Flex, In A State of Flux: Covid-19 Might Not be the Death of Coworking Spaces. Long-term Trends Could Bring a Brighter Tomorrow

Written by Matthew Niksa  – Commercial real estate reporter, Silicon Valley Business Journal
Photo credit: Tomas Ovalle

The Covid-19 pandemic is expected to lead to a contraction of the global coworking space market of nearly 13 percent since last year.

With that kind of pullback, you might expect a pessimistic attitude among the companies that have invested in coworking or flexible space facilities in Silicon Valley.

You’d be wrong.

“We have entered the ‘no-term deal’ era, where, more than ever, people need to check into a workspace for an hour, for a day, for a month and sometimes more,” said Laurent Dhollande, CEO of on-demand workplace companies CloudVO and Pacific Workplaces. “Short-term leases are not enough. The workspace needs to be available on-demand.”

Pacific Workplaces, a San Francisco-based company that has several locations throughout the Bay Area, definitely saw a dip in its business in the months after the Bay Area’s March 17 shelter-in-place order. But now it sees where its outposts can be well supported in the long term, contingent on tech companies in Silicon Valley continuing to support remote work for their employees, among other factors.

“We have always benefited from hourly, daily and month-to-month deals, which is why over 60% of our members are month-to-month or shorter,” said Keith Warner, managing partner at Pacific Workplaces. “We benefit now with the increase in demand by having been prepared in advance.”

Flexible space accounts for a fraction of Silicon Valley’s office inventory, taking up less than 1 percent of the 86.4 million square feet of Class A and Class B office space. But with high-profile players like WeWork along with competitors like Pacific Workplaces, Novel Coworking and Regus Corp.’s sister brand Spaces, it can be a bellwether for what to expect in the near term for commercial real estate.

A second-quarter drop, then a rebound

While coworking spaces are scattered throughout Silicon Valley, the greatest concentration is in San Jose. One possible reason for that is they help satisfy a demand for multitenant office space that’s outpaced its supply.

In general, the Valley’s biggest city has not yet achieved the asking rents necessary to justify building new multitenant office product. That means coworking spaces such as WeWork’s 72,160-square-foot location over four floors at Riverpark Tower I in downtown and Spaces’ creative office space at Tisch Tower next to Santana Row offer potential benefits for not only their operators but also the city.

Who’s who in local co-working

Silicon Valley has a number of coworking companies offering short-term, flexible lease terms. Here are some of the big players.

• WeWork: 29 locations in the Bay Area, including three in San Jose, three in San Mateo and one in Palo Alto
• Spaces: Nine locations in the Bay Area, with two in San Jose and one each in Santa Clara, San Mateo and Menlo Park
• Pacific Workplaces: Nine locations in the Bay Area, with one each in San Jose, Cupertino, Palo Alto, San Mateo and Santa Cruz
• OnePiece Work: Four locations in the Bay Area, including one each in San Jose, Santa Clara and Foster City
• Novel Coworking: One location, in San Jose, where the company owns an entire building on North First Street
• Regus: 35 locations in the Bay Area, including multiple ones in Santa Clara, San Jose, and Palo Alto, among other cities.
• Others: Several companies have a single location, some with a dedicated focus for startups and entrepreneurs. Among these: GSVlabs in San Mateo, Silicon FinTech Bay in Redwood City, Critosphere in Fremont and HanaHaus in Palo Alto.

WeWork, the New York-based coworking giant, has multiple locations throughout the Bay Area, including two in San Jose with another set to open next February. Elton Kwok, head of California for WeWork, said the company has seen increased demand, both for individuals and for large companies seeking “full floor spaces given their plans for a hub-and-spoke model.”

Responding to questions via email, Kwok noted that some of its individual users, who have been working from home, are taking advantage of WeWork All Access, a monthly membership program that allows members to work from any one of the company’s locations. The company made the program free to use through November for existing members.

“Now more than ever, it is essential that companies are able to pivot and adjust due to the ever-changing world we live in, be it a member company or WeWork itself,” Kwok said. “WeWork is constantly evaluating the needs of our members and global community to ensure we are prioritizing safety.”

Pacific Workplaces operates 16 locations in Northern California and one in Reno, Nevada, including a suite at 111 N. Market St. in downtown San Jose. Like most other coworking companies, Pacific Workplaces offers a variety of space options that can be rented by the hour, day or month — among them, use of desk space, a meeting room reservation or a private office.

Pacific Workplaces’ ability to provide a flexible, no-lease-term-type of fully furnished space is partly why Dhollande doesn’t think that his company is competing with traditional office landlords for short-term office lease deals.

“We do see landlords trying to sort of package very flexible terms on spaces that are not furnished,” Dhollande said. “Traditional space is not that complicated, but you need to do that. How about Internet connections? How do you provide reception services, which are helpful when you receive visitors?” He noted that these are among the amenities Pacific Workplaces provides in its locations.

Rachel Quinto, west region sales manager at Novel Coworking, raised a similar point when asked whether Novel is competing with more traditional office landlords for short-term deals compared to before Covid-19: “With traditional space, you’re renting a box to work from.” Quinto said. “You’ll still need to set up and pay for utilities, Internet, coffee, furniture. What everyone needs right now is a productive workspace that is ready to go. That’s exactly what we offer.”

Chicago-based Novel made its first — and to date only — foray into the Bay Area market in March 2019 when it acquired a 123,699-square-foot office building at 2150 N. 1st St. in North San Jose for $42 million, or more than $339 a square foot. The six-floor building can support companies with workforces ranging from one to 500 employees.

Numbers to know

• 86.4 million: Total amount of square feet of Class A and Class B office inventory in Silicon Valley
• 726,000: Square feet of space in Silicon Valley dedicated to co-working
• 61%: Percentage of that space that’s in San Jose proper

To be clear, there are differences in Novel’s and Pacific Workplaces’ business models, as Novel does not rent out office space by the hour or day, while 60% of Pacific Workplaces’ members are on month-to-month plans or shorter. But both share something in common in that their respective San Jose locations experienced a decrease in business around the time the Bay Area initially ordered residents to shelter-in-place because of Covid-19 starting in mid-March.

“In March and April, new members were nearly zero as everyone was assessing their workplace situation, trying to make do at home, and making their best guess as to how long shelter-in-place would last,” Warner of Pacific Workplaces said, adding that he saw slight member increases — three to five a month — in May and June.

As for Novel, new inquiries for its San Jose office space dropped from 65 at the end of the first quarter to 36 at the end of the second quarter, a 44% decline, according to data provided by Quinto.

As California and Santa Clara County eased restrictions on businesses, and as some workers felt increasingly non-productive at home due to distractions, Warner said, both flex office providers’ San Jose offices are seeing renewed demand. New memberships for Pacific Workplaces have increased to between five and ten a month since August, Warner said, while plans with coworking usage have increased each month since April.

Quinto said that the number of office space inquiries for Novel’s San Jose space increased from 36 to 66 from Q2 2020 to Q3 2020, an indication that business is heading in the right direction. What’s more, after rent collection rates for that location were 93% in March and April, slightly lower than usual, those rates have climbed to 99% in the months since.

‘Tremendous growth potential’

As both Novel Coworking and Pacific Workplaces head into the final months of 2020 — a year in which both have experienced numerous unforeseen challenges and have watched competitors like WeWork close locations and Regus Corp. declare bankruptcy — it would be understandable if both were wary of what the future holds for their San Jose locations.

Dhollande said the short-term outlook for that location is “highly uncertain” because “people are afraid of downtown areas” and because its revenue declined this year. Longer-term, he said the future is going to be bright for Pacific Workplaces as long as people continue working from home, which creates opportunities for flexible office space providers to serve anyone dealing with daily or monthly work-from-home inefficiencies.

Warner said San Jose’s flexible office space sector has “tremendous growth potential,” with “more and more large companies taking advantage of a bustling downtown community with great restaurants and new residential units coming online every year.”

As for Novel, it’s seeing inquiries for space at its North San Jose building trending upward in the fourth quarter, and the company is expecting even more of an uptick in 2021, said Alex Raiyn, area San Jose sales manager at Novel. Although San Jose has more co-working space than anywhere else in Silicon Valley, Raiyn, who started working at Novel in September, said he’s come across people during tours he’s led for its San Jose location who really didn’t know what coworking was.

“I think the brand recognition is huge, and I think the outlook is that once they’re here for the short-term and they’re exposed to what we have to offer, then I think that falls into the long-term outlook,” he said. “That recognition, that exposure could then help lift off the coworking industry for the long term once we get over Covid.”