- In recent years, flexible-workspace firms grew dramatically in New York, amassing a nearly 20-million-square-foot portfolio of space that could now result in vacancies.
- Flexible-space firms have had layoffs, sought to restructure and terminate leases, and face an uncertain future as a result of the coronavirus pandemic.
- That could prompt millions of square feet to be cast off into the office market at a time when tenants are already pulling back because of an expected recession touched off by the lockdown.
- In the last recession, office vacancies surged and rents plummeted over 30% – a scenario some market observers worry could again unfold, this time with the help of floundering flex-space firms.
- Still, some experts believe the current crisis could actually help workspace firms as tenants gravitate to short-term, flexible deals.
- Click here for more BI Prime stories.
To dominate the flexible-workspace industry, WeWork snapped up over 9 million square feet of space in New York City in recent years, vaulting past tech giants, big banks, and white-shoe law firms to become the city’s single largest office occupier.
Once the lynchpin of the brand’s effort to become a $50 billion public company, that sprawling footprint is now a growing cause of concern among real-estate executives.
WeWork and its peers in the fast-growing flexible workspace sector have slashed their workforces, entered into talks to renegotiate or exit leases, and are bracing for an uncertain future in a post-coronavirus world. The tumult in the sector could cast millions of square feet onto the market at a time when tenant appetite for new space has been diminished by the crisis and the economic damage the pandemic has inflicted on commerce.
Altogether, flexible-workspace firms occupy about 18 million square feet in the city, according to data from the real-estate brokerage and services firm Newmark Knight Frank, a block of space equivalent in size to about six Empire State Buildings.
That square footage accounts for roughly 4% of the office market’s inventory of space in Manhattan, according to Newmark. While that may not like sound like much, office experts say vacancy increases of just a few percentage points can send office rents tumbling and trigger a downturn in the market.
What happens to NYC real estate in a recession
If flexible workspace firms begin casting off space, it could become a compounding factor in a wave of availabilities that many experts anticipate will result from an expected recession touched off by the crisis — which may prompt tenants across the city to shed space or put offices they occupy up for sublease.
“If we were just talking pre-Covid, I would say that the impact of coworking vacancies on the market would be huge,” said Jeffrey Peck, a vice chairman at the real-estate services firm Savills. “Post-Covid, it could be percentage points on top of what we already believe is going to be an even bigger number.”
The workspace sector’s ongoing problems were on display this week, with WeWork initiating another round of layoffs to cut costs. The virus crisis has raised questions about the viability of flexible-workspace firms, whose clients generally occupy spaces on short-term contracts they may seek to now cancel because of the upheaval.
Another industry player, Knotel, which has about 2.5 million square feet in the city, has stated it will slash its portfolio of space by 20% and has laid off workers.
“What we’re hearing is that every major coworking firm is approaching their landlords to evaluate their remaining obligation and either reduce their rent or negotiate a termination,” said Jared Horowitz, a vice chairman at Newmark. “The business model can’t survive right now. These are firms that leased space at the tippy top of the market and how do you convince tenants to pay a premium on top of those rents when the market is falling now? It’s a huge challenge.”
The availability rate in Manhattan, a calculation that includes present vacancy and spaces that are expected to become empty in the coming months, was 11.8% at the end of the first quarter, according to Newmark data. Average asking rents were a record $81.71 per square foot, the firm reported, a factor of both years of solid leasing that have absorbed space and newly built spaces in markets such as Hudson Yards that are more expensive than existing office space and whose entry to the market pushes average prices up.
During the last recession, average office asking rents in Manhattan fell from just over $70 per square foot to about $48 per square foot in the trough of the downturn in 2010, a decline of about 33%.
WeWork has been vague about what steps it is taking to rightsize its portfolio and hasn’t named specific locations where it is seeking rent reductions or to potentially exit space.
“As part of our plan to seek profitable growth, we are conducting an in-depth review of operations and assets globally in order to rightsize the business and optimize our real estate portfolio,” a WeWork spokeswoman, Nicole Sizemore, said in a statement. “As we work through this process, we are working with industry partners where appropriate.”
WeWork and rivals helped tighten the market
WeWork and its peers played a large role in pushing up the office market in recent years.
“They helped tighten the market,” Savills executive Jeffrey Peck said. “If you were with a tenant looking for 100,000 square feet, you knew you had a coworking company behind you that was willing to bid up pricing for the space and compete. Not having that alone now has hurt landlords.”
Flexible-workspace firms also often vacuumed up spaces that landlords had difficulty leasing.
“They would take lower floors in a building with less light and views and they were sucking up a lot of the hard-to-use spaces,” Peck said. “If these spaces are handed back to landlords they are especially problematic to refill.”
Some observers forecast that the aftereffects of the pandemic could actually bolster flexible workspace firms, rather than unravel them. Uncertain of how office space occupancy may have to evolve as a result of the crisis, tenants may opt to take short term, flexible deals with workspace providers rather than commit to longer term conventional leases for the time being.
“You might actually want to take some coworking space right now because of this crisis,” said Mary Ann Tighe, the New York area CEO of CBRE. “I would not for one minute want to make a long-term commitment until we have had time to absorb what’s going on and what the implications will be.”
Have a tip? Contact Daniel Geiger at firstname.lastname@example.org or via encrypted messaging app Signal at +1 (646) 352-2884, or Twitter DM at @dangeiger79.