The inquiries started coming into Galvanize shortly after its coworking-space rival, WeWork, began publicly imploding.
The interest in tech educator Galvanize, which also rents out month-to-month office space via memberships, came not just from one- to two-person startups, but larger companies needing dozens or more than 100 seats for a year or two — a lengthy lease in this real estate niche.
“When it’s that long of a term, (potential tenants) have to look at whether the coworking space will be there for the long term,” Galvanize CEO Harsh Patel. “I’m sure we’re not the only ones getting calls.”
The Colorado coworking scene is bracing for what will happen next with WeWork, which is reportedly Denver’s largest office tenant. Renamed The We Company this year, it has multi-year leases in at least 10 Denver buildings plus one in Boulder — four are not yet open, according to the company. But after revealing its startlingly terrible financial situation, the unicorn that was once valued at $47 billion canceled its IPO last month, kicked out its founder and is now scrambling to cut costs drastically.
Area companies say they are glad they focused on slower but sustainable growth rather than a venture-funded gamble.
“I called them from day one the Starbucks of coworking. They took this cute little coffee shop and learned to commercialize it,” said Jennifer Thoemke, founder and owner of Connects Workspace in Golden. “I kept saying, ‘How do they do it? The numbers don’t make sense.’ And they didn’t.”
WeWork, which opened its first Denver space in 2016, grew quickly but with massive losses. After releasing its numbers in August, the New York company got reamed by investors and the press for losing $1.3 billion from its operations in the first half of this year. As CBSNews put it, “WeWork loses 94 cents every minute … during a 40-hour workweek.”
The fate of WeWork is uncertain — thousands of layoffs and a multi billion-dollar rescue by top investor Softbank to avoid closure are reportedly next. Calls to building managers of unopened WeWork sites were not returned, or managers declined comment or said nothing had changed yet. But competitors and industry watchers believe that done right, flexible office space remains financially feasible and a growing business — with or without WeWork.
“WeWork did a lot of things, right. They were the first ones to show how to scale up a space like this, how to bring scale to a physical expansion. But (its business model) wasn’t sustainable,” said Josh Freed, CEO of Montrose-based Proximity Space, which has coworking locations in Montrose, Ridgway and Grand Junction. “The fortunate thing that we can see is coworking is very, very viable if negotiated correctly.”
He knows this because he sees what’s happening at hundreds of non-WeWork sites nationwide. Frustrated by cobbling disparate systems together to run its locations, Proximity developed software and tools to make it easier to run a coworking business.
The service is now used by 550 brands nationwide and in five countries and is adding between 25 to 40 spaces monthly. Proximity Network allows members from one space visit to other spaces three times a month at no extra cost. (“It’s been a real benefit for us to provide places in the Proximity network for our members who travel,” said Amanda Piela, general manager of Green Spaces, open in Denver since 2009.)
But Freed says the coworking community is still buzzing about what happened at WeWork. He’s planning a webinar on Oct. 21 called “The impact of We” to “just calm everybody down and bring in some perspective,” he said. What worries him most is the disruption to WeWork’s tenants, landlords and employees.
“I’m not worried about WeWork,” he said. “The milk’s already been spilt. So let’s not cry about it. But what happens after that, what’s the rest of the story? The rest of it is around who’s going to be damaged by it. Not only just the employees of WeWork, but all the members who were relying on it. They had an obligation to their members.”
WeWork officials declined to comment but pointed to statements made after withdrawing its IPO on Sept. 30.
“We are as committed as ever to serving our members, enterprise customers, landlord partners, employees and shareholders. We have every intention to operate WeWork as a public company and look forward to revisiting the public equity markets in the future,” new co-CEOs Artie Minson and Sebastian Gunningham said in a written statement.
The future of flexible
WeWork skewed the business model, leaving competitors wondering how to make it work. According to some local owners, WeWork would go after their members and offer steep discounts, like half off the first year. But when WeWork’s prices went up, members returned, at least to Thrive Workplace in Denver.
“It felt crazy because everyone’s like, WeWork this and WeWork that,” said Chad Johnson, who opened Thrive Workplace in Denver with his brother Charlie in 2011. “But again when me and Charlie just do the simple numbers like, we know that they’ve spent this on the lease and this much on TI (tenant improvements), and this much on employees. Heck, they even spent $12,000 on kombucha a month and I’m just like, how are they even profitable? Yeah, doesn’t even make sense. And of course they’re not.”
Thrive moved a couple of times but is now in larger space in the Ballpark neighborhood. It also opened new offices in Cherry Creek and West Arvada. Like many home-grown spaces, its members have been key to growth, and Johnson says the company involves tenants in making spaces unique to the community. At the Ballpark location, which housed videographers and other creative firms, for example, Thrive surveyed members and decided to turn an awkward boiler room into a production studio for video and podcast making.
“It’s in our plans to expand, but we want to expand right,” Johnson said. “If someone comes to our door the next day and gives us all this money, sure we can take it and build as many of these as you want. But if you don’t do the research, like our process of selection, that’s where you’ll run into issues where it might not be a sustainable location.”
Nationwide, WeWork dominates the flexible office market, so named because tenants can get shorter lease terms, move in quickly and expand or shrink square footage based on their business each month.
In Denver, flexible office space is a fraction of the overall office market — at just 2.4%, according to commercial real estate firm CBRE. But that’s higher than the national average of 1.8%. It also makes Denver the seventh largest in the nation for flex space, or 2.8 million square feet, said Pete Schippits, senior managing director of CBRE’s mountain states region.
And it’s not just WeWork.
“The last I looked, we had 50 different operators in Denver alone with over 100 locations. So It’s a very diverse group,” Schippits said. “Nationally, it’s growing significantly year over year. We had a 26% year-over-year growth rate in total percent going back five or seven years.”
And despite a potential downturn or recession, the flexible office market is expected to be between 6% and 13.5% of the office market by 2030, or more than double its growth, he said.
“Our fundamental belief is that this is here to stay and will be growing quickly,” Schippits said. “Our low-end growth anticipates this going from 1.8% to 6.5% of the overall market. That’s the baseline for our growth expectations. This is here to stay. We don’t see anything curbing the current trajectory of … interest in this space.”
Over at Galvanize, the venture-funded company is preparing to vacate its original campus in the Golden Triangle neighborhood by the end of the year. It was forced by investors to reshuffle its business this year and under new CEO Harsh Patel profitability is the goal. He honed in on heavy interest from large clients that needed lots of trained workers and larger flexible office spaces.
“What we’re seeing with enterprise clients is that more and more of them are interested in having a flexible workspace and less interested in operating their own workspace and so they’re willing to pay a little bit of a premium to do that,” Patel said. “That’s a sound business model, as long as your space is configured in such a way that when you run the numbers you can make it work.”
WeWork marketed the heck out of coworking to familiarize consumers with the concept, and that’s helping the next phase of flexible offices, said Freed, with Proximity. He believes the tools are now available so building owners themselves could soon step in to offer flexible leases and cut out the middleman, like WeWork.
“That’s the vacuum WeWork is creating and what is going to fill it. These really big spaces in tier one and tier two cities become viable when they aren’t giving a high percent of revenues to third parties and can keep it in-house,” Freed said. “Honestly, this is nothing more than an iteration what commercial real estate has seen before. It’s like parking garages. At a private garage, they don’t care if you use it for a day or an hour. They’re willing to sell it to you for as long as you want.”
There’s also a cultural element feeding the growth of flex space. Businesses in flex offices have gotten used to an office being a monthly service instead of a 10- to 15-year lease.
The shift is becoming increasingly evident in cities like Colorado Springs, where WeWork never opened but a half-dozen flexible work spaces now exist downtown. It’s too expensive to build new office space, but converting older buildings or sectioning off a small part of a traditional space suits the audience or makes sense to the developer, said Alexander Armani-Munn, economic development specialist with Downtown Partnership of Colorado Springs.
“When you look at demand for office space in Colorado Springs, there are more people and businesses interested in flex space than the traditional Class A commercial space,” Armani-Munn said. “Two people may come in needing two desks, but in six months, they may need 20. If they can negotiate the lease, they’ll stay.”
Beyond WeWork
Coworking has taken off in places where there is no WeWork, especially in Colorado’s mountain towns where reliable home internet is a challenge. Offices have popped up all over the state, some thanks to the state’s Coworking 101 initiative, offering resources to rural communities.
Ultimately, though in smaller towns, owners say it starts with the community. Colorado Workspace in Eagle offers its facility free to nonprofits. Locals use it as a gathering place. The Chamber of Commerce has its monthly breakfast meetings there. The adjacent Boneyard restaurant helps with the food. Plus, a lot of remote workers use the space to get out of the house and meet their neighbors, said Yuri Kostick, the town’s former mayor who cofounded the coworking space with fellow businessmen John Shipp, Paul Wible and Lonnie Leto.
“We’re not trying to build WeWork here. We’re not trying to build a real estate empire, but we’re trying to build small community-focused place to work,” Kostick said. “It’s working for us. We’ve been in the black since we started.”
Same, too, with Connects Workspace, which opened in Golden in 2015. Founder and Golden native Jennifer Thoemke said she focused on being a community asset, kept her business in the black and helped tenants who outgrew the space find a larger one. Even with some competition — she said she lost some members when WeWork opened in Denver — she’s been able to expand to a second building, quintuple in size and is scouting for more locations.
“I’ve always felt like they (WeWork) aren’t part of us. They are different. That’s the vibe. It’s a different business model,” she said. “I do think they make people think coworking is a whole lot more lucrative than it is. No one should go into coworking to make money. If that’s your focus, it’s going to skew your ability to create community.”
Freed believes that should a recession hit, community workspaces will fare much better than the large ones like WeWork that need a constant influx of new tenants.
“Coworking at its best is infrastructure for the community,” he said. “It’s resiliency, it’s job creation.”
Updated at 10:30 a.m. on Oct. 15, 2019: This story was updated to clarify that CBRE’s Pete Schippits said flex office space is projected to be 6 to 13.5% of the office market by 2030.