Most of my business partners and friends know that I have long despised coworking businesses. Sure, Regus has seen success at the traditional office suite game. Sure, WeWork and some others have tapped into a physical workplace paradigm shift. And, don’t get me wrong. We at MetaProp NYC spend a good portion of our days dealing with some fabulous startups; we love the energy, opportunity, risk and reward of our venture capital and acceleration efforts.
As a young office leasing broker, I witnessed (and benefitted from) through the rise and demise of HQ Global around the United States. As an entrepreneur, I helped sell a leading co-working operation in San Francisco. Alarmingly, as a business owner in NYC, I’ve witnessed the explosion of a multitude of local coworking brands, shapes and sizes. Some are raising capital. Most are blowing through capital. Everyone claims to have a “community.” At the end of the day, I reckon that precious few will survive.
And...let’s be clear, it takes a special-kind-of-crazy to make these startups YOUR CLIENTS. Frequently, these clients are young, cash strapped, transient, first-time CEOs and their wannabe entrepreneur possies. Fear not, coworking lemmings! I’m reminded of wise friend and advisor Josh Mendelsohn’s old remark that a small coworking business is only as good as its GM or MD. I take this to mean that one kindergarten cop can actually create value and sustain a business for a while - under the right circumstances (great location, frothy start-up market, strong brand, differentiated product/service offering, etc.). Kudos to early leaders like our friends Lisa Anne, Jason and other superstars who worked their tails off for years to keep the dream alive.
Of course, the cliche is true: it’s hard to find good help these days. Perhaps more importantly, it seems to me that the previously mentioned circumstances are changing. What was “right” might now be turning “wrong.” Some interesting data points have surfaced over the past few weeks. These small reports/facts/rumors show a clear breaking point in the coworking industry:
The WSJ reported that WeWork missed growth targets. Note the higher capital expenses, lowered fees, free rent and “delayed success” of some major business lines DURING A VERY HOT ECONOMY.
We continue to hear rumors about vacancies and turnover in coworking spaces. In fact, one insider recently told us that a major player has recently seen a 600% increase in member churn rate.
In NYC, The Real Deal reported that office leasing activity (a good leading indicator for rents and vacancies) has substantially declined. If the trend continues, hungrier landlords and sublandlords will potentially lower rents, offer incentives and provide lease flexibility in order to secure tenants (including entrepreneurial folks who normally sit in coworking environments). Coworking providers will drop membership fees and try to renegotiate deals signed at the peak of the market.
A number of our friends in the accelerator world (across real estate, education, healthcare, etc.) are moving to virtual or semi-virtual programs due to cost constraints. Talented, experienced coworking leaders are leaving the industry.
To me, these data points signal that the market may have finally entered “the beginning of the end” of this recent coworking hysteria. Either way, I’ll probably continue hating on coworking for years to come!
- Aaron Block, MetaProp NYC