Small Coworking Owners Believe They Will Bounce Back — If They Can Survive
Lisa Skye Hain has been in the real estate and hospitality industry since 1998. She worked in Danny Meyer’s restaurants, wrote a cookbook and was WeWork’s second-ever employee, opening up two of their New York locations. Today, she is the CEO of Primary, the small coworking company she co-founded.
Like many small operators, Primary relies on its brand to stand out. Its complimentary fitness classes, moss walls and greenery attract companies that want to gear their workspaces toward wellness, Skye Hain said. But Primary has closed its two locations, both in Manhattan, for the time being, waiting for Gov. Andrew Cuomo to lift New York’s stay-at-home order.
As coworking giants like WeWork and Convene lay off workers and renegotiate their leases amid the coronavirus pandemic, some wonder if the sector once believed to be the future of office can survive through the next year. Operators say they are bullish on their market position in the medium and long-run, but many say small operators are at risk of going out of business before they can see that prosperity.
“The only way small operators like ours are going to get through this is with rent relief and forgiveness from landlords,” Skye Hain said. “Without it, I don’t know if small operators are going to make it.”
Mom-and-pop operators account for 70% to 80% of coworking businesses nationally, said Global Working Association Executive Director Jamie Russo, who is a small operator in California herself.
The ones that survive will be the ones that have a rainy day fund and a landlord who can alleviate stress from rent, she said.
“Like every other small business, if they have a cash reserve and supportive landlord, they will be OK,” Russo said. “For those that tend to be smaller, and those that are newer, it’s going to be challenging.”
A plurality of coworking operators foresee tough times in the near future. In April, 38% of flex space operators across North America felt pessimistic about what the next three months will look like for the sector, according to a survey by Workthere, Savills’ flexible office leasing platform.
Of the 101 flex office providers around the globe Savills surveyed between April 14 and April 20, 31% were undecided about the next three months and 26% felt positively. Morale is higher for the medium term, with 62% optimistic about the sector for the next year and 8% pessimistic, the survey showed.
Occupancy rates are on the decline: Global flex office space was 83% occupied before the coronavirus hit, according to Workthere, and the number is expected to drop to 71% by June.
With declining leases, many operators are struggling to pay their rent — 31% of coworking operators in North America said they have asked for rent relief. Inquiries for coworking space in North America were reported at 19% of typical levels.
“The flex market is clearly exposed in the short-term to any market impacts such as what we are witnessing with COVID-19,” Global Head of Workthere Cal Lee said in a statement. “It is at risk from companies that are not renewing contracts as they go into survival mode and we expect that these figures will rise come the next survey in May as more members seek help putting further pressure on providers.”
Skye Hain is fully confident that coworking will bounce back, but she thinks it will look different from the industry’s growth before the pandemic, when smaller operators sprang up across the country to provide offices, coffee and community to mom-and-pop businesses.
“I think 18-24 months from now, and in the big picture, coworking will prevail, because companies of all sizes will want to have flexibility in their lease term so to speak and their rental agreement,” she said. “But I think that the next six to 18 months are going to be very difficult for all coworking operators, and I think you will see a number of small, mom-and-pop coworking operators go out of business or do their best to be acquired by a larger operator.”
Those in the industry have anticipated this so-called “wave of consolidation,” for a while, Skye Hain said. The pandemic may accelerate that moment.
Many small operators didn't qualify for federal loans provided through the Paycheck Protection Program in the Coronavirus Aid, Relief and Economic Security Act because they didn't have enough employees, Russo said.
Brooklyn Creative League co-founder Neil Carlson was able to obtain a PPP loan. But the loan the company got only covered about 30% of his revenue, he said.
Carlson founded the BCL, located in the Gowanus area of Brooklyn, with his wife, Erin Carney, in 2009. When the couple moved to the neighborhood, he discovered the area was lacking workspace he needed then as a freelance writer.
BCL counts small companies like Honey and Wax booksellers as members, as well as larger businesses like Greenmax Capital Advisors. The 11-year-old coworking company is focused on local community and sustainability, which has been guiding them through the losses that they have faced.
Several of BCL's tenants have already pulled out of their leases, Carlson said, but he has been able to work with other members to try and lessen the losses not covered by PPP loans.
“We’re hoping that by pulling together with our members, that they’ll get funded and we’ll be able to work out some sort of fair payment,” he said. “If we get a break, we’ll pass some of that along and if they get a break, we’d love for them to make us whole as best they can. A lot of this is just a waiting game.”
He is negotiating with his landlords, brothers Peter and David Sweeny, whom he said BCL is "fortunate that we have a good relationship with."
“A lot of coworking operators, if they’re dealing with a big real estate investment trust or corporate ownership, are probably going to have a harder time,” Carlson acknowledged.
Multiple small coworking operators told Bisnow that they need rent relief if they are going to survive.
“A dream scenario would be a landlord issuing three to 12 months of full or partial rent relief now in exchange for an extension on the lease term,” Skye Hain said.
As small operators in New York close their doors for the time being, the entire office real estate industry is wondering what the future holds for these spaces when, or if, they open their doors again.
“The office sector is grappling with two contradictory imperatives,” Colliers Tri-State Region President Michael Cohen said. “The contradictory imperatives are work from home, take advantage of the results of this great experiment and make work from home a larger part of your culture, versus the need to increase everyone’s need for personal space.”
On the whole, millennials, many of whom live with multiple roommates, may continue to crave office space, while those in older generations with homes outside of the city may prefer working from home, he said.
Coworking and traditional office spaces alike are finding new ways to accommodate a new need for individual space and cleanliness, Cohen said. Coworking operators are doing the best they can to keep connected with their members by moving networking and activities online, Russo said.
If these small operators can make it through, those in the industry feel hopeful that membership will return, and maybe improve.
“For those that can make it through, we are seeing a lot of indicators that they will bounce back,” Russo said.
But like many other fragile parts of the economy, like retail and hospitality, the biggest question on coworking industry watchers' minds is who will still be standing when something resembling normalcy returns.