- Last November, coworking giant WeWork announced it would be closing 40 of its underperforming spaces after it took hundreds of millions in losses.
- Many are wondering who is taking on these spaces, as well as how they intend to make them successful when WeWork could not.
- Allwork.Space spoke to two experts in the industry to get their opinion on why exactly this is occurring for WeWork.
After it rose to success so quickly (in 2019 it was considered one of the most valuable startups with a $47 billion valuation), it’s natural to be confused as to why this is happening for the company.
Coworking and serviced office centers are very, very expensive to build out in terms of tenant improvement costs; WeWork centers are even more costly due to their size and popularity.
Landlords for these spaces have to invest huge amounts into their offices, but they also need to be doing something to recoup their investment.
When this isn’t achieved, it can mean the end of that particular space or organization.
In addition, a recessionary market — historically — is the time when the flexible workplace industry gains the most new square footage for future growth (mostly due to anxious and flexible landlords).
Given that recession red flags over shadowed all of 2022, the question is: what’s happening to all the WeWork space that’s gone up for sale? Who is taking over these spaces, and why would the new operators be able to make them successful instead?
The answer lies within the nature of the ownership.
Ownership and operating costs
If an operator fits out a building as a coworking center and then closes it down and sells the building, it will not recover the amount spent on the fit out.
“WeWork and IWG tend to lease their buildings, and so the landlord may have paid for the fit out or contributed towards it in order to attract WeWork or IWG to sign the lease,” Jonathan Price, who pioneered the world’s first public fund for investment in coworking space, told Allwork.Space. “In that situation, there is normally a minimum period for which they must pay the rent, and if they close before that, they still have to keep paying unless they have leased through a subsidiary and they allow it to go bust. Doing that understandably generates a lot of hostility from landlords, which they may or may not care about.”
In this case, sometimes the parent company has had to guarantee the lease anyway.
“Smaller operators are often keen to look at buildings let go by the Big Two, but they may have different ideas as to what is the right layout. WeWork’s centers in particular are very specific and not many others would want the same layout,” Price said.
Will Kinnear, founder of flexible workspace agency HEWN, told Allwork.Space that WeWork has been a pioneer in the coworking industry, and almost immediately it “became a big fish in a relatively small pond.”
But this may also be the reason for its possible downfall.
“WeWork has, in the main, taken premium office space on leases. Like other operators on lease models, to ensure that the sites are profitable they need to maximize the income available,” Kinnear told Allwork.Space, “but this is not being achieved in a number of locations due to current market conditions. These historic rents do not reflect today’s market, which is affecting its ability to make these spaces profitable.”
Fitting a space to a certain market, and to function as a coworking space, is extremely costly — as is updating it and keeping it relevant.
“Due to the very nature of the cost of fitting out spaces, the WeWork product hasn’t changed in many of these sites for 5-6 years — where so much about the workplace has changed — and this is having an impact on desirability and demand,” Kinnear said. “Other, newer operations are offering more diverse products that responded to demand and new working practices. The crucial thing to note is that if a WeWork hasn’t worked in a particular location, it doesn’t mean that flexible workspaces don’t work there at all. It’s all about matching the right space with the right operator.”
IWG has picked up many WeWork spaces in the U.S., but fewer in the U.K. The spaces that have been vacated by WeWork have gone to operators that have been able to adapt the product offered.
“Whilst demand for flexible workspace since the pandemic has increased, the sector and product being demanded has changed and occupiers now have more choice,” said Kinnear.