Hybrid Work Adoption Driving Rush Of Coworking Consolidation
The global coworking and flexible office industry is maturing into its next phase as it becomes an entrenched component of the hybrid work model being embraced by corporate America, and that means consolidation.
The largest players in the industry, like WeWork and Industrious, have made several acquisitions this year and are primed to do more, while some smaller operators have merged in an effort to match their scale to the demand of large users.
“If you're trying to get corporate accounts ... then scale is huge. That is the bread and butter,” said Flip Howard, the founder and CEO of WorkSuites, which has more than 20 locations in Texas and is expanding to Atlanta. “It's going to be a race to see who can have the best scale."
Industrious bought two international coworking operators — Great Room Offices in Asia and Welkin & Meraki in Europe — for $100M in cash and stock earlier this month, Bloomberg reported. Wednesday morning, CBRE said it would pump another $100M of equity into the New York-based coworking firm, adding to the $220M it has already invested, which will go to fund more acquisitions.
"CBRE's investment assures we have the capital we need in the coming years to grow on a global scale to meet current and future demand for flexible space,” Industrious CEO and co-founder Jamie Hodari said in a statement.
In an interview with Bisnow before the deal was announced, Hodari said the pandemic has pushed coworking providers to expand aggressively — even though growing too fast is one of the factors that brought WeWork crashing down.
“Scale matters a lot," Hodari told Bisnow. "There's a massive rise in the number of global companies that want to work with a single provider or two providers. This did not exist pre-Covid."
Earlier this year, WeWork acquired Common Desk, absorbing the coworking operator's 23 locations in 13 cities in Texas and North Carolina, and formed a partnership with coworking aggregator UpFlex in February.
"When we think about growth, we are focused on accretive and asset-light opportunities with good operators with whom we have both a product and cultural fit," WeWork President of the Americas Melinda Holland wrote in an email to Bisnow. "We’ll continue to look for other asset-light opportunities like Common Desk, but we have no new plans to share right now."
WeWork and IWG, which runs the Regus and Spaces brands, are the clear industry leaders, and Hodari said Industrious — which had 150 U.S. spaces under management before going global — is one of many operators jockeying for a seat at their table.
“Most industries like this consolidate into really three companies. It's not 10 companies,” Hodari said. “So I think the third seat at the table has been pretty open.”
There has been no shortage of merger and acquisition activity at smaller scales: On May 3, United Franchise Group, which runs Venture X coworking, merged its brand with Office Evolution to create the largest privately owned coworking franchisor operation, called Coworks. Last month, Washington-based WorkChew, which operates coworking centers out of hotels, restaurants, empty offices and other nontraditional facilities, bought New York City coworking operator KettleSpace to expand its presence to the Big Apple.
Other firms have raised capital to proliferate. Atlanta-based Thrive landed private equity investment from 33 Degrees to expand from three suburban Atlanta locations to 500 locations across the U.S. and Canada. In March, New York-based Rudin Ventures was part of a group to invest nearly $10M in seed funding for Daybase, a new coworking startup led in part by a host of former WeWork executives that is seeking to create a hybrid coworking platform across the U.S., Fortune reported.
Coworking proponents say the industry is entering a renaissance phase as the world gets more used to living in a pandemic and companies encourage employees to report back to the office. As they do so, they are increasingly relying on hybrid work models that appear to be permanent instead of a Band-Aid to get through the pandemic.
"There has never been a stronger moment for flexible office space. The pandemic fundamentally shifted the purpose of the office, creating a market that demands flexibility and optionality more than ever," Holland said. "Having a global footprint enables WeWork to meet the global demand for flexible space immediately and at scale."
Demand for Industrious, especially among enterprise customers, exceeds what it was before the coronavirus, Hodari said. As larger companies turn to coworking, they are doing so with a preference to work with providers that can offer multiple locations.
“In a certain way, that has flipped the old dynamic on its head," Hodari said. "Ten years ago, I would say people really preferred the local provider.”
The coworking industry took a huge hit during the pandemic. Between 2020 and 2021, nearly 1,400 coworking spaces closed, according to research from coworking operator Coworker. There are now roughly 19,500 spaces globally, approaching pre-pandemic levels, and that number is projected to rise to 40,000 by 2024.
The global coworking market, now at $16.1B, is expected to eclipse $30B by 2026 with a compounded annual growth rate of 17%, according to Business Research.
Fortune 500 companies are the ones largely fueling this growth as they seek to offer flex office options for their employees, especially as the labor market is historically tight and companies don't want to cut down on flexibility. According to a recent Accenture report, 63% of high-growth companies have hybrid work opportunities for their employees.
“I think the biggest shift is we now have office occupiers of every size and shape in either the office-first or remote-first camp,” Everything Coworking CEO Jamie Russo said. “That's very interesting because it used to be everybody was office-first.”
This trend has encouraged growth not only among coworking firms, but office landlords themselves are opening their own coworking operations. In recent years, national owners like Hines, Tishman Speyer, Bridge Commercial Real Estate and CP Group have all launched their own coworking operations.
“You will find most new buildings, in particular, will have a coworking floor,” Lucror Resources Managing Principal Arun Nijhawan said. "Whether it's run by Industrious or run by the landlord, it is a coworking floor."
Hybrid office policies are becoming a key lure by companies for prospective employees, Bridge Commercial Real Estate CEO Jeff Shaw said. The firm has its own flex office operation called Abridge in six of its properties, including in Minneapolis, where it just signed the local office of real estate brokerage firm Avison Young to its location.
Back-to-the-office efforts, where many companies have soft-pedaled on those demands, coupled with new economic uncertainty, has many companies leaning more on flex office options.
“As larger companies have been starting to move forward with their portfolio plans ... we've seen an increase in activity in our Abridge space,” Shaw said.
Holland said WeWork's All Access program, which allows companies to permit their employees to use 700 WeWork locations globally, has been popular since the pandemic: Memberships have jumped 267% by the first quarter of this year to 55,000.
But while rapidly growing, coworking as a percentage of the total global office market is roughly 5%, Russo said. While it makes sense for some coworking operators to look to consolidate in order to grow their footprints, the industry as a whole is still very young, she said.
Most coworking operators are either boutique operators, local firms or real estate owners themselves, so there is a limit to how much M&A potential there is outside of the biggest players.
“We’re like in the first inning,” Russo said. “Outside of Industrious and Regus, there are a lot of people trying to figure out how to diversify” their portfolios.
Howard didn't want his coworking firm, WorkSuites, to grow rapidly in the hopes of luring a buyer. That would have required him to take on too much debt, and concentrating more units in a single market is a better strategy than spreading WorkSuites into more cities with fewer locations, he said.
“[Other firms] are just trying to put a lot of dots on the map to get a recognizable brand that has perceived value and then get acquired at a high valuation,” Howard said. “It would be much sexier if I had those 23 locations spread out in 15 different cities. I would be a much more recognizable brand. But I would be losing money.”