L.A. Mayor Eric Garcetti looked to WeWork Cos. when he decided the city needed space to headquarter the recently established Clean Energy Smart Manufacturing Innovation Institute, a $140 million partnership between UCLA, the City of Los Angeles, the U.S. Department of Energy.
WeWork donated space at its center in Century City for the manufacturing institute’s headquarters, part of the private sector’s participation in the bid to foster the trend of giving local makers an edge with advanced manufacturing methods.
WeWork and other companies that offer coworking spaces are a significant trend in their own right – generally membership-based companies that offer shared workplaces such as suites for freelancers, entrepreneurs, telecommuters and others seeking flexibility in their office locations.
They’ve grown in popularity among users who cite a desire to have an office close to home, a desire to avoid traffic, build a community, network with colleagues and work in a hip environment among the reasons for the trend.
It’s not all blue sky for the coworking spaces, though. A number of them cropped up amid the Great Recession, when they could get big chunks of space on the cheap. Signs of strain have emerged for several outfits, even as investors continue to fund a number of them.
Fees
Members of WeWork in L.A. County typically pay a monthly fee of $350 to rent a desk and $800 for an office, according to the company. The fee generally ranges based on location and the extent of access to the shared space.
The sector has seen strong growth in recent years in and around Los Angeles County.
Cushman & Wakefield said eight coworking companies are set to take more than 364,000 square feet in the county so far this year, and stand a good chance of matching or topping 2017’s total.
“The level of new coworking occupancy in Greater LA in 2018 is already among the highest annual totals we have tracked on record (post-recession), and is pacing pretty evenly with 2017 (over 500,000 square feet) and 2016 (over 600,000 square feet) – the two highest annual levels tracked across Greater L.A.,” wrote Vincent Chang, associate market director of research for greater L.A. for Cushman & Wakefield, in a research note.
There’s plenty of competition in the segment.
Spaces, part of Switzerland-based IWG, which also owns executive suites provider Regus, plans to open five additional Southern California locations by July, including Hollywood, Calabasas, El Segundo and downtown.
“(Los Angeles County) is a massive concentration of all the right ingredients: high tech, media, aerospace,” said Michael Berretta, head of growth strategy for IWG. “Vendors want to be near those companies.”
New spin, old idea
Coworking space companies have put a new spin on an old business model similar to the way Uber Technologies Inc. and Lyft Inc. changed the taxi business. Coworking spaces have a reputation for hipper, fresher takes on the decades-old executive suites models, which often amounted to small offices or cubicles with some common reception services and equipment.
The concept has shown staying power as the economy has recovered. Some of the more prominent operators in the segment have significant operations in L.A.
New York-based WeWork, one of the biggest and fastest-growing companies in this sector, said its local membership has swelled to 12,000 throughout its 16 locations in Los Angeles County.
New York-based Bond Collective raised $50 million late last year, with an eye on an expansion to 30 sites within three years, some of them locally.
Cross Campus of Santa Monica, on whose website Garcetti makes an appearance, counts four locations countywide. Industrious offers locations in Century City, West Hollywood and downtown.
Hollywood’s Bar Works LA offers creative office space and highlights the property’s history as the Cat & Fiddle Restaurant, which “was a hot spot for rockers and was frequented by legends such as Robert Plant and Rod Stewart,” the company’s website states.
Chinatown-based Kleverdog Coworking, like some other competitors, allows members to bring pets, though “this is not a doggy-daycare,” its website admonishes.
Paragon Coin, a cannabis industry blockchain provider, in July will open Paragon Space, a Hollywood coworking site for members working in the marijuana sector. Collab&Play markets itself as a child care-friendly coworking spot in Glendale, the Westside and Culver City.
Women-focused coworking spaces also are entering the market.
Riveter, a Seattle-based company, plans on opening its inaugural female-themed coworking space in Los Angeles in June. Wing of New York, a women-only company that publishes a magazine entitled “No Man’s Land,” also has announced plans to open a space in Los Angeles.
“For greater L.A., coworking is a very small percentage of the overall square footage base,” said Nico Vilgiate, an executive vice president at Colliers International, who estimates coworking companies occupy less than 2 percent of the county’s overall office space.
“So, there’s definitely room to grow,” Vilgiate said.
Not-so-rosy spaces
Some analysts aren’t convinced the newer sector is sustainable, and a debate is emerging whether an economic downturn would hurt or strengthen its viability.
“In a down market, it drives more people to our business” looking to cut lease cost, said IWG’S Berretta. “They have to have flexibility.”
That didn’t bring Regus through the Great Recession unscathed. The company lost customers as the economy sagged, and in 2010 reported a 25 percent increase in customer delinquencies. The bursting of the dot.com bubble in the recession of the early 2000s also took a toll on Regus, which filed for Chapter 11 bankruptcy protection in 2003.
IWG issued a profit warning in October 2017, citing the United Kingdom’s vote last year to leave the European Union as well as a series of natural disasters in the U.S. for lower earnings.
WeWork, meanwhile, recently announced it lost $934 million last year and owes $18 billion in rent. It was, however, able to raise more than $700 million in bonds but with interest rates reportedly near 8 percent.
“WeWork caters mostly to small and home offices,” said Jeff Holzmann, managing director of iintoo Investments, a New York-based real estate investment firm. “Those type of companies, by definition, are very transitional in nature and don’t last a long time. Most will either outgrow the WeWork concept and move into their own space or fold up altogether.”
The barrier to entry appears low for coworking companies – have space, will rent. But the cost of rent, upgrading properties, supplying amenities such as Wi-Fi and coffee as well as arranging for events and speakers erode margins.
“There probably are too many coworking spaces being delivered,” said Jennifer Frisk, a managing director at Newmark Knight Frank. “The good spaces will sustain (during a recession), but the ones in secondary locations or in older buildings will go away.”
