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Will COVID-19 Doom Co-Working?

[Updated: Jan 05, 2021 ] Apr 01, 2020 by Kevin Vandenboss
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Throughout most of the country, co-working office spaces are looking like ghost towns. In some states, people have been forced to work from home because of nonessential businesses being closed. In others, people are choosing to work from home to practice social distancing.

Since co-working offices have only recently gained their current popularity, it wouldn't be a huge adjustment for businesses to transition back to home offices or traditional office space.

What's happening now to co-working spaces

Convene, a New York-based co-working provider, has temporarily closed their 28 locations nationwide and laid off 150 employees in the wake of the coronavirus pandemic. While one of the smaller players in the market, Convene could be providing a glimpse into what other shared workspace providers will be forced into as cases of COVID-19 continue to rise at an increasing rate.

In March, International Workplace Group (IWG: London) notified its members that any offices with a confirmed case of COVID-19 may be required to close temporarily. The support staff in many of their locations have also reduced their working hours to only be available to accept deliveries.

Despite its members being unable to use their services, International Workplace Group's flagship brand, Regus, has so far been refusing requests to provide refunds, waive monthly service fees, or even offer a discount during this pandemic. This has been leaving many Regus members outraged and looking for ways to terminate their contracts.

WeWork, the largest provider of co-working space worldwide, has also refused to provide refunds to its members or waive any of their fees. An upset member base comes at a bad time for WeWork, as they had a loss of nearly $2 billion in 2019 as well as an aborted IPO. WeWork has also been relying on a $3 billion bailout from SoftBank (OTCMKTS: SFTBY), who is now looking for ways to back out of the bailout deal.

Several commercial real estate landlords are deferring rent for their tenants, many banks are deferring loan payments, and service providers, such as Verizon (NYSE: VZ), are waiving late fees and committing to not disconnecting service. This quick response from companies willing to help their clients and customers has set an expectation in the marketplace that the major co-working providers aren't yet meeting.

WeWork's hands may be tied when it comes to waiving fees or providing refunds since they are locked into building leases themselves, which are an average of 15 years each. Even if some of WeWork's landlords offer to defer rent, it still may not be enough for them to waive fees for members throughout all of their locations.

Many Regus offices are owned as a partnership between the owner of the office building and separate entities owned by Regus. This type of joint venture situation may also make it difficult for Regus to offer any sort of financial compensation to its members without the property owner agreeing to it. Again, even if some landlords are willing to work with them, it likely won't be enough to compensate members throughout all of their locations. Waiving fees in only some of their locations would likely cause even more outrage amongst the rest of their member base.

How COVID-19 can hurt co-working spaces

The coronavirus pandemic alone may not be enough to take down the co-working industry, but it is likely to have a seriously negative impact. As businesses that have been utilizing co-working spaces are getting accustomed to working from home, and becoming disgruntled with the lack of their office provider's willingness to work with them on fees, it's likely that many contracts won't be renewed.

The impact of the coronavirus pandemic is likely to have a lasting effect on how people socialize and gather in public. This alone may cause many people to opt for more isolated office environments and almost reset the growing co-working trend.

Additionally, co-working offices rely on a steady flow of new clients because of their high turnover rate. One of the attractive things about utilizing this type of workspace is the month-to-month lease options. With people fearing that the coronavirus pandemic may last months, a large number of small businesses on a month-to-month agreement are likely to terminate their contracts over the next several weeks.

New member sales have nearly halted for co-working offices across the globe. The lack of new members, combined with the increase in cancellations and their national attrition, is putting a major strain on the cash flow for these companies that already operate at a fairly low margin.

How co-working spaces can survive the coronavirus pandemic

One of the major benefits to co-working is the services that are provided in addition to the workspace. A professional address, meeting space, answering services, and basic office amenities are the major draw. Many of these services will still be needed even if more people transition to a home office.

Co-working office centers may have to shift their focus slightly, once the things start getting back to normal, by allocating more space to conference rooms and small pods to accommodate home office workers who still want the office amenities.

The financial impact to co-working spaces will likely be exponential the longer people are distancing themselves from public settings like the workplace. The coming weeks will provide a clearer picture of the fate of co-working as the COVID-19 outbreak continues to develop.

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Kevin Vandenboss has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.