2019 was a fascinating and memorable year for the real estate industry, to say the least. While the WeWork IPO attempt and subsequent downfall dominated the news cycle during the second half of the year, the rest of the flex space industry experienced growth, evolution and exciting new opportunities.
Below are some of the top trends that I observed in 2019:
- Investors remain invested in the future of the flex space industry. This year, we saw large funding rounds for some of the other dominant coworking industry players such as Knotel and Industrious. Convene also secured a $150M credit facility via a partnership with Goldman Sachs, Morgan Stanley and Barclays.
- Landlords are still determining if they can manage flexibility and tenant experience on their own. While The Durst Organization launched Durst Ready this year, Tishman grew Studio, and other landlords like Chicago-based Sterling Bay have chosen to partner with providers like Convene.
- Sharing economy strength continues with the rise of coliving. Coliving companies like Ollie, Common, Quarters, and Startcity have over 3,000 beds in the US and are growing rapidly to meet the growing demand for “affordable” urban housing.
- Other players are catching on to the importance of hospitality in the workplace. While Convene locations have been managed by hospitality professionals since 2009, UK-based Work.Life has recently been promoting their “hospitality-focused offering” to members, while Industrious promises “inviting hospitality” at all of their spaces, and companies like HqO & Lane continue scaling their app-based tenant experiences in class A office buildings.
While the shelved WeWork IPO attempt will continue to have far-reaching impact, 2020 will see even more evolution in the flex space industry, especially as economic headwinds continue to mount, industry consolidation accelerates further, and the industry adapts to rapidly changing customer preferences.
Time to dust off the crystal ball again to share my annual five predictions for the flex space industry in the coming year.
1.The WeWork tsunami finally makes its way to shore, and the entire industry feels the impact.
As the dust settles from their failed IPO attempt, the real impact is felt by all, as landlords with substantial WeWork exposure and pending debt maturities see their asset values impaired and hundreds of non-performing WeWork locations are closed, leaving thousands of WeWork customers without a home. The residual damage continues for WeWork employees, including people who were let go and those remaining on staff who are navigating the uncertainty from within.
2. The consolidation in the industry accelerates as the smaller, less capitalized operators who have trouble accessing capital are forced to sell.
Scale becomes increasingly relevant for both success and survival as big enterprise customers and global landlords choose their strategic flex space partners. A few “big” and transformative deals will steal the headlines, while many smaller M&A deals get done at a local and regional level. Unfortunately, several coworking companies will be forced to wind down their operations or sell off individual assets.
3. The cream rises to the top, and profitability defeats “growth for growth’s sake.”
The operators with strong and profitable business models will be rewarded for their product quality, financial discipline, and stakeholder-friendly approach and get the benefit of landlord partnerships, rapidly growing enterprise demand, and improved pricing leverage in a more “rational” post-WeWork operating environment. The winners and losers in this new and emerging industry will officially be crowned in 2020.
4. Coworking 2.0 is replaced by Coworking 3.0.
A new business model emerges where landlords, tenants, and flex space providers work together in partnership to create win-win-win outcomes for all. The siloed conversations driven by the existing model will be replaced by an entirely new collaborative approach to deal making where landlords and flex providers work together to create the “right” spaces for all building tenants and share in the value created by delivering the spaces, experiences, and flexibility that today’s progressive companies demand.
5. The industry will be truly tested for the first time since 2009.
As the global economy continues to march closer to a recession, the big technology companies (who, in addition to coworking, have been the driving force behind office absorption globally) begin to retrench, placing real pressure on landlords to lease up their buildings. In addition, supply and demand imbalances in some major markets puts occupancy and price pressure on the coworking sector. This will create both challenges and opportunities for the flex space industry at a macro level.
There’s no doubt that 2020 is going to be an exciting year for the flex space sector and the real estate industry as a whole. Will delivering hospitality at work truly become “table stakes?” Will the major players need to learn how to be more inclusive from niche players? How will flex space design evolve? There’s so much to come as the sector continues to see new competition, more complexity, and accelerating consolidation in 2020. Convene is excited to be along for the ride and can’t wait to see how the game unfolds. Happy Holidays, all!