Exploring the Most Transformative Trends in Commercial Real Estate | PROPMODO METATRENDS 2023→

Co-Working’s Flex Future is Taking a Page from Hotels

The co-working and flex office industry has rebounded from the darkest days of the pandemic, and brands have shifted strategies to meet users’ wants and needs. Like most real estate sectors, the pandemic caused short-term and long-term impacts. Some of the field’s most prominent players have had meteoric rises and falls over the last several years, consolidations have taken place, and more recently, major real estate services firms like JLL and CBRE have launched their own co-working and flex office platforms. 

Now, amid a fragmented office landscape where many companies are still crafting their own hybrid and remote plans, and institutional tenants are increasingly taking large chunks of flex space, co-working brands are creating new user agreements, looking closely at location, and figuring out where they fit within this important—and still evolving—sector.

Getting in the game

The rise of flexible offices didn’t begin with WeWork, but the co-working giant accelerated the trend to say the least. Once WeWork’s valuation started to skyrocket, more co-working brands soon followed. Between 2008 and 2018, the number of co-working spaces grew by more than 1,000 percent. By 2019, flexible workspace accounted for one-third of office leasing in the prior 18 months alone, according to Colliers. However, it accounted for just 1.6 percent of all office space within major markets. “I think what’s really compelling for co-working is there’s a drama of life that is played out in front of everybody,” said Glenn Brill of FTI Consulting, describing a bustling scene where co-working users share space to discuss business, talk about their startups getting funded, and then eventually, someone leaves to start a new chapter. “It creates this sort of tension that perhaps you don’t get when working from home.”

Despite a wave of consolidations driven by widespread hybrid work adoption, there seems to be something for everyone nowadays. The Wing, launched in 2016, is a meticulously curated private club and co-working space for urban professional women. There’s Colette, a members-only social and co-working club for the super-rich, where prospective members have to cough up $125,000 just for initiation fees. On the flip side, there’s Club 75 (operated by Convene), a private social club and co-working brand that bills itself as an affordable alternative to pricey members-only clubs. “It’s a little bit like the restaurant business—big chains, local spots, high-end, everyday ones–there’s a lot,” said CBRE’s Christelle Bron, who advises clients on strategies including co-working and flex space, on the current co-working offerings.

Major brokerage firms, including CBRE and JLL, have recently taken a dip into the space and launched flex space platforms. CBRE’s Hana was eventually acquired by Industrious, while JLL is operating JLL Flex in 7 locations under different brands, including Orchard and The Pitch. JLL’s Global Head of Flex, Ben Munn, said the company has several more locations in development over the next 12 months and believes that 30 percent of all office stock will become flex space by 2030. “We expect to be a meaningful player in that,” he added.

 Last year, Cushman & Wakefield formed a $150 million partnership with WeWork to beef up its office space management business. “I believe that they realized co-working was eating into their business,” Brill said about why brokerage firms decided to get into the flex and co-working space. “While they’re not focused on small transactions, they do some of that and are losing some business to co-working to some extent. They’re realizing the traditional leasing business is, to some extent, under assault, and they want a piece of that pie,” he said. “How do we capture that business that’s going away?” 

Lay of the land 

Regarding comprehensive market data, tracking performance across geographic areas in co-working can be tricky, and information often ends up being anecdotal. The speed at which space becomes leased out makes it “almost impossible” to track, said CBRE’s Bron, and there are few, if any, overview reports that take the whole picture into account. “Once we have more transparency in the co-working market, which is very nascent, we can see it as being an early indicator of what’s happening in the office market,” added Bron, who sees trends in co-working as often in lockstep with the office market. 

Firms like CBRE do produce reports on the flex space market. CBRE’s latest research shows that sales and occupancy rebounded from the pandemic in 2021, mainly from small and medium-sized businesses. The sector also experienced growing demand from enterprise tenants for large blocks of space. Of its new customers globally, IWG, the brand behind Regus, reported more than 80 percent were Fortune 500 companies, while WeWork reported nearly half of its members (about 2,300) were enterprise customers.

Globally, WeWork and IWG have the largest footprint in the co-working and flex space industry, with Industrious not too far behind, followed by many other smaller brands. WeWork, which has stabilized under new leadership after a very public rise and fall in 2019, has been on the road to recovery after going public last fall. The company is still not quite profitable, with its most recent earnings report showing a second-quarter loss of $635 million earlier this month. However, revenue and occupancy have continued to rise, albeit lower than 2021 figures, while growing 5 percent between the first and second quarters of the year. The company’s CEO & Chairman, Sandeep Mathrani, said in the company’s most recent earnings call that the firm is focused on getting more all-access memberships and recently partnered with Yardi on a new software management tool (WeWork Workplace) for companies to manage their space at WeWork locations. Mathrani said that amid a time of high inflation and a potential recession, co-working would be more desirable to companies looking to reduce costs and “future-proof” workplace strategies. 

Knotel, which at its height was valued at $1.6 billion, filed for bankruptcy last year after being hit hard by the pandemic and was acquired by Newmark for $70 million. Newmark said in its latest earnings call it is seeing “incredibly strong demand” in its flex space products, and its portfolio is close to 90 percent occupied. Along with Knotel, Newmark also owns Deskeo, a flex office provider based in Paris with 50 locations. Major industry player Industrious has more than 100 locations across the country, plus 16 in Europe, with a Toronto location set to open this fall. The company also operates two locations of Hana, CBRE’s former platform, in London. The company’s offerings have grown over time; now, an estimated 90-95 percent of its business is not leases but management agreements.

Demanding more

Management agreements have quickly become the norm over the last few years as a means for landlords to reduce their risk by sharing it with an operating partner. It’s also a way to subdivide their properties and diversify their offerings across their portfolio. Taking a page from the hotel industry, by creating these agreements, operators shift the burden of leasing and capital expenditures to the tenant, who doesn’t pay rent but shares in profits. “You can think about it as more of a partnership with the landlord where they both go in together,” said Bron. “It depends on the market and what it can bear. It’s really dictated by demand and what market.”

Another trend industry experts are seeing now that could have implications for the future is a rise in all-access memberships. In addition to WeWork’s push to get more all-access members, other brands are also experiencing demand for memberships that allow users to work from any brand location around the world. And it’s not just business districts around the globe that workers are interested in—especially when it comes to individual co-working users. According to Ernest Lee, chief growth officer at CitizenM, areas with more mixed-use developments that are more “neighborhood-y” are the hottest spots for co-working and flex space. He pointed to the strength of the European co-working market, where co-working properties in vibrant neighborhoods are thriving, and to hip neighborhoods of Brooklyn like Williamsburg. “People want to get out of the house from working from home, but they don’t necessarily want to trek into central business districts to do that,” said Lee. 

The demand for suites, pre-built spaces that typically are enclosed with a certain number of desks, is increasing, and the size of these spaces is too. Bron said CBRE is seeing demand for the number of desks go up “across the board,” but mostly with larger companies looking to go into the space. These kinds of spaces can come serviced or non-serviced, often have longer leases and tend to be occupied by enterprise companies. JLL also sees the demand for suites, and it’s outpacing traditional co-working spaces. “It’s becoming pretty ubiquitous across multiple different players,” said JLL’s Munn. “A big part of it is that companies are in this very weird place with the war for talent and the scatter and gather for talent, so they’re figuring out short-term solutions.”

For all its bells and whistles, co-working has been around for a long time and won’t be disappearing anytime soon. As the pandemic has proved, co-working and flex spaces are a part of the overall workplace ecosystem that is still being tweaked and adjusted by landlords, brands and occupiers. We can expect to see more partnerships and consolidation ahead, and more large enterprise companies are taking chunks of flex space as they figure out their workplace strategies. And while market volatility could lead to struggles ahead for some companies, the good news is, as the co-working landscape has become more sophisticated and diversified, it has created an environment where there’s something for everyone.

Image - Design