Commercial real estate’s co-working industry is going to feel an impact from the COVID-19 pandemic. With the economy on an uncertain path and social distancing requirements in place, it may take time before new leases are inked for the spaces and employees feel comfortable using shared space.
Co-working allows workers from different companies to occupy shared office space to work alone or with others. It offers cost savings for users who share the facilities, utilities and office services. This type of space is frequently used by freelancers, telecommuters and small businesses that need equipment they do not own.
Some workers are drawn to these flexible spaces to feel a sense of community when traveling or working from home. Also, larger companies might use co-working facilities to offer workers’ workspace when there are more employees than available desks.
Along with the workspace, facility features might include 24/7 access; Wi-Fi; meeting areas that can be reserved; parcel-acceptance service; a receptionist; and a communal printer, kitchen and bathroom.
How do co-working spaces earn money?
Typically, co-working companies lease space from landlords and sublet it to office users. The main revenue streams for operating co-working space are membership and leasing space.
Shared workspace providers often offer a membership fee allowing access to a workstation for one-time use or a set number of days per week, month or year. Co-working providers’ fees can include facilities at multiple locations that are available to members. Providers also might offer group memberships when several users book space together.
Renting private or dedicated office space is another revenue stream for some co-working providers. Further, leasing space specifically for events or large meetings is an option.
Small businesses or entrepreneurs also might pay to use the address of a co-working space as a virtual office while they work from home.
Additionally, there are real estate brokerages in the market that work with property owners to design, build and operate co-working areas in previously vacant space. Money is earned through revenue and profit-sharing agreements with property owners.
What is the demand?
Before the pandemic, the demand for co-working space was high and experiencing strong growth. The flexible space/co-working sector is viewed in the real estate industry as the primary growth driver within the office market, projected to total 30 percent of the market by 2030, according to real estate firm JLL.
Co-working space grew by an average of about 23 percent per year between 2010 and 2017, JLL reported. The number of co-working spaces worldwide was projected to reach 25,968 by 2022, an increase of 42 percent from 2019, according to a co-working growth study by Co-working Resources.
How will COVID-19 impact the co-working market?
The pandemic could slow growth in the co-working sector as expiring leases may not be renewed or tenants choose to downsize.
With many employees now working from home, co-working space is not being used. Under these circumstances, demand for long-term leases and the number of new leases inked for co-working space are expected to fall.
Some landlords are now negotiating changes in lease terms in a bid to help hang on to tenants through this rough patch. Shorter leases offering one to three years versus five to 10 years might become more readily available.
Despite the new reality of social distancing, the CRE co-working market is still expected to be a viable business. Workers who want to leave the house for some of the workday and still maintain a level of social distancing may use co-working space as a happy medium between working from home and going into the office.
This may lead to a change in the overall co-working market. Freelancers, small businesses and startups often use the spaces now, but the industry could expand to cater more to corporations. These large companies may be looking to rent co-working space to make their main offices less dense due to ongoing health concerns.
Landlords also might consider offering hourly memberships.
The layout of shared office space also could change, with leases offering a small amount of desks with their own amenities rather than sharing among a larger number of workers.
Other changes might include a co-working provider offering more customized amenities, such as a tenant’s specific security or internet bandwidth requirements. Staggered seating and increased sanitizing procedures also are likely.
Co-working is a major player in the CRE office sector. Working from home has become more common amid COVID-19 physical distancing recommendations. When restrictions begin to loosen, some workers might turn to co-working space as an alternative to going back to the office. At the same time, co-working providers are working to better accommodate tenants by offering shorter leases and more individualized amenities.
Ryan Letzeiser is the Co-Founder and CEO of Obie, a portfolio management platform for commercial and multi-family real estate. He’s written on CRE for sites like RealtyTimes, REOptimizer, and Propmodo.