The Plight of Coworking
Nearly five years ago we detailed the co-working industry surge that largely propelled the region’s then stagnant office market forward, particularly in the District of Columbia. However, in our Q4 2019 Washington/Baltimore Office Report we cautioned:
“The overall coworking market has yet to prove that it is viable over the long-term, as most providers have yet to turn a profit or weather an economic downturn. Property owners in the Washington office market have significant risk exposure as coworking firms collectively occupy approximately 3 million SF of space.”
Unfortunately it seems that the risk has now been actualized, triggered by the COVID-19 pandemic which delivered a massive shock to nearly every corner of the economy, including the office market and coworking industry. The business model for coworking operators, which has accounted for millions of SF of positive absorption since the last downturn, is very ill-suited to the challenges of the pandemic, more so than traditional office providers.
Demand from users of coworking space, which amounts to very short-term subleases, have all but disappeared. In addition, the layout and character of coworking spaces—dense, open floorplans, and communal spaces—make them extremely challenging to operate safely amidst the pandemic. Below is a glance at how the COVID-19 pandemic have affected five of the largest coworking operators in the region:
WeWork was in trouble even before the onset of the pandemic. Under ousted CEO Adam Neumann the industry leader consistently struggled to achieve profitability and burned through cash at an extreme pace. The pandemic further compounded the company’s troubles as it struggled to pay rent for its leased space.
Over the past year, the company has been forced to close seven locations—six in the District of Columbia and one in Northern Virginia—totaling over 250,000 SF combined. Additionally, WeWork placed 73,000 SF of space at two locations in the District on the market for sublease. WeWork also cancelled its pre-lease for its first and only location in the Baltimore metro area, for 69,000 SF in Baltimore’s Harbor Point mixed-use development. It has also abandoned the WeLive concept nationally to focus on its core business. Meanwhile, investor Softbank has continued to prop up the company, recently injecting another $1 billion into the company to avert Chapter 11.
Like WeWork, industry-pioneer Regus had its own struggles prior to the pandemic. Many U.S. affiliates of the legacy coworking provider have filed for Chapter 11 over the past year, and at least three locations in the Washington region have closed.
Spaces recently closed one location in the District at 1441 L St. NW. This left the firm with just a single location in the district at Douglas Development’s renovated Uline Arena in NoMa. In addition, the operates four locations in Northern Virginia, one in Montgomery County, and two in Baltimore City.
Industrious is one of the few bright spots of the coworking industry. Industrious has a greater focus on the dense inner-suburbs compared to its competitors, which are more heavily concentrated in the District. The company contrarily entered expansion mode during the pandemic opening two locations locally in 2020 and committed to operate 43,000 SF at the Pike & Rose development in North Bethesda, MD earlier this year.
Originally founded as Uber Offices, the local operator made the decision to close all nine of its locations across the Washington metro area.
Despite the negative turn of events, it’s not all “doom and gloom” for the coworking industry. In addition to the expansion of Industrious, Launch Workplaces and JLL have agreed to respectively operate two spaces vacated by MakeOffices in Glover Park and at the Wharf.
Over the long-term, if remote working becomes more commonplace after the pandemic (as all current indications point towards) coworking firms stand to benefit. The ability for remote-work employees without dedicated at-home workspace and amenities (office supplies, printers/fax machines, high-speed internet, meeting rooms, etc.) to access on-demand office space is a potentially enormous market opportunity. There is also the potential for national commercial tenants to open turnkey satellite offices around the nation in partnership with coworking operators to cater to remote workforces.