Small Coworking Outfits In Dire Straits As ‘Funny Money’-Backed Competitors Prepare For Comeback
The major players in the New York City coworking market have buckled under the stress of the coronavirus pandemic, giving back millions of square feet, needing cash infusions or restructuring.
But Knotel, IWG and WeWork all appear poised to exist in a post-Covid landscape where workplace flexibility is expected to be key. Smaller operators — the backbone of the coworking industry — have a far less certain future. Unlike the giants of the coworking world, these entrepreneurs do not have a cash cushion or an institutional real estate name to break their falls.
“Us mom-and-pops have worked so hard to have the small piece that we had, and we’re giving back a much larger piece of what we’ve had now,” said Primary co-founder and CEO Lisa Skye, whose company has given back a quarter of its portfolio as it goes through the Chapter 11 bankruptcy process. “For the larger operators, it’s a less significant impact.”
In Manhattan, small operators gave back a total of 180K SF in the 12 months ending in March, according to Colliers, a figure that doesn’t include the many operators that popped up in Brooklyn over the past decade, trying to attract the borough’s many startups and entrepreneurs.
While that number pales in comparison to what operators with portfolios larger than 100K SF have given up, it has left a mark.
Mom-and-pop coworking brands like Primary, which recently saw its 25K SF coworking space in Midtown taken over by Industrious, and BKLYN Commons, have shrunk in the hope of surviving the pandemic. Others have simply closed for good, like The Assemblage, which closed down all three of its Manhattan locations in June, A/D/O, a coworking space for designers and architects in Greenpoint that closed last April, and Ignitia Office, which permanently shuttered in July.
Across the country, 20% of all coworking space, or 25M SF, has closed, according to a January report by online coworking space network Upsuite. Operators with one location in a single geographic market made up 46.4% of these closures, while those in one market with multiple locations made up another 10.2%. Unlike larger companies, many of these small operators do not have enough financial backing to survive, Upsuite's researchers wrote.
“Large companies have the resources,” Global Workspace Association Board President William Edmundson said. “They have the teams they have enough locations where they can call on this group of enterprise companies, they can be a resource for those because they've got it locations across the country, whereas a mom-and-pop doesn’t … It’s the scale.”
Manhattan’s large coworking businesses — its three biggest operators are WeWork, Knotel and IWG — gave back nearly 2.4M SF in the borough over the past year, according to Colliers. But despite financial woes, these companies are still around, and each has paved a path for future growth.
WeWork, the largest operator in Manhattan, gave back, closed or placed on the sublease market nearly 1.8M SF in New York City alone in the last year, according to data compiled by Savills.
The downsizing is part of a strategy to rightsize and turn a profit by the end of 2021, which the company is currently on pace to do, according to WeWork CEO Sandeep Manthrani. WeWork is closer to going public now than it has been since its failed initial public offering in fall 2019, when it had an 8.9M SF footprint in Manhattan.
While it might be on pace to turn a small profit in the fourth quarter, it has been operating at a massive loss for years. It lost $3.2B in 2020 after a $3.5B loss in 2019 and a $1.9B loss in 2018. Its majority owner, Japanese investment giant SoftBank, has pumped billions in cash into the company to keep it solvent.
Knotel, once valued at over $1B, filed for bankruptcy in late January and is set to be taken over by real estate brokerage Newmark, which is providing $20M to keep Knotel afloat. Before and during the bankruptcy, it could walk away from more than 393K SF of flexible offices in Manhattan, according to Savills.
“Our restructuring will enable us to strengthen our balance sheet, focus on a rightsized portfolio of locations, and maintain relationships with our customer base while continuing to build on Knotel's differentiated service offering,” former CEO Amol Sarva said in a release when the company filed for bankruptcy. “We continue to believe in Knotel's potential in the growing flex market.”
Even Industrious, which has grown its footprint by over 1M SF over the course of the pandemic by taking over abandoned spaces from WeWork, Primary and other operators, has given back leased space to landlords as it has streamlined its portfolio to include only spaces where it has a management agreement.
Each of these major companies is poised to survive, but the effect their boom and bust has had on the market still lingers, said Neil Carlson, founder of the Brooklyn Creative League, a 20K SF coworking outlet in Gowanus, Brooklyn.
“I think that even before the pandemic, there were a lot of people in business with unsustainable business models,” he said. “They were overpaying for the core real estate … a lot of that was due to the distortion that WeWork created.
"They had billions of dollars of funny money on the consumer side, but also on the investor side," Carlson added. "That’s a bigger structural problem, the venture capital and investment side impacted the startup and real estate side of things, too.”
But while big, well-capitalized companies may have turbocharged the market over the past decade, small and midsized operators still make up the majority of the industry, and their losses will be felt throughout the office market.
“The WeWork, the Knotels, the IWGs, those guys are like 20% of the market. The other 80% is small-to-medium-sized business operators,” Global Coworking Unconference Community founder and Executive Producer Liz Elam said. “We did not get all of the PPP we needed, we did not all get loans we needed and so you know [the pandemic] really, really affected small business.”