The Coronavirus challenge for tech coworking spaces

This blog will explore the difficulties currently facing tech coworking spaces in light of the COVID-19 pandemic, how providers can keep tenants engaged and what the future may hold for these spaces. For an audio introduction to this topic, please listen to episode 7 of our Tech in Two Minutes podcast below.
 

It shouldn’t come as a shock to hear that coworking spaces experienced a boom both nationally and internationally in the last decade. In August 2019, WeWork, one of the industry’s main protagonists, was named as the largest single occupier of corporate office space in London and was valued at $47bn in advance of its proposed IPO, making it the most highly valued startup in any sector in recent years. Whilst the IPO didn’t take place and the valuation of the company plummeted (for reasons which we don’t have time to elaborate on fully here), WeWork’s success did not take place in isolation. Various alternative providers have enjoyed similar success to WeWork in the last decade, creating a multi-billion pound coworking market. These coworking spaces have been extremely popular with tech startups, becoming the natural choice for an HQ for many of them. 

Why are these tech coworking spaces so appealing?

When a startup graduates from the bedroom of its founder, it’s usually too early to enter into the world of traditional office rentals, with their often long and expensive tenancies. Coworking spaces, on the other hand, are often able to offer a more practical stepping stone in a young tech startup’s office journey. The tenancy agreements are affordable, flexible and short-term, making coworking spaces the perfect environment to grow a young business without having to worry about high start-up costs. Coworking spaces also offer tenants the opportunity to collaborate with like-minded entrepreneurs, as their layouts encourage community and interaction. Many providers also hold regular networking events which provide tenants with access to potential future investors, employees and knowhow, making coworking spaces a great place to create and grow business connections.

However, this is not to say that everyone has been dazzled by the services offered by coworking providers. Turning to the case of WeWork, from its inception the company attempted to attract potential tenants by building its brand and reputation on being different to other offerings. The company presented itself as a disruptive tech startup, offering innovative coworking solutions to its tenants, such as the launch of its member app which was designed to better connect tenants with the coworking spaces they occupied. Yet, even before the spread of COVID-19, many commentators believed that WeWork was anything but an innovator, and was instead just a real estate startup attempting to corner the market by leasing large volumes of office space, racking up a massive amount of debt in the process.

What has the impact of COVID-19 been on coworking spaces?

Despite the major growth the coworking sector has seen in the last decade, coworking providers have been harshly impacted by the current COVID-19 pandemic. The government’s recent emergency measures have forced people to exercise social distancing practices and work from home where possible. This has amounted to many providers having to close down their coworking spaces and therefore all the beneficial face-to-face networking opportunities offered by coworking have come to a grinding halt. The economic impact of the COVID-19 pandemic on coworking spaces has been equally seismic. 

It’s fair to presume that most coworking spaces follow the business model set out in WeWork’s proposed IPO documentation. This model involves coworking providers leasing office space from landlords on long-term leases and, in turn, subdividing that office space and sub-leasing it to startup tenants on attractive short-term tenancies. With many tech startup tenants currently unable to access the coworking spaces they are paying for, whilst also facing significant cashflow disruption as a result of the pandemic, there’s little economic incentive for them to continue with their tenancies in these uncertain times. WeWork has already seen the group’s occupancy rate fall and it has recently been reported that many of WeWork’s tenants have asked to withhold rental payments or terminate their leases in the last month.

Whilst numbers of coworking tenants fall due to the COVID-19 pandemic, providers’ long-term leases with landlords remain in place, along with the obligation to regularly continue paying rent. It therefore seems clear that most coworking spaces face a real challenge to stay solvent in the current climate. 

Can current coworking challenges be overcome?

In order to reduce the exodus of tenants from coworking spaces, it seems inevitable that providers will need to lessen, or even waive, the rent of their tenants. Whether this is feasible, however, greatly depends on the willingness of the coworking providers’ landlords to do the same in respect of the rent owed to them by the providers.  In the case of WeWork, it has been reported that the company has withheld April rental payments to landlords in certain locations, yet is continuing to charge its own tenants for rent. Ultimately, WeWork’s landlords will want to receive the money owed to them and WeWork’s own tenants are increasingly demanding some form of financial rental relief, creating a financially unstable environment for the late-stage startup. Therefore coworking providers should tread carefully if they intend to adopt a similar approach to WeWork.

However, this should not stop coworking providers from exploring the possibility of negotiating rent payment holidays with their landlords. It’s arguable that if a coworking provider defaults on its rent obligations and is evicted, a landlord will have significant difficulty securing a replacement tenant in the current economic climate. Many coworking providers were reliable, lucrative tenants for landlords prior to the epidemic and so adopting a pragmatic, long-term approach to the current crisis may be the most commercially prudent course of action for landlords.

Coworking providers will likely need to provide more than just financial incentives to keep tech startup tenants happy during the current lockdown. Given that the community feeling of coworking spaces is likely to have played a large part in first attracting tenants to those spaces, maintaining that sense of community is now a necessity for coworking providers, most likely through the use of technology.

It is highly likely that many tech startups are feeling overwhelmed by the constantly changing economic developments, as well as the constant flow of commentary being released by solicitors, accountants, economists and other professionals on a wealth of topics. From the government’s plans to cover the wages of furloughed workers, VAT and income tax holidays, government backed business loans and government grants, to the impact of the pandemic on startup fundraising, there is a lot of information for tech startups to wade through. Moreover, the position is dynamic. The situation rarely stays the same on any one given day, making it even more difficult for tech startups to understand where they stand at this time.

So, how can coworking providers help tech startups whilst holding onto them as tenants?

Well, coworking providers are undoubtedly in the best position to curate and disseminate the constant flow of information to their tenants. By providing regular newsletters, co-ordinating webinars and giving access to collaborative software, coworking providers have an opportunity to maintain the community benefits provided by coworking spaces even whilst tenants are working from home. Many providers have already begun to offer additional services to their tenants. For instance, Second Home has started sending its tenants regular email newsletters with online classes and guides, whilst others have begun hosting virtual social drinks to keep community spirits high.   

Is there a brighter future for tech coworking spaces?

Despite the disruption currently facing coworking spaces and their tenants, the current pandemic may benefit providers in the long-term. Owing to the current social distancing measures in play, individuals and businesses will become even more accustomed to working from home. It is possible that we may emerge from this current pandemic with a desire to work more flexibly. Coworking may well enter the mainstream as a preferred way of working. Therefore, the flexible and short-term leases offered by coworking providers may become even more attractive to tech startups once normality is resumed. The short-term losses impacting coworking spaces at present may lead to long-term gain.

Additionally, if coworking spaces become an even more attractive offering once normality is resumed, there may be real opportunities for providers to capitalise on the additional tech and innovative services that WeWork was arguably unable to meaningfully implement whilst trying to build a reputation for itself as a disruptive tech company. It will be interesting to see how providers take advantage of these opportunities whilst maintaining a flexible business model, considering that real estate overheads (i.e. paying rent to institutional landlords) will remain a significant fixed cost. Given the ever-increasing number of challenges currently facing WeWork, it seems unclear whether the once promising startup will be a beneficiary of these new opportunities and whether it will still exist in its current form once the pandemic has subsided.

This blog was co-authored with Jessica Rice, Paralegal in the Corporate and Commercial Team.

About the author

Andrew Solomon is a Senior Associate in the corporate and commercial department. Andrew's commercial practice is focussed on drafting and negotiating technology contracts, although he also advises in relation to a wide range of commercial issues, such as intellectual property, branding, data protection and sponsorship arrangements.