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COVID May Kill The Subleasing Model Of Coworking, But Another Model Is Rising To Take Its Place

Much like it did with short-term rentals in multifamily, the coronavirus pandemic has pushed the coworking industry away from a model based on long-term liabilities and short-term revenue.

A Manhattan location of Knotel, which recently declared Chapter 11 bankruptcy

The office industry as a whole has been impacted by the widespread adoption of remote work, but the sharpest losses have been felt by coworking companies that signed long-term leases at urban core office buildings, The Wall Street Journal reports. Operators with models based on partnerships with landlords, or landlords themselves, look poised to capitalize.

MakeOffices and Breather have shut down their office operations entirely in the past few months, with Breather CEO Bryan Murphy going so far as to doubt that his company's business model "ever made sense." WeWork has been kept afloat, thanks to billions of dollars from SoftBank Group, but it has been closing downtown locations all over the country and turning to the partnership model for at least some future locations.

The sublease model was already falling out of favor before the pandemic, thanks in part to WeWork's spectacular flameout when it attempted an initial public offering. Now, the dichotomy has been laid out in even more stark terms, with partnership-based Industrious set to take over dozens of spaces abandoned by sublease-based operators.

A microcosm of how the flexible office space industry might move forward lies in Knotel, which has always resisted being labeled as a coworking operator. Though its own subleasing strategy resulted in several lawsuits over unpaid rent and Chapter 11 bankruptcy, it will be taken over by brokerage firm Newmark. Knotel's appeal to Newmark might lie in its model of customizing small offices to be entirely occupied by one company, CoStar reports.

As it becomes increasingly obvious that remote work will become a permanent element of many office-using jobs, the concept of a hub-and-spoke model has exploded in popularity. If workers are more reluctant to work in the office and moving out of the most expensive cities, the thinking goes, companies competing for talent want to develop networks of smaller offices to fit those preferences.

CBRE was planning on using 2020 to aggressively expand its own flexible workspace offering as a service, Hana, for its landlord clients before the pandemic curtailed its activity. But in a call with investors late last year, CBRE CEO Bob Sulentic told investors that it intends to ramp back up once conditions have improved, CoStar reports.