• Thu. Jul 7th, 2022

mccoy.ventures

All content has been processed with publicly available content spinners. Not for human consumption.

Start-Ups Flock to WeWork, Trellis and Other Low-Commitment Spaces

When Melissa Pancoast moved her financial literacy start-up, The Beans, into a WeWork office in San Francisco’s Salesforce Tower last May, most of the offices around her were rented out but unoccupied.

As vaccination rates climbed and San Francisco flirted with lifting pandemic restrictions, her neighbors started trickling back in. Ms. Pancoast’s social calendar soon filled up with bike rides and coffee dates with other start-up founders she met in the building.

Today, the co-working space is bustling. “Phone booths and conference rooms have become precious commodities,” Ms. Pancoast said.

She is one of 1,100 members at the 76,400-square-foot WeWork location, which has three floors with panoramic views of the San Francisco Bay. Her neighbors include start-ups that make business software, online recruiting tools for engineers and open-source database systems.

New members are clamoring to join. Most of the offices have wait lists, and daily desk bookings — drop-in spaces for WeWork members without dedicated office spaces — regularly run out, WeWork said. That is up from 46 percent occupancy across WeWork’s San Francisco locations in December 2020.

The demand for WeWork at the Salesforce Tower is indicative of how start-ups have begun returning to offices around the Bay Area. Instead of going to traditional offices, they are opting for flexible co-working spaces, where they can sign short leases or drop in to common space as necessary. Those co-working spaces are now bursting at the seams.

The long-awaited return to office is coinciding with a start-up environment that is showing signs of faltering, after two years of free-flowing venture capital cash and soaring valuations. Tech stocks have sunk, interest rates have risen and geopolitical unrest has contributed to a general feeling of uncertainty.

In uncertain times — as start-ups undergo tremendous growth, with the knowledge that the funding spigot may yet turn off — short-term leases are more appealing than ever. Start-ups are flocking to spaces like WeWork, the national chain, as well as smaller co-working companies with more elaborate designs like the San Francisco-based Canopy and the New York-based Industrious.

“Start-ups are going to markets where they would traditionally grab leases and they’re finding a Canopy or a WeWork or an Industrious,” said Hugh Scott, the executive managing director of the commercial real estate firm Jones Lang LaSalle.

The Beans was one of them. “Things were still really uncertain as far as what our trajectory was, and the plan is to close significant capital and to grow,” Ms. Pancoast said. “We need the flexibility of being able to be in a different space than we could have afforded right in the middle of the pandemic.”

But for many co-working spaces, especially during the pandemic, the short-term-lease models that appeal to start-ups can sometimes present risks.

In San Francisco’s Mission District, the unfortunately named co-working space Covo lost 94 percent of its business in the first months of the pandemic. By October 2020, it had closed.

Last May, the founders tried again. They reopened with a new name, Trellis, and a new business model: Rather than a traditional lease, they negotiated a revenue-sharing model with their landlord. Trellis would pay a minimum monthly payment much lower than that of its previous lease, and the landlord would take a cut of the revenue — sharing the potential profit and the risk.

“It used to be the landlord took no risk — all the risk is on the tenant,” said Rebecca Pan, Trellis’s co-founder. “Asking for that sort of thing, they’re like: ‘Why would I do that? I don’t need to take a risk.’ The pandemic has shifted that quite a bit.”

Other co-working spaces had been moving toward a revenue-sharing model since before the pandemic. That includes independent spaces like the Port Workspaces, with two locations in Oakland, Calif., and Blankspaces, with several locations in Southern California. Chains like Industrious and Common Desk, the latter of which agreed to be acquired by WeWork this year, have also adopted revenue-sharing structures.

WeWork itself, perhaps the most infamous co-working company, took a different approach: Last fall, the company went public, two years after its aborted initial public offering.

Last Thursday, WeWork reported a $435 million loss in the first three months of 2022. The company said 501,000 members signed up in the first quarter, which is over 100,000 more than in the same period last year, but still lower than before the pandemic.

The Bay Area’s initial shelter-in-place order, in March 2020, meant that many WeWork members stopped coming in, the company said. The building stayed open for essential businesses, but attendance dropped and some companies consolidated their WeWork memberships.

In October 2020, Merge, a start-up that makes business software for human resources, payroll and accounting, was one of the first companies to move back into a WeWork location on Montgomery Street, a few blocks away from the Salesforce Tower location. At that point, the company — founded just months earlier — consisted of the two founders and an engineer, their first employee. Feeling cooped up at home, the three were eager to work together in person, and they felt comfortable adopting one another into their Covid-19 bubbles.

“We were the only ones in the office,” Gil Feig, one of the founders, said.

In February 2021, Merge moved over to Salesforce Tower, seeking a bigger office space as the company expanded. Occupancy at that location began to tick back up that month before increasing more rapidly after Covid vaccine appointments started to become widely available in May 2021, WeWork said.

The Beans was part of that wave, Ms. Pancoast said. Already, there were signs that interest in co-working spaces was rebounding; she snagged the last office of her size, she said.

But in a tight tech labor market, the return-to-office plan can be a make-or-break factor for prospective employees. And not everyone is excited to get back to a cubicle.

“Some people I’ve spoken to are itching to get back in the office, but I’m getting a lot of responses saying they won’t entertain an offer without a full remote option,” said Abigail Lovegrove, a recruiter for the Collective Search, a recruitment firm, who works out of the Salesforce Tower WeWork.

Mo El Mahallawy, a co-founder of Shepherd, a start-up that provides insurance for the construction industry, moved in with his two co-workers last May.

“Being in person was a big game-changer at that stage,” Mr. El Mahallawy said. “We were able to draw ideas in the room, whiteboard together, do a jam session, throw ideas around and prototype really quickly.”

But “that whole area was still a ghost town,” he said.

Over the next few months, the “ghost town” started coming back to life. He and Ms. Pancoast started going on bike rides and meeting their neighbors. By the end of the summer, Mr. El Mahallawy said, he had outgrown the space and moved to a nearby WeWork.

After the optimistic return in the fall, daily visitor numbers took a hit in December and January as the typical holiday exodus combined with the surge of the Omicron variant of the coronavirus, WeWork said.

By February, as San Francisco ended its masking requirement for most indoor spaces, members were starting to return.

A Valentine’s Day event, complete with chocolate fountains, felt like a return to prepandemic excess — although, Ms. Pancoast noted, “it was not a double-dipping situation.”

For some companies, recreating a prepandemic office environment is the goal. Merge, now with around 40 employees in San Francisco and New York locations, expects employees to come into the office four or five days a week. After the official workday wraps up, they serve a communal “family dinner” in WeWork’s common space.

Mr. Feig acknowledged that his company’s insistence on working in person limited the workers it was able to recruit.

In the early stages of hiring, “you’re going to have some candidates where, like, ‘That’s a no for me — I’m not into it,’” he said. “But once you kind of knock off that 20, 30 percent who’s not into it, you get a 70 percent of candidates who are really excited about the opportunity.”

Mr. Feig said he hoped to expand the company to 80 or 100 employees by the end of the year. He intends to keep the company in co-working spaces, at least in part.

Merge’s vice president of marketing, Nick Kephart, said the ideal plan would be a mix. “The current plan,” he said, “would be some mix of: in some cities, where we have enough scale, to start having our own private office space; in some cities, stick with WeWork; and in other cities, we may actually open up new offices.”