At the beginning of the COVID-19 pandemic, offices started to look less like a recipe for productive collaboration and more like breeding grounds for the virus. As working from home became the norm for many white-collar workers, companies looked for ways to reduce costs, including cutting office space.
Sam Rosen, CEO of Deskpass, a booking application that pairs individuals and businesses with flexible workspaces, told Leverage.com the pandemic showed companies that “their employees can work remotely. [They] don’t have to be in the office to get work done…That was something most companies didn’t believe pre COVID.”
If traditional office spaces — used by just one company, designed for their specifications, with long, not particularly flexible leases — were in flux, what would that mean for flexible office spaces?
What Is Flexible Office Space?
Flexible offices refer to spaces that have a variety of different layouts, uses, shared spaces, collaboration opportunities, and the ability to expand or contract depending on the needs of the companies using them. Sometimes that means a co-working space, often with “hot desks” individual workers can choose on demand or pay in advance as part of a membership.
Other times it’s offices within a larger space rented by a company (or companies) just for their employees, but with shared meeting and event spaces, and other amenities. Some companies provide a little of each.
Early Fallout From COVID
In the Spring of 2020, the future of flexible workspaces seemed grim. Knotel, Inc. was acquired by Newmark and filed for Chapter 11 Bankruptcy. So did Breather. WeWork closed five of its New York City spaces, including a Wall Street location, and three in Washington D.C. The company told Bisnow it would likely close more in Chicago, Los Angeles and the Bay Area.
The Wing, a coworking space for women, initially closed all 11 locations, though their Instagram page suggests they’re beginning to reopen in May 2021. IWC, an international flexible space company, acquired a majority stake in The Wing in February.
A Year Later, Flex Space Comes Out on Top
It’s not all doom and bankruptcy for everyone.
“Flexible office space is in an interesting spot right now,” Darius Nicknamfard, an associate and member of the Finance and Real Estate Practice Group at Garfunkel Wild, P.C., told Leverage.com. On one hand there’s a lot of vacancies for existing operators, and it’s hard for all of these companies to differentiate their offerings. On the other hand, “during the pandemic, folks have gotten used to more flexible arrangements,” and are amenable to working in and outside of the home throughout the week.
Anna Squires Levine, Chief Commercial Officer at Industrious, said, “I think demand for flex offices isn’t going anywhere, especially once it’s proven that people are safe sharing offices, people are going to want the flexibility that [flexible office] offers. Demand dipped at the beginning of the pandemic, but we’re now back to pre-COVID levels with sales surpassing exciting milestones each week.”
In its 2020 Flexible Workspace Report, Colliers International concluded: “For operators who can weather near-term occupancy shortfalls through prudent financial management, lease restructuring, and reactive new products and services to retain members, there may be a very bright future ahead.”
Decline of the Lease and Sublet Model
The lease and sublet model, with a single co-working company buying a large amount of office space and then upgrading and renting it out for a profit, might be on shaky ground.
Industrious, Levine explained, “pivoted away from traditional leases a number of years ago, and partnership agreements now make up the majority of our portfolio. We knew early on that this was the business model that would align our interests with landlords and form the foundation of a sustainable future.”
Partnership agreements, The Wall Street Journal explains, “are similar to the relationship between hotel owners and operators, where operators get fees and a share of profits but don’t have to pay rent. Revenue-sharing deals are considered less risky because they leave operators with lower fixed costs.”
Are Suburbs the New Central Business Districts?
Operators rethinking their business models are also rethinking location, with new demand for both traditional and flexible spaces in the suburbs.
“Demand for suburban office space has just exploded,” Niknamfard said. “Folks have gotten used to being at home or near home and thought ‘why do I need to commute into a large city for when I can have my office at or ten minutes from home.’”
Clients hoping to stay in central business districts are taking a wait-and-see approach.
“There’s not a lot of distress in the market, especially with respect to offices. Owners are not really forced to sell,” Niknamfard said.
There are, however, opportunities for tenants, including more flexible leases, shorter lease terms, fewer penalties for termination and, in some cases, rent concessions.
Companies Join Freelancers at Flex Spaces
Rosen observes that when he started in co-working, individual freelancers were the main customers, but more and more companies are joining them. With that trend — and a post-COVID future — comes new requests.
“Meeting rooms and private offices are more popular than ever,” Rosen said. “Previously, we did a lot of business in hot desk and communal space.” Now, “companies are also looking for more private space or semi-private space.”
Are Hybrid Models With Flex Space the Future of Work?
While a single corporate headquarters might not be in all of our post-COVID futures, that doesn’t mean giving up on a physical presence.
Rosen said, “It seems like the winning solution is this idea of a hybrid workplace. It’s that while most companies are going to continue to have real estate, they’re going to have less real estate, and they’re going to allow their employees to work remotely at least a few days or a couple of days a week.”
Levine agreed. “This model empowers employees to choose which locations to visit based on what’s on their plate for the day, and also allows the company to expand and contract the footprint of these offices as needed — that’s where the flexibility comes in.”
She’s optimistic, adding, “we only anticipate this need to grow in a post-pandemic world.”