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Flexible Workspace Industry Growth Expected To Slow Over Next Two Years

by Cecilia Amador de San José
December 25, 2019
in Business
Reading Time: 5 mins read
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The next two years will not be filled with as much growth and capital for the industry as the past few years, according to Cushman & Wakefield.

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  • The flexible workspace industry has experienced exponential growth in this decade; coworking leases now represent 9.5% of all net new leasing activity in US gateway cities.
  • But the next two years will not be filled with as much growth and capital for the industry as the past few years, according to Cushman & Wakefield.
  • A slowdown in capital and the knock-on effect of WeWork’s failed IPO may impact coworking’s immediate future, although the market is expected to bounce back.

Earlier this month, Cushman & Wakefield published the report “Flexible Space: Misplaced Schadenfreude? Implications for CRE”. The report reexamines fundamental assumptions regarding the flexible space office sector. 

The flexible workspace industry, particularly coworking, experienced exponential growth in this decade. According to Cushman & Wakefield, coworking experienced a “meteoric 45% compound annual growth rate in US gateway markets from 2010-2018.” 

While in 2010 coworking leases represented just 0.5% of all net new leasing activity in US gateway cities, that percentage has jumped to 9.5% by 2018. The popularity of coworking and flexible workspaces has completely transformed the relationship between landlords and occupiers, which is why flexible space is here to stay. 

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Though coworking memberships in the US are expected to grow from approximately 750,000 today to one million by 2023, the next two years will not be filled with as much growth and capital for the industry as the past few years, according to Cushman & Wakefield. 

Key Takeaways from Cushman & Wakefield’s Implications for CRE Report

1. Corporate coworking will drive demand and help stabilize operators. 

The report found that “the proportion of large corporate occupiers’ workforce using flexible space is projected to increase four-fold by 2023.” These types of memberships will drive demand of flexible workspace in the coming years, but more importantly, they will greatly contribute to the success of the industry in an economic downturn. 

Corporate members matter because “occupiers or enterprise-level users are the investment-grade portion of a coworking operator’s sublease cashflow.” Already, corporate clients represent a significant portion of flexible workspace revenue and in the coming years their business will be key as corporates are more likely to withstand an economic downturn. 

In a recent Allwork.Space article, various industry experts pointed out the increasing role large enterprises will play in the industry. Liz Elam from GCUC said those operators who don’t cater to corporates will miss an opportunity, Jamie Russo from GWA stated that there will be a deeper focus on brands catering to enterprise users, Niki Fuchs from Office Space in Town argued that there will be a drive for quality as demand from larger clients and blue-chip firms increase, and Jeff Reinstein from Premier Workspaces argued that profitability of flexible workspaces will be driven by the continued acceptance of flexible offices by large companies. 

2. The influx of capital will decrease, which will slow down operator growth. 

Cushman & Wakefield argues that capital for the industry is looking slightly weaker, which will have ripple effects “particularly on fundraising and due diligence.” Flexible workspace operators might find it harder to raise both debt and equity in the next two years, which will lead to a slowdown in expansion, therefore dampening the sector’s growth. 

“We currently estimate that a pullback in coworking leasing will reduce overall new leasing in the U.S. by 8-10 million square feet or approximately 3% of net new leasing.”

Another factor that could influence the decrease in available capital for the industry could be the recent media coverage of WeWork and its failed IPO. Investors might be more wary of providing funds to coworking operators in the wake of WeWork’s shocking drop in valuation and the billions lost by SoftBank from investing in it. 

Cushman & Wakefield concludes that there will be more due diligence from funders and overall less liquidity for operators, while landlords will be more likely to require lease guarantees or ask for profit sharing agreements. 

  • WeWork Files for IPO Amid Heavy Losses and Investor Skepticism
  • WeOut: WeWork Postpones IPO after Lower Valuation Fails to Warm up Investors

China-based coworking company, Ucommune, recently announced plans to file for an IPO. These plans have been met with skepticism, with various media outlets pointing out similarities between WeWork and Ucommune. Though there’s no predicting the future, it will be interesting to see how Ucommune’s IPO pans out. 

3. There will be a shift in operator focus. 

Cushman & Wakefield calls this shift “freeze the footprint”. 

“While some flexible space operators will continue to grow, others will likely refocus from expansion mode to stabilizing existing properties and possibly even close unviable locations.” This view is shared by Jeff Reinstein, who recently stated that “flexible workspace operators will start focusing on profitability and return on investment instead of growth.”

The footprint of the industry, however, is expected to remain constant even as operators focus on stabilizing their properties and optimizing their profitability. This shift could also help operators raise funds in the future. 

With current investor skepticism as it is, those operators that are able to assuage questions relating to cashflows, credit strength, and profitability are the ones that are most likely to receive capital or even be successful in closing management deals with landlords and property developers. 

4. Not everyone will thrive in a downturn. 

Contrary to what many believe, an economic downturn will definitely impact the industry. Cushman & Wakefield estimates that during a downturn, the coworking sector’s footprint will shrink by 25%, although the range is anywhere between 20% and 33%.”


Suggested Reading: “Magical Thinking and Unicorns: the Irrationality of Thriving in a Recession”


However, it’s not all bad news. The report estimates that the space lost in a downturn would be given back to the market over three years. Furthermore, once the original hit of the economic downturn wears off, many organizations and individuals are likely to seek more flexibility in leases as the economy stabilizes.

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Cecilia Amador de San José

Cecilia Amador de San José

Cecilia Amador de San José, Senior Associate Editor of Allwork.Space, is based from wherever her laptop is. She enjoys traveling and visiting new flexible workspaces. If you'd like Ceci to check out your workspace, feel free to reach out to her at [email protected] (and send a plane ticket).

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