- In the wake of the coronavirus crisis, coworking space providers have seen their occupancy levels fall by about 10 to 15 percentage points on average, Tom Smith, a cofounder of real-estate marketplace Truss, told Business Insider.
- For the most part, tenants who have abandoned their spaces have been ones whose contracts were expiring, not ones who are defaulting on their agreements, he said.
- Coworking providers have limited losses by reaching relief agreements, including free-rent periods, with tenants.
- But occupancy levels could decline much farther once those free-rent periods and government relief ends, he said.
- Click here for more BI Prime stories.
The coronavirus pandemic appears to have started to take a toll on the coworking sector — but not as much as may have been expected or as much as it eventually could.
WeWork and other coworking office providers have seen their occupancy levels fall about 10 to 15 percentage points on average in recent weeks thanks to the coronavirus pandemic, said Tom Smith, a cofounder of Truss, an online commercial real-estate marketplace that focuses on the flexible office space market, citing a recent survey of such companies by his firm.
Shelter-in-place orders that are in effect in most states around the nation have meant that few tenants of coworking spaces are actually going into their offices, Smith said. The corresponding rapid economic downturn has meant that many companies — whether they are coworking tenants or not — are running low on cash and have been seeking rent relief from landlords. Coworking providers have been able to limit their occupancy losses by offering just that, Smith said. But that may be just a temporary respite for both, he said.
“We’re just essentially punting that situation,” Smith said. “There’s a lot of companies,” he continued, “that still haven’t violated or otherwise defaulted on their leases that may very well in next 60 to 90 days.”
Coworking providers have vulnerable tenants
Coworking space providers would seem to be especially vulnerable to the ongoing meltdown. Many of their clients are small businesses, sole proprietorships, and startups that were attracted by leases that were shorter and less costly than those for traditional office space. Those kinds of companies tend to have few financial reserves, and many have already been shutting down or laying off workers.
In the last several weeks, the flexible office providers have seen their occupancy levels — defined as the percentage of their desks they provide that are rented — fall. If a provider’s space was 75% occupied in late February or early March, it’s now around 60 to 65%, Smith said. That kind of decline — 10 to 15 percentage points — is what coworking providers are typically seeing, he said.
Some coworking companies are struggling in the wake of the downturn. Convene has already had two rounds of layoffs. WeWork is reportedly preparing to cut another 1,000 jobs, after its massive layoffs last year following its failed initial public offering.
But thus far the fall-off in occupancy has generally been from tenants whose contracts were expiring, Smith said. For the most part, it wasn’t due to tenants in the middle of their contracts defaulting on them, he said.
Tenants and space providers are largely trying to work through the situation, Smith said. Coworking providers don’t want to lose tenants or force them to make decisions under duress, and those tenants want to conserve cash and keep their options open, he said.
So many companies with expiring agreements are choosing to just extend them rather than abandoning them or signing new deals, he said. Those companies as well as ones that are in the middle of their contracts are also asking for rent relief and generally getting it, he said.
“No one wants to commit, but they also don’t want to not have a place to go if we all back to work in May or June,” Smith said.
WeWork and other coworking providers are offering rent relief
WeWork has declined to renegotiate a lease with at least one venture-backed startup, Business Insider reported. But for the most part, it and other coworking providers are providing rent reductions or free-rent periods to tenants that ask for them, Smith said.
Those discounts usually come in one of three forms, he said. The most popular relief is for the flexible space providers to give tenants free rent and March and April and then extending the tenants’ contracts by two months in which they’d have to pay rent.
The landlords are offering a variation on that for tenants who negotiated to have free rent periods at the beginning and end of their contracts. For those companies, the flexible space providers are offering to move forward those free months and apply them to March and April and then charge rent in the months at the end of the tenants’ contracts.
In other cases, WeWork and other coworking providers are offering to discount rent in March and April, say by charging half of what tenants would have otherwise paid, Smith said.
Truss is actively working with tenants to help them get rent relief, he said.
“We’re getting really good responses from all ilks of landlords, including WeWork,” Smith said. “WeWork is giving some concessions where they can. Some landlords are giving more.”
Things could get worse in coming months
But the relief is temporary and may be only staving a bigger drop in occupancy this summer and later this year. Under the recently passed $2 trillion stimulus package, small businesses can get loans from the federal government to cover their payrolls, rent, and other expenses. But those loans are only authorized to cover their costs through the end of June. Even if the shelter-in-place orders are lifted by then, it’s quite likely that with so many people having been laid off in recent weeks, the economy will be depressed for months after that and many companies will continue to be low on cash. Some will go out of business, others will downsize to try to survive. Either way, occupancy levels will likely continue to fall.
Indeed, Smith expects average occupancy levels at coworking spaces to drop by 30 percentage points total before the economy starts to recover.
“I think where you’ll see the real effect of this [crisis] will be at the end of June and July, where there isn’t any more cash to support the operations,” he said.
Got a tip about WeWork or the coworking business? Contact this reporter via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
- Read more about WeWork and how the pandemic is affecting startups:
- Consultants who try to help VCs salvage struggling startups say the coronavirus crisis has them ‘on more conference calls than we probably ever have been’
- Silicon Valley startups may get to tap into the $350 billion coronavirus small-business loan program after all, thanks to late rule changes by regulators
- Airbnb could run out of cash in one year, even with the $1 billion it just raised, because of how devastating the coronavirus is on its business
- SoftBank is backing out of its plan to buy $3 billion worth of WeWork shares, including nearly $1 billion from former CEO Adam Neumann
SEE ALSO: The $2 trillion stimulus law could leave startups out in the cold. Here’s why Silicon Valley is worried.
Join the conversation about this story »
NOW WATCH: Watch Elon Musk unveil his latest plan for conquering Mars