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.
Latest blogs and news
Recent tribunal cases involving Covid-19
Nick Ralph looks in detail at recent cases that have stemmed from the pandemic, including a refusal to attend work due to fear of contracting the virus.
Covid vaccination and the workplace – what you need to know
One of the most topical issues regarding Covid-19 is that of vaccination and whether it should be mandatory.
Stories regarding big employers such as Citibank in the US mandating vaccination as a condition of employment (“no jab, no job”), the experience of great sports personalities such as Novak Djokovic and the decision of the Supreme Court in the US last week regarding laws mandating vaccination in the private sector, have all brought this issue into the spotlight.
So what is the legal position in the UK?
The Covid-19 Inquiry – the importance of the terms of reference
Any day now the Covid-19 Inquiry will publish draft terms of reference. This will be a significant event. Once agreed, the terms of reference will determine the scope and length of the inquiry which is due to begin its work in the Spring. In turn this will have a direct impact on how valuable the inquiry turns out to be.
The future of the City: An insight into the effect of coronavirus on commercial tenants
On 16 March 2020 Number 10 advised those living in the UK against “non-essential travel” in order to curb the growing outbreak of Coronavirus. This encouraged many office-based businesses to communicate to their employees that they should work from home until further notice.
Back to the workplace – the new guidance and key considerations for employers
COVID-19 Fraud: HMRC ramps up its investigations activity
In March 2021 the Chancellor announced the establishment of a taskforce to investigate those who may have fraudulently made use of government schemes set up to protect individuals and businesses against the economic impact of COVID-19 – such as the Coronavirus Job Retention Scheme (CJRS) (widely referred to as the Furlough scheme), the Self-Employment Income Support Scheme (SEISS) and the ‘Eat Out to Help Out’ Scheme.
Mandatory Covid-19 Vaccinations for Care Home Workers
This week, the Government announced that Covid-19 vaccinations will be made compulsory for care home staff, raising strong emotions on both sides of the argument.
How immune are COVID-19 relief scheme fraudsters from law enforcement action?
The devastating economic impact of the COVID-19 pandemic has led to unprecedented levels of government support aimed at keeping jobs intact and businesses afloat. Although the news is beginning to promise a path out of lockdown and a gradual return to some degree of normality, equally as prominent are reports of fraudulent abuse of the COVID-19 support schemes and the government’s planned response.
Arrests of care home workers following COVID-19 outbreaks: a review of criminal liability
In late February 2021 a news article reported that a care home worker had been arrested on suspicion of gross negligence manslaughter after a patient died of COVID-19. In late March 2021, two further care home workers were arrested on suspicion of wilful neglect. We look at how those working in care homes can potentially face criminal liability in respect of COVID-19 cases.
COVID-19 Fraud: New Taxpayer Protection Taskforce
In the Budget 2021, presented to Parliament on 3 March, the Chancellor announced that HMRC will establish a taskforce to investigate those who have fraudulently made use of government schemes set up to protect individuals and businesses against the economic impact of COVID-19 – such as the Coronavirus Job Retention Scheme (CJRS) (widely referred to as the Furlough scheme) and the Self-Employment Income Support Scheme (SEISS).
Coaching, Teaching and Support Work in Lockdown: Safeguarding and Data Protection considerations when working with children online
The COVID-19 crisis has forced sports clubs, schools, universities and charities to rapidly change their approaches to coaching, teaching and support work. The regulations on social distancing have forced organisations to innovate; services which had previously been offered mostly or wholly in person were rapidly shifted online during “lockdown 1” and will return online at least for the duration of “lockdown 3”. If the vaccine rollout has the desired effect there will no doubt be some return to “traditional” methods, but it seems very unlikely that the changes brought about by the pandemic will be completely reversed. In this blog, Claire Parry from Kingsley Napley’s Regulatory team and Fred Allen from the Public Law team look at the challenges organisations face engaging with children online.
As Lockdown Ends – Updated Guidance on General Meetings During Covid
On 30 March 2021 the provisions of the Corporate Insolvency and Governance Act 2020 (“CIGA”) which allowed purely virtual general meetings will lapse, and the normal rules will apply. ICSA have produced some useful guidance to assist companies in dealing with their general meetings in the light of this change.
£26 billion fraud: The other side of the Coronavirus Business Interruption Loan Schemes
We have previously examined how the Government’s Coronavirus Business Interruption Loan Schemes (the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)(together the “Schemes”) work. A report issued by the Public Accounts Committee on 10 December 2020 highlights the darker side of the Schemes and what it is costing the UK taxpayer.
Will There be Covid Compensation Claims?
In this blog Terence Donovan discuss legal issues arising from the pandemic when considering compensation claims.
FCA sets expectations for firms to record communications when working from home
FCA focuses on risks associated with unmonitored communications, including the use of unencrypted apps, such as WhatsApp, for sharing potentially sensitive or confidential information when working from home.
Regulation and Uptake of the COVID-19 Vaccine
The government has now approved the supply of the Pfizer-BioNTech COVID-19 vaccine. The reason they have been able to do this so quickly is because they have taken advantage of the temporary authorisation regime laid out by the Human Medicine Regulations of 2012 and 2020. The 2012 Regulations were updated in 2020 specifically to facilitate the smooth rollout of the COVID-19 vaccine. In the public consultation preceding the introduction of these updated regulations, several respondents raised concerns regarding unlicensed vaccines and immunity from civil liability. In practice, very little is known about these regulations and their application. This article seeks to shed some light on the temporary authorisation regime and suggest a means of alleviating concerns in the context of “vaccine hesitancy”.
The question of Christmas: How far can employers go in telling employees where to spend it?
The Government's latest announcement reducing quarantine requirements for travellers returning to England from 14 to 5 days post-15 December 2020 (providing they can provide a negative test result for COVID-19) once again raises questions for employers on what right they have to influence employees' overseas holiday and travel plans over the Christmas period.
Firms brace for negligence impact
Accounting firms should be bracing themselves for a rise in professional negligence claims as a result of the Covid-19 pandemic.
Justice delayed is justice denied for clients in lockdown limbo
The top five most stressful events in life are commonly regarded as death of a loved one; divorce; major illness or injury; job loss; and moving house (in that order). Some might argue that the Covid-19 pandemic and associated lockdowns should be a new addition to this list. Not only does it make life more stressful but also the first four events more likely.
Parliamentary scrutiny in the time of Coronavirus
As a new nationwide lockdown comes into effect, Stephen Parkinson and Charlie Roe from our Public Law team, consider the often limited role of Parliament in scrutinising restrictive regulations throughout the COVID-19 pandemic.
Share insightLinkedIn Twitter Facebook Email to a friend Print