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Real Estate Quarterly: Coworking Returns

Fueled by the media attention that WeWork attracted, the flexible office space phenomenon known as coworking reached peak popularity by early 2020. Then the pandemic hit and Covid-era restrictions made collaborative office models difficult, if not impossible. Demand for coworking space plummeted.

Today, however, the picture for coworking is not as bleak as it once appeared.
Coworking in Los Angeles totals approximately 4.7 million square feet, compared with 5.5 million square feet before the pandemic, according to Petra Durnin, head of market analytics at Raise Commercial Real Estate.

“The decrease stems from a combination of boutique operators closing their doors and larger, established firms reevaluating underperforming locations,” Durnin said.
Coworking survived the pandemic by proving adaptable.

“Early on, it looked like coworking might not make it through the pandemic, but true to its flexible core, operators pivoted and began offering practical services like child care,” Durnin said. “It also became a necessity for those who couldn’t work from home or an office. The idea of third working locations cemented the necessity for coworking spaces and their role in the office zeitgeist and the hybrid workplace model. Coworking offers flexibility, affordability, and a professional setting to individuals and companies alike.”

Savills’ Director of Research Mike Soto observed some trends of rival coworking operators opening in former WeWork spaces.
“Most of the WeWork locations which were returned to their landlords happened in 2020,” Soto said. “We’re beginning to slowly see other coworking providers leasing former WeWork spaces around L.A.”

Industrious took some of WeWork’s former space at 7083 Hollywood Blvd. in Hollywood, while IWG’s Spaces has taken WeWork’s former locations at 925 N. La Brea Ave. in West Hollywood and 811 W. 7th St. in downtown L.A.

“But other than that, new leasing from coworking providers has been slow,” Soto said.
The reason may be because many landlords were burned by WeWork during the pandemic, he added.

“WeWork leased space all over the country that they then had to back out of, which meant the landlords were left with vacant space they had to lease again,” Soto said. “Or landlords were in leases with WeWork to go into their buildings but then WeWork walked away from the deal and landlords had to go back to the drawing board.”

Also, coworking operators looking to grow, such as IWG — which operates under Regus and Spaces — and Industrious are seeking management agreements from landlords, and some landlords are hesitant, Soto said.

“WeWork was probably the most high-profile operator to downsize,” Durnin said, “but in reality, as with most operators, they are continuously evaluating locations, performance, and market conditions. And as with most trends over the past two years, the pandemic compressed that timeline.”

IWG has seen customers divided on the type of workspace they are choosing.
“It’s still a hybrid,” IWG Vice President of Network Development for the Americas Michael Berretta said. “The design itself is now a mix of private office and communal workspace.”
What is clear, Berretta said, is that customers do not want to spend much time driving.
“The preference is becoming evident that our customer is not interested in a long commute,” Berretta said. “We’re seeing a real demand surge in users wanting to be as close as possible to home.”

To accommodate the minimal commute time, IWG has 50 locations of Regus and Spaces all over the Metro Los Angeles area.
“Our advantage is making sure we counteract that by putting more and more places where our customers are,” said Berretta, who added that IWG will continue to grow by 500 to 700 new locations nationwide during the next two to three years.

Berretta said IWG did not see much attrition in Los Angeles during the pandemic.
“We had some leases that were expiring naturally,” Berretta said. “Some leases, we changed locations and modified the size. For the most part, our footprint has remained the same. In fact, we’ve shifted to growing the business in L.A. We opened new sites in West Hollywood and downtown. We have several more under consideration.”

Learning from the pandemic

Elton Kwok, territory vice president and head of California and Nevada at WeWork, said that navigating the pandemic became a learning opportunity.
“In terms of our operation, we adopted our health and safety standards,” he said. “We reevaluated our real estate portfolio during that time. We’re focusing on our core business, the existing locations that we have, the experience of those locations.”

The pandemic, according to Kwok, created more demand for flexible office space.
WeWork has also introduced “the creation of two new product lines: the All Access membership and On Demand,” Kwok said. “All Access is a passport to visit any location around the world. With the On Demand, you’re available to book space at any time using an app.”

WeWork still has a strong presence citywide with sites in downtown Los Angeles, West Hollywood, Culver City, El Segundo and Manhattan Beach. Kwok said WeWork’s Playa Vista site “has the strength and demand.”

Santa Monica, WeWork’s top-performing submarket, is currently going through changes.
“We’ve investing capital to freshen and modernize that space,” Kwok said. “That’ll reopen at the end of the year.”

WeWork will not be adding any locations for now.
“Growth is always on our mind,” Kwok said. “The most important right now is to drive toward profitability and our new product lines.”

Kwok noted that WeWork is also focusing on improving the experience at existing locations by hosting Wellness Wednesdays, which offer relaxation and mental health-oriented sessions; and weekly happy hours and socials on Thursdays.
“These are essentially opportunities to bring members of the community together especially eager for connection after the pandemic,” Kwok said.

Kwok downplayed any sense that WeWork struggled during the Covid years.
“Like any company during the pandemic, we had to adjust together,” Kwok said. “We had to communicate with our customers. We had to evaluate our product lines. It was a game changer in many ways. We now have better partnerships with our landlords than ever before. It demonstrates the interest in flexibility.”

Despite the outsized attention coworking gets in the media, Durnin noted that coworking was and still is less than 2% of the total office inventory for L.A. She predicts that coworking growth globally will range from 2% to 5% over the next few years.
“Even with a looming recession, coworking will remain an important part of the landscape,” Durnin said.

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