“Coworking” doesn’t mean what it used to

90% of WeWork’s inventory is private offices.
90% of WeWork’s inventory is private offices.
Image: Courtesy of WeWork
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Before opening one of New York’s first coworking spaces, New Work City, in 2008, Tony Bacigalupo stumbled across weekly events called “Jellies.” They were often hosted in people’s homes, where remote workers and freelancers met up to work side-by-side. “The reason [we went to Jellies] wasn’t because we needed office space,” says Bacigalupo, who is still friends with people he met at the events. “We’re communal humans, and we need to be around other humans.” Jelly members shared coffee, went to lunch together, and often ended up collaborating on projects.

The concept was surprisingly sticky. Amit Gupta, who created a Wiki to keep tabs on Jelly meetups, says that at its peak, there were between 100 and 200 jelly events happening every week across the world. Meanwhile, as the informal work groups gained momentum, a handful of people like Bacigalupo picked up the idea of “coworking” and turned it into a business. The focus was on creating a club for workers who would otherwise be staring at laptops by themselves. “It wasn’t a proven biz model, it wasn’t a venture,” Bacigalupo says. “It was a social effort.”

Only 10 years later, coworking has transformed from a social experiment to a burgeoning industry. Commercial real estate services firm Jones Lang LaSalle estimates that shared workspaces now occupy 27 million square feet of office space in the United States alone. WeWork, the largest coworking company, has more than 130 locations and a nearly $18 billion valuation.

But “coworking” doesn’t mean what it used to.

Bacigalupo’s shut down New Work City in 2015. Other coworking spaces have adjusted their business models so they look more like providers of private offices. And more recently, they have become outsourcers of office space to big companies. Like many lovely ideas–the sharing economy, to name another–the coworking movement, when it became a business, did not scale.

How coworking grew walls

When Duncan Logan decided to open a coworking business in 2011, he almost asked the landlord to tear down the offices inside the 30-desk space he had rented for the business.

“Thank god I didn’t,” he says now.

While working in one big open space—a situation ripe for random encounters and spontaneous collaboration—initially sounded cool to the young funded tech companies that Logan targeted, it became old quickly. Soon, startups asked if they could reserve a corner of the space for their growing teams rather than work in the middle. Then, they asked for dedicated offices. Today, almost all of the companies in the coworking office, called RocketSpace, pay for dedicated desks or private spaces.

Across the coworking industry, drop-in coworking space is disappearing. When a coworking company called Alley opened its first location near Penn Station in in 2011, 90% of the space was filled with open desks that anyone could pay to use. At its most recent location, 90% of the space is filled with dedicated desks and private offices. At the New York-based Bond Collective’s five locations, only 10% to 20% of the space is dedicated to open coworking. At WeWork, 90% of space is occupied by private offices that start at $400 per month, according to the company.

Most coworking spaces now have business models that look almost exactly like providers of small offices, such as Regus. They rent private offices on flexible terms.

It’s not surprising that coworking has grown walls.

As open offices become the dominant layout in American businesses, it’s become clear that employees hate them. Workers who toil in open office plans get sick more often, are less productive, and say they don’t like working in an open office. Small companies meanwhile want the security of locking a door, or an opportunity to build a culture in private. Walls make coworking a more broadly desirable product.

Adding walls also makes coworking a better business. Most coworking spaces take on long-term, expensive commercial leases. In the open-desk model, they don’t have any commitment from members to show up and pay for a desk. While a freelancer who pays to work from a space for a day can just as easily work from a coffee shop the next, renting him or her an office creates a commitment. “In a private office, that’s their home,” says Alley CEO and founder Jason Saltzman. “They’re taking ownership of it. So it’s just more sustainable.” He plans to shut down his original coworking space, the one that mostly offers shared desks, after the lease expires next year. “It’s an underperforming asset,” he says.

WeWork has essentially expanded the business started by small office providers like Regus and ServCorp. “Really their best innovation was to make it cool and to make all these people who wouldn’t have been aware of Regus aware of WeWork,” says Charles Clinton, the cofounder and CEO of the online real estate investment company EquityMultiple. “That’s not a business model difference, but they’ve been able to build a successful company with it. I think the brand power is meaningful.”

Outsourced office space management

The coworking industry demonstrated new demand for flexible office space. Now coworking companies are trying to fill that demand for larger companies.

Some newer spaces, like a coworking startup called Industrious that opened in 2013, have done away with open-office seating all together. The startup rents one- to 150-person offices instead, in some cases building out offices with private entrances for larger companies. A startup called Knotel, which claims in its PR pitch to be “tired of co-working frat antics,” offers “tailored headquarters on demand.” These headquarters often involve building out an entire floor of an office building for a company to rent on flexible basis.

WeWork, meanwhile, says that 22% of its customers are now companies with more than 500 people. It is also building out variations of office management that have nothing to do with its own office space. Recently the company started a facilities management business. It has also said it will build digital products and other services for members.

Some new generation coworking companies, meanwhile, are attempting to merge the community focus that coworking was built upon with these new types of businesses. “I think the concept of coworking has been coopted so that people associate it with renting office space,”says Bacigalupo, who has since opened and closed a coworking space in New York City. But he doesn’t think that walls are the litmus test for whether a coworking space is really just an office rental company. “Whether you have walls up or down in the space, it doesn’t create a huge shift in culture,” he says.

Walls might actually help community, argues Industrious’s co-founder and CEO, Jamie Hodari. They often come with more permanent residents who are willing to invest in getting to know each other. “We see so many customers who are introverts and not necessarily like ‘I’m looking to go to keg parties on Wednesday night,’ and they still find a lot of value in the community, even if they can’t articulate why,” he says.

In other words, even if coworking has evolved to something else entirely, its economically sustainable offspring is not necessarily devoid of lovely ideas.