Submarkets are where coworking firms sense the opportunity for growth, in the suburbs of cities like Miami, Nashville and Dallas. In Manhattan, it means locating offices in Soho and Greenwich Village, rather than Downtown or Midtown, in an effort to give tenants a 15-minute commute. 

WeWork, however, played its hand early. In 2018, it boasted of being Manhattan’s largest office occupier. Today, its strategy of signing lengthy leases in order to book large revenues is dead. 

“Business cycles are shorter than traditional lease terms,” said Arenas, “So what’s the point?”  The point, perhaps, is that flexible office firms are enjoying some financial leverage. 

July was the sixth straight month that more owners fell behind on their CMBS office loans, which rose to nearly 5 percent delinquency from 1.58 percent at the start of 2023, according to Trepp. Landlords can expect further downsizing, and the prospect of WeWork getting out from under more leases — its highest priority at the moment — is another possible wound in waiting.

The shift is underway for the Durst Organization at 205 East 42nd Street, where Serendipity Labs took over 41,000 square feet from WeWork in February and replaced a lease agreement with one that divides up the revenue brought in by tenants.

Building owners can expect to negotiate for between half and three-fourths of revenue from flex space tenants, which at a 20- to 30-percent markup could possibly generate more income than a traditional lease. Underperforming spaces may net owners less than a traditional lease would.

There are many variations on the co-working theme, and regional operators as well as startups are looking to accommodate shifts in demand for office space. The market has more crossover with European cities than most lines of real estate business in the US, because the relationship between employee and the workplace has long been more flexible across the pond.

Kitt, launched from London in March 2019, has four New York locations. The brand’s niche is speedy, design-focused build outs. “It’s tempting to take on the lease.” co-founder Steve Coulson said, “ but we’ve stayed disciplined that every deal will be profitable.”

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The coworking industry’s largest firm remains IWG, formerly Regus, which claims more than 65 million square feet of office worldwide. It booked $209 million in operating profit last year, although its U.S. locations lost money. Based in Zug, Switzerland, the company has had a rocky ride in the U.S., particularly following the dotcom crash when its state-side subsidiary entered bankruptcy protection. The restructuring was led by Arenas before he left to launch Serendipity.

“I did it the old way, the leasing arbitrage model, and learned,” he said. Arenas claimed that Serendipity now generates positive cash flow and is not fundraising. Industrious’ Hodari said the spike in demand for submarket offices will make it cash flow positive by the end of this year, and added that the company will either seek to IPO or do a final round of private fund raising.

Industrious has come a long way since 2017, Hodari said, when WeWork took to poaching its tenants in the Dallas market by offering them free rent for a year. That wasteful spending, and what Arenas called “history’s largest glut of sublet” brought on by the pandemic finally broke the WeWork model, “in addition to some more salacious details,” Arenas added.

For all its trailblazing, brashness and unbridled optimism, WeWork’s rewards may await it in corporate heaven, where businesses must go when the music stops. Though the fruits of its labor live on. 

“We wouldn’t be able to do our work without WeWork having done what it did because it educated the market,” Coulson said.