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Coronavirus, Coworking, Consolidation

The coronavirus pandemic’s long-term effect on the area’s office market—be it rents, vacancy rates, or building design and operations—remains to be seen.

In the short term, one subset of the office market appears particularly vulnerable: the coworking and shared space sector, which in Orange County had nearly tripled in size the past three years to some 3 million square feet of leased space as of earlier this year, with promises of more on the horizon.

Nearly 200,000 square feet of that space has already been given back to landlords during the pandemic, as the industry has fought to keep its footing as members work from home, and safety precautions keep many locations shuttered, or operating at a shrunken capacity.

More consolidation and industry shake-ups are expected as 2020 lurches on. Industry watchers note the sector is more vulnerable than other office types to downturns due to the ease of coworking operators’ members to not renew their short-term leases.

What’s the outlook for 2021?

Those operators in a solid financial standing prior to the pandemic—with access to capital and a more manageable footprint—will be able to make it, said Stefan Rogers, an office and coworking specialist at Voit Real Estate Services.

“Just as coronavirus affects those with weakened immune systems more drastically, COVID-19 will impact companies that weren’t faring well before the pandemic worse than those that were healthy prior,” Rogers said.

WeWork Giveback

During the growth of the coworking sector over the past few years, decisions being made by WeWork grabbed the most headlines.

That’s the case during the current downturn, too.

WeWork, the country’s largest shared space operator and the fastest growing, has been in a retrenching mode since a botched initial public offering last year. The company’s shaky financial situation has only been exacerbated in recent months as coworking has fallen out of vogue due to social distancing-related safety concerns and work-from-home edicts.

It started canceling large lease deals in June, when it gave up plans to move into a large Manhattan office.

More recently, the company was reported to be giving back its space at Spectrum Terrace, a 116,000-square-foot full-building deal in Irvine inked a year ago.

It’s the largest giveback reported for WeWork in the western U.S.; the Business Journal was first to report on the change in plans for the full-building location in July.

The building’s landlord, Irvine Co., recently listed the Spectrum Terrace space as being available for lease on its website. The location has also been removed from WeWork’s website. The company has nine other area locations, none of which are reported to be in imminent jeopardy of closure, although national news reports suggest the company is looking to shed some other locations in the Los Angeles region.

Servcorp and Others

Other area consolidations include that of Australia-based Servcorp, a shared space operator that is in the process of shuttering more than half of its U.S. locations. That includes its single Orange County location at the Irvine Towers office complex, sources tell the Business Journal.

Like WeWork, Servcorp’s struggles began pre-COVID-19. Last year, the company’s CEO Alf Moufarrige said its U.S. locations have been a long-standing issue. The virus “was the last straw,” Moufarrige said in a more recent interview with The Australian Financial Review.

Work Well Win is another coworking company that struggled prior to the pandemic, with financing issues causing closures last year, including in its hometown of Greenwich, Conn. It’s also more recently backed out of its first planned Orange County location, sources indicate. The yet-to-open spot was expected to span about 25,000 square feet at the new Flight office project at Tustin Legacy.

Hana’s Strategy

Parke Miller, executive vice president of Lincoln Property Co., compares the coworking sector to that of the retail industry, with each operator providing “an experience or a service or a value proposition to its customers.”

“Just like in retail, there very well may be bankruptcies and/or closures. And just like in retail, great locations and great properties will be fine long term, even if there are painful impacts in the short term,” he said.

The Dallas-based landlord, which counts several different coworking firms as tenants among its 6 million-square-foot local office portfolio, remains bullish on the sector, noting that “great coworking operators” are a value-add to a property, and are still in demand from customers.

“Many of the companies struggling now grew too quickly, with supply outpacing current demand levels,” said Voit’s Rogers, who works at the brokerage’s Irvine office.

As for other companies, industry watchers, though wary of significant short-term headwinds, are largely optimistic.

Obstacles in the short term include ongoing stay-at-home mandates and a predominately remote workforce, causing a shrunken membership base, social distancing guidelines, and sanitation concerns, among others.

“In March, activity pretty much dried up overnight,” notes Andrew Kupiec, chief executive of Hana, the CBRE Group-backed coworking option that launched last year.

“While it is going to take time to see activity completely return back to normal, we are already seeing new signs of demand, with employers looking for flexible lease options, and employees looking for creative spaces to work and collaborate.”

Coworking companies likely to avoid the larger consolidation trend include those that have experience dealing with downturns, such as IWG, the parent company of shared space operator Regus and Spaces—among Orange County’s largest coworking landlords—as well as those with cash reserves, and smaller firms with more managed growth.

There’s a reason Hana only opened two locations in its first 18 months of business, including one in Dallas and one in Irvine at the Park Place office campus.

“We knew we were at the top of the market, and there was a downturn on the horizon, though we didn’t guess it would be a pandemic,” Kupiec notes.

“We are very cautious about our growth pipeline.”

The Irvine location is open to members, and Hana said it has “introduced a number of precautionary measures.”

The company’s growth strategy is a targeted push to match supply with demand, working with potential landlords and users at the same time to ensure there’s a reason to open, or grow, in a specific market.

It does this by focusing on enterprise business, in which coworking firms make deals with larger companies looking to test out a market, or looking for a more flexible lease option as it considers its space requirements.

“We are able to leverage relationships from our parent company, CBRE, and understand the needs and demands of clients, including Fortune 500 companies across the globe,” Kupiec said.

This enterprise business may be a driver of demand for the coworking sector, as companies deal with a fluctuating head count in the office and consider how much space it needs, and for how long.

This is the largest source of business for Hana, which is bullish on the sector in the long-term.

“We definitely think the enterprise space will be over indexing on the adoption of coworking.”

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