Coworking And Flex Office Providers Say They're Past The Pandemic And Set To Expand
Government officials across the U.S. are lifting mask mandates, a long-awaited sign that companies can start to think seriously about returning workers to their offices. But it isn't as if nothing has changed, and many expect new ways of working will replace the old.
That may mean good times ahead for flex office providers.
“The dark cloud of the pandemic is starting to blow over a little,” said Joe Brady, CEO of the Americas at flexible workspace company The Instant Group. “But no one believes there’s going to be a return to pre-pandemic behavior.”
Brady said he expects many employees will increasingly make clear they want to keep working from home, at least for portions of the week. When they do return to their offices, they will want more amenities and a wide range of spaces that can offer privacy if needed. And if landlords and employers want to entice their workers back, they will have to follow through and provide what they want.
“The pandemic made a tectonic shift,” Brady said, adding more power now resides with workers. “[Employees] can demand that one day they are going to go to an office, one day they will go to a WeWork and one day they can work from home. Employees are going to vote with their feet about where they choose to work.”
That isn't a recipe for business as usual, he added. Companies will experiment with various hybrid strategies and work schedules, and it may take time to hit the right mix of spaces, from private cubbyholes to high-tech conference centers that can host whole workforces. That could mean a burst of demand throughout 2022 for coworking and flex office spaces, especially for small firms just returning to the office and large firms looking to establish offices in new markets.
“No one is going to sign a 10-year lease right now,” Brady said. “But there are going to be a lot of cases where companies test out a flex office space for six months.”
Flex office and coworking providers typically rent out large spaces and then divide it into small portions for companies and individuals who buy memberships, sharing the amenities with other users.
The industry turnaround started in 2021 after a rapid dip that saw nearly 25% of such locations in North America shuttered between the start of the pandemic and Q2 2021, according to Upsuite, a Denver-based flex office data and analysis platform. But the pain wasn't felt equally.
“Providers who had been bullish on rapid expansion pre-pandemic faced challenges that were well-reported; however, we’ve found that the smaller operators suffered the most,” Brady said. “In Chicago, which mirrors much of the U.S., small operators saw locations decline by 19% while the top 20 operators actually expanded their market share.”
The bleeding stopped in Q3. In the last few months of the year, demand began soaring, even during the rise of the omicron variant, according to Upsuite.
North American flex and coworking spaces saw demand increase 40% from Q3 2021 to Q4 2021, Upsuite found, a 50% increase from Q1 2021 and up 26% from pre-coronavirus levels recorded for Q1 2020. Metro areas such as Atlanta, Houston and Los Angeles are leading the demand surges, with increases of at least 91% in Q4 2021.
Rents and inventory also started growing again, Upsuite added. The average asking price for each flex seat grew 2.5% between Q3 2021 and Q4 2021, the biggest jump since the pandemic began and 5.8% higher in Q4 2021 compared to Q1 2020.
“The pandemic was a major crisis for the industry,” Upsuite noted in the Q4 2021 report. “But with recovery well under way, operators should be scouting new locations and planning for growth. In short, the operators who survived should not waste a crisis – they should accelerate out of it.”
Some industry leaders say they are ready to do just that.
According to a 2021 survey of flex operators in the U.S., United Kingdom and the Asia-Pacific countries by Brady’s The Instant Group, 77% say they feel positive about the industry’s future. Furthermore, 64% predicted occupancy would climb above 81% in the six months after the survey was conducted in September 2021. Nearly half of the operators reported they were likely to start expanding. Omicron did toss a wrench into some plans, but with the variant now dissipating, last year’s optimism has returned.
“We’re absolutely expecting demand to grow, and then it will be a challenge for supply to keep up with demand,” Brady said.
Expansion will come from a wide variety of providers, he added. Flex office is a massively fragmented industry, with thousands of providers in the U.S. alone, ranging from giants like WeWork, Industrious and Serendipity Labs to mom-and-pop shops, as well as landlords such as Hines and Tishman Speyer, which have been launching coworking spaces as amenities within their own buildings.
The New York-based Bond Collective has already sunk its roots deeper into downtown Chicago, according to Chicago-based Community Manager Mariah Mell. The coworking and shared space provider, which has about a dozen locations across the U.S., just before the pandemic opened a roughly 70K SF space at 20 North Wacker Drive in Chicago’s Civic Opera Building. This past November, it unveiled a new three-floor, 30K SF office at 1101 West Lake St. in Fulton Market, the city's hottest office submarket.
Many of its clients are small firms with eight to 10 people, she added. As Covid-19 cases fell in the past few weeks, and especially after the statewide mask mandate was lifted on Feb. 28, companies have started flooding back downtown.
“We’ve seen a huge upsurge of members coming in,” Mell said. “And we signed two more leases just today.”
The Bond Collective wants to provide members with an upscale atmosphere, more like a boutique hotel than a simple office, she added. Its spaces typically feature not just coworking areas but lounges, coffee bars, conference rooms and private nooks, which should help companies pull people away from their home offices.
“It’s not the same as asking employees to come back to a stale cubicle,” Mell said. “They don’t want to come back to a space with only a microwave.”
“The last two years have been a challenging experience for all of us,” he said.
But conditions have greatly improved. Convene, which manages flex spaces, as well as meeting and event spaces, along with virtual and hybrid events, has 19 locations across Boston, Chicago, New York, Philadelphia and Washington, D.C. It recorded about $10M in net new business in the month of February, which roughly equals what it was seeing just before the pandemic hit.
“That’s got us thinking about growing again,” Simonetti said.
Convene will open a London space at 22 Bishopsgate this month, its first outpost outside the U.S., according to Simonetti. It also has dozens of potential deals in the pipeline that should result in eight or nine new locations over the next 18 months.
Most of the potential deals would be partnerships with landlords to provide coworking and amenity spaces for their tenants. In Chicago, Convene has five locations, including the amenities and meeting spaces it runs for landlord Sterling Bay at 333 North Green St. in Fulton Market and 311 West Monroe St. in the West Loop. In addition, Convene was hired by EQ Office to open a 91K SF amenity space in its Willis Tower, part of that property’s $500M makeover.
Simonetti said he is still bearish on the overall office sector, which may suffer if companies decide to shrink their footprints due to some employees staying home. At the same time, markets don’t have enough trophy spaces to entice workers to return.
“That’s where we see the opportunity,” he said. “[Landlords] realize that in order to attract tenants to their buildings, a new lobby and LEED certification isn’t going to be enough.”
Of course, all office providers are also keeping a close eye on any new potential Covid-19 threats.
“The current trajectory looks good, although we do know things can change very quickly these days,” Mell said.