As the novel coronavirus COVID-19 spreads around the globe, we’re seeing major economic disruption caused by social distancing. The airlines are getting hammered; restaurants, hospitality, and tourism are experiencing significant declines. Cancellations of live events, business and academic conferences, music festivals, and sports tournaments are hurting the people who host, serve, and clean during and after such events. The supply chain may experience disruption due to factory closures in China. But what about the recent darling of the commercial real estate industry: coworking?

Coworking spaces will be emptying out for a little while. People and companies can cancel their subscriptions at the end of any month, and a pandemic suddenly gives people a good reason to start cancelling. Though unprecedented, full-on closures of workplaces and community spaces have already started in major cities. It’s too early to tell how long it will last. After getting rocked by WeWork’s near-collapse during its botched IPO, the industry as a whole has been exposed as much more fragile than previously believed.

Yet, the stress on coworking spaces is less related to the outbreak itself (more likely to last for months than years) than it is to the extended economic downturn the outbreak may be causing. How will these factors impact membership and the industry’s cash flow?

If you’re not a big company, the main value proposition of coworking is the social aspect. Coworking surrounds you with people who are all invested in the same activity, which helps you stay focused at your desk. Coworking gives you familiar faces for making small talk, refreshing you between tasks. There are confidantes to complain with, share ideas and pitfalls with, and who encourage you to keep up the fight. Networking opportunities abound. These people might become your vendor or your client – an accountant providing bookkeeping services or some data analysts asking you to help build their web site. Creativity, inspiration, and accountability are found at your coworking space.

It’s the sociability that you pay for. These are not people that you will meet with over video at pre-scheduled times: your encounters with them are serendipitous. You will lose that if you stop going to your physical coworking space in the long-term.

At first glance, membership cancellations come down to the length of time that someone expects to be self-isolating. If our time of social distancing only lasts a few weeks, there’s no real reason to cancel your coworking membership. But if this keeps going for months on end, people will start canceling. Even worse, mandatory closures may prevent coworking operators from billing their members for a service they can no longer offer, putting a major dent in their revenues.

So, what does all this mean for the coworking real estate industry?

Coworking has been on an expansion kick since 2010, leasing up bulk space (and buying entire buildings) all over the place, making up the bulk of new office leases. We have all heard of WeWork, the biggest and fastest-growing (we’ll get to them in sec), but Industrious and Spaces and Knotel and ImpactHub and The Wing all sprang up, not to mention your local coffee shop making use of the big room next door. It seemed, for one shining brief moment, the coworking operators would become the office operators of the future.

But WeWork’s attempted and aborted IPO exposed a lot of weakness in the coworking category. The highlights: SoftBank kept pumping investment capital into WeWork, but no one else was. With this, they single-handedly controlled the “valuation” of WeWork, and kept pumping it up and up, from $2.1 billion to $17 billion to $47 billion. The hope was that if they kept valuing it at that high level, other people would… what? Assume that they knew something that no one else knew?

It didn’t work. The attempt to blinker everyone else into accepting that ridiculously huge valuation fell flat. SoftBank attempted to roll out an IPO, pricing the shares so the total market cap would be somewhere around $20 billion. No one bought it (both figuratively and literally). At the prices that seemed to be acceptable to the would-be buyers of the stock, WeWork was worth ~$2 billion. That threw their whole operation into mega-turmoil. As a result, WeWork started hurting for cash, and pretty much went broke.

Like, seriously broke. Just about ready to go out of business broke. And people started asking themselves, will we be able to get into our office tomorrow? Will WeWork call it quits, lock the doors, and lock us out of our internet access? In the end, SoftBank ate it: they ponied up for a major cash infusion to keep the operation going, and paid Adam Nuemann off with $1.7 billion dollars to go away. Today, WeWork is humming along quietly. The news cycle is filled with much crazier and more consequential stuff.

We learned from that near fiasco that coworking remains a fragile operation with a thin profit margin. They have large obligations (long-term leases on lots of office space) and high-risk subscriptions (coworkers can rent space month-to-month and desk-to-desk). One of the big complaints about the WeWork IPO was that coworking hasn’t yet been tested by a downturn. But we’re at the start of one now, and it could be a historically big one.

Will current coworking occupiers keep paying for space if there are major disruptions? If social distancing is a short-term expectation and then everything goes back to normal, then why lose your seat? The social advantages of coworking are permanent; the outbreak and social distancing recommendations are temporary. Since it is unlikely that everyone will cancel at once, the coworking providers can probably deal with this dip in membership, as many people who choose not to go to coworking spaces for a while will keep paying their fees anyhow. This assumes that any mandated space closures and resulting revenue hits are short-lived.

The COVID19 outbreak will change behavior in the short-term, which brings some additional risk. The length of time of the disruption will influence how many people get accustomed to working from home. If you find it works well for you after all, do you return to the coworking space? It seems likely that there will be enormous pent-up demand for in-person social interaction once the virus passes, and many will be eager to return to their coworking community spaces and professional networks. But if that demand doesn’t materialize, will the coworking providers need to offer incentives, adding to the mounting costs of cancellations and closures?

However, the biggest threat to demand is actually the same old threat. Recent large-scale disease outbreaks have not brought protracted economic hits to the market. Of twelve major disease outbreaks since the early 1980s, only one was followed by a major S&P decline in the subsequent 12 months (HIV/AIDs June 1981, -16.5% change). By 2020, a cyclical market correction has been due for some time, but the expected economic impact of the virus and extreme change to life routines has deepened the magnitude of it.

If the current uncertainty destabilizes the market enough to become a lasting recession, people won’t be indefinitely canceling their coworking memberships because they want to work from home. They’ll be canceling because they’re facing reduced revenues, cutting their expenses, losing their jobs, or going out of business altogether. That won’t be virus-based alone, that will be the double-whammy of the virus exacerbating the already-in-progress downturn.

It’s too early to tell, at this point, how deep and how long a recession might last. It may be big enough to kill off a lot of the startups currently paying for coworking space; it may even get big enough to kill off the undercapitalized coworking startups. Our next questions are, what happens if the coworking operator goes under first? What if the businesses inside that space are left stranded?

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