Key takeaways:

  1. Co-working will survive this recession, as it has the past two; however, the same cannot be said for the companies in this space.
  2. The pandemic brought countervailing market forces — decreased demand for shared space and increased demand for flexible and temporary workspace.
  3. Shorter lease terms create valuation uncertainty, but are attractive for companies transitioning to remote models.
  4. This recovery will bring consolidation and slower annual workstation growth.

Co-working will survive this recession, as it has the past two.

The debate over the valuation of co-working space and the sustainability of the business model was one of real estate’s hot topics pre-COVID, sparked in late 2019 after WeWork’s postponed IPO; but it is important to remember that the co-working is older than WeWork.

The co-working market has more than doubled in size over the last decade in terms of operating companies, and garnered a significant amount of attention in the real estate industry. While the newest entrants have been the most discussed companies (i.e., WeWork), the incumbent IWG (Regus) still holds the lion’s share and is a reminder of the staying power of the business model.

 

 

The pandemic brought countervailing market forces — decreased demand for shared space and increased demand for flexible and temporary workspace.

Over the last five years, and during one of the tightest labor markets, occupancy across co-working space has been relatively flat between 70-75%. Co-working industry faces the operational challenge of re-opening safely (inspiring some unexpected collaboration), which will increase operating expenses and continue the decline in profit margins.

Looking at IWG’s (Regus) experience through the last two recessions:

  • 2000 recession – profit margins in the Americas region contracted from 16% for 2000 to -21% in 2002, driven in a large part by the fall in occupancy (estimated to have fallen from 68% in 2000 to 55% in 2002)
  • 2007 recession – profit margins in the Americas region contracted by 862 bps from 31% to 22% and occupancy fell from 85% to 78%

Similar to past recessions, occupancy levels across the co-working space industry are down, given the full economic shutdown. However, unlike the past recessions, there will likely be additional pressure on the profitability from increased operating expenses related to necessary health and safety precautions when reopening.

Shorter lease terms create valuation uncertainty, but are attractive for companies transitioning to remote models. The shorter lease terms for co-working businesses makes for greater cash flow uncertainty than the traditional office model, but these shorter-term leases may be attractive for many companies that are not renewing their traditional multi-year leases, or who are downsizing their work areas as they prepare for open-shut-repeat recovery.

Expect to see increased demand from corporate clients looking to use the flexible workspace as they transition between permanent leases or shift to a new distributed employee business model. Corporates (particularly small and medium sized businesses) are likely to make up a greater portion of the new memberships.

This recovery will bring consolidation and slower annual workstation growth. Reonomy Research analysis shows that between 2015-2019, the number of co-working workstations has grown at a rate of 10% per year. Elevated unemployment levels will likely suppress the workstation growth rate in the near-term. However, overall discount to office properties may be an opportunity for survivors to acquire and convert new properties.