Startups are flocking to WeWork, Trellis, and other low-engagement places

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When Melissa Pancoast moved her financial education startup, The Beans, to a WeWork office in San Francisco’s Salesforce Tower last May, most of the offices around her were leased but empty.

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

Today there is a lot of activity in the coworking space. “Phone booths and conference rooms have become valuable commodities,” Ms. Pancoast said.

She is one of 1,100 members at the 800,000-square-foot WeWork campus, which features three floors with panoramic views of the San Francisco Bay. Their neighbors include startups that make enterprise software, online recruiting tools for engineers, and open-source database systems.

New members are pushing to join. Most offices have waiting lists, and daily desk bookings — drop-in spots for WeWork members without dedicated office space — regularly run out, WeWork said. That’s a 46 percent increase in occupancy at WeWork’s San Francisco locations in December 2020.

Demand for WeWork in the Salesforce Tower shows how startups have begun to return to Bay Area offices. Instead of going to traditional offices, they are opting for flexible co-working spaces where they can take on short leases or drop by common spaces when needed. These coworking spaces are now bursting at the seams.

So the long-awaited return to office coincides with a start-up environment shows signs of failureafter two years of free-flowing venture capital cash and rising valuations. tech stocks declined, interest rates have risen and geopolitical unrest have contributed to general uncertainty.

In uncertain times – when start-ups are experiencing tremendous growth with the knowledge that the financing tap may still be turning – short-term leases are more attractive than ever. Startups are flocking to spaces like WeWork, the national chain, as well as smaller co-working companies with more lavish designs like San Francisco-based Canopy and New York-based Industrious.

“Startups go into markets where they would traditionally lease and they find a Canopy, a WeWork or an Industrious,” said Hugh Scott, managing director of commercial real estate firm Jones Lang LaSalle.

The Beans was one of them. “Things were still very uncertain as to our path and the plan is to close significant capital and grow,” said Ms. Pancoast. “We need the flexibility to be in a different location in the middle of the pandemic than we could have afforded.”

But for many coworking spaces, especially in times of the pandemic, the short-term rental models that are attractive to start-ups sometimes harbor risks.

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

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

“In the past, the landlord didn’t take any risks – the tenant took all the risk,” says Rebecca Pan, co-founder of Trellis. “When they ask about something like that, they say, ‘Why should I do that? I don’t have to take any chances.” The pandemic has shifted that quite a bit.”

Other co-working spaces were moving towards a revenue-sharing model even before the pandemic. These include independent spaces like the two-location Port Workspaces in Oakland, California and Blankspaces with multiple locations in Southern California. Chains like Industrious and Common Desk, which agreed to be acquired by WeWork this year, have also introduced revenue-sharing structures.

WeWork itself, perhaps the most notorious coworking company, took a different route: The company went public last fall, two years after its aborted IPO.

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

The Bay Area’s first shelter-in-place order in March 2020 meant many WeWork members stopped coming, the company said. The building remained open to major businesses, but attendance fell and some businesses consolidated their WeWork memberships.

In October 2020, Merge, a startup that makes enterprise software for human resources, payroll, and accounting, became one of the first companies to move back to a WeWork location on Montgomery Street, just blocks from the Salesforce Tower site. At this point, the company, which had been founded just a few months earlier, consisted of the two founders and an engineer, their first employee. Feeling confined at home and keen to work together in person, the three felt comfortable adopting each other into their Covid-19 bubbles.

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

In February 2021, Merge relocated to the Salesforce Tower, seeking larger office space as the company expanded. Occupancy at that site began increasing again this month before accelerating after Covid vaccine dates became widely available in May 2021, WeWork said.

The Beans were part of that wave, Ms. Pancoast said. There were already signs that interest in co-working spaces was picking up again; She snagged the last office of her size, she said.

But in a tight tech job market, a return-to-office plan can be a deciding factor for prospective employees. And not everyone looks forward to returning to a cabin.

“Some people I’ve spoken to are dying to get back into the office, but I get a lot of replies saying they wouldn’t take an offer without a full remote option,” said Abigail Lovegrove, a recruiter for the Kollektiv Search, a recruitment firm operating out of Salesforce Tower WeWork.

Mo El Mahallawy, co-founder of Shepherd, a start-up offering insurance to the construction industry, moved in with his two colleagues last May.

“Being personal was a huge turning point at this stage,” said Mr. El Mahallawy. “We could draw ideas around the room, whiteboard together, have a jam session, throw ideas around, and prototype very quickly.”

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

Over the next few months, the “ghost town” came back to life. He and Mrs. Pancoast began going on bike rides and seeing 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 suffered a slump in December and January when the typical holiday escape was combined with the rise of the Omicron variant of the coronavirus, WeWork said.

In February, when San Francisco ended its mask requirement for most indoor spaces, members began returning.

A Valentine’s Day event, complete with chocolate fountains, felt like a return to pre-pandemic excess – although, as Ms Pancoast noted, “it wasn’t a double-dip situation”.

For some companies, restoring a pre-pandemic office environment is the goal. Merge, now with around 40 employees in offices in San Francisco and New York, expects employees to come into the office four or five days a week. After the official workday is over, they serve a “family meal” together in the WeWork common room.

Mr. Feig acknowledged that his company’s insistence on in-person work limited the number of employees it could recruit.

In the early stages of hiring, “you’re going to have some candidates where you’re like, ‘That’s a no for me – I’m not in it,'” he said. “But if you smash that 20, 30 percent who aren’t into it, you get 70 percent of the candidates who are really excited about the opportunity.”

Mr. Feig said he hopes to expand the company to 80 or 100 employees by the end of the year. He wants to keep the company at least partially in coworking spaces.

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



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