Coworking Space and Its Effect on Tenants

If you live in a major metropolitan area, you likely have several coworking space options at your disposal. In 2018, more than 2,000 coworking spaces opened around the world, with 1,000 of those being in the U.S. By 2022, there will be almost 26,000 coworking spaces worldwide.

Coworking spaces are defined as shared workspaces that offer a combination of subscriptions, day passes, and open houses to allow professionals to use their resources. These resources typically include all the features of a conventional office: desks, meeting rooms, open collaborate spaces, and often amenities such as kitchens and/or break rooms.

Coworking spaces are increasingly popular due to their versatility and value they provide to their communities. The largest boom in this area is likely due to the gig economy: more than 3.9 million Americans now work from home at least half of the time. That is a lot of people working outside of a traditional office environment. While working in the privacy and comfort of one’s own home has unique advantages, some may miss the occasional hum of nearby coworkers, the hustle and bustle of corporate America, or the need for a professional location for client meetings. Coworking spaces offer the perfect middle ground.

What does this mean for tenants and the CRE industry? 
The explosive growth of coworking space is dramatically changing the way real estate investors and lenders value assets and how companies think about space for their employees. The law firm Ropes & Gray recently conducted a survey of 100 senior executives in real estate—including investors, lenders, landlords, brokers, tenants and coworking companies—examining key growth drivers, potential risks and challenges, the likelihood of consolidation, and how coworking will fare in a market downturn. Their findings indicate that corporate tenants are increasingly turning to coworking operators for shorter-term and flexible office arrangements. Coworking has also disrupted traditional methods of real estate valuation and has created downward pressure on the average term for office leases. Additional report findings worth noting:

  • 89% agree that traditional office landlords have adopted service innovations and amenities inspired by the coworking sector to assist their tenant companies.
  • 61% of lenders believe that coworking is less vulnerable than traditional office space in an economic downturn, and 73% of all respondents believe an economic downturn would have a positive effect on the coworking sector and those tenants who use similar facilities for their employees.
  • 70% agree that the trend of coworking providers buying—not leasing—assets will accelerate over the next three years.
  • 67% of real estate investors and landlords expect significant consolidation in the coworking sector through M&A over the next 3 years.
  • The leading risks that coworking companies may face in the years ahead are rising interest rates, increased leasing and construction costs, competition from new market entrants and traditional real estate companies that are launching coworking brands, and the vulnerability of small business and startups in a downturn.

From a tenant’s perspective, the question is whether focusing efforts on potentially smaller deals is worth it to give your flexible workers more choices. Given the popularity of the market, it is likely a good opportunity to create a similar opportunity for your employees as this dynamic is here to stay. Also, many of the tenants of coworking space are smaller—but growing—companies. Investors, the real estate industry along with larger companies can benefit by helping these companies find their perfect coworking space. Last year, WeWork increased and refined its investment structures. According to Bisnow, WeWork is boosting the benefits offered to investors, realtors and companies that sign longer-term leases.

Additionally, the flexibility of a coworking space allows an organization to expand organically without outgrowing its office lease, which offers companies a greater capacity to stay in one location longer.

Coworking is likely here to stay? 
Coworking is the new normal, and the industry is having a great impact on the larger commercial and office real estate industry as noted below:

  • Flexible workspace will represent between 5% and 10% of office inventory in various markets.
  • Three million square feet of flexible workspace were added in the first half of 2018.
  • There are at least 20 markets that have over 500,000 square feet of coworking spaces.
  • 11% of all coworking locations globally are joint ventures between a coworking operator/tenant and a landlord.
  • Building owners are now comfortable to allocate 15% to 30% of a property to coworking, which could potentially be great flex space for the building’s current tenants.
  • Flexible space providers accounted for 4.4% of square footage leased in major deals in H1 2018.
  • WeWork is now the largest office space occupier in London and New York City.
  • Coworking spaces accounted for nearly 10% of leasing volume in New York in the first half of 2018.
  • The amount of coworking space in Manhattan will likely approach 8 million square feet or roughly 2% of existing office stock by the end of 2018.
  • The amount of coworking space in Chicago’s CBD has risen to 2.6 million square feet, equivalent to a 250% increase over the past 4 years.
  • A growing number of workspaces experience occupancy rates above 90%.
  • Coworking space in retail properties will grow at a rate of 25% annually through 2023 and reach approximately 3.4 million square feet.

We all need to be aware of this growing trend that is likely here to stay and remain open to exploring new ideas and professional collaborations to enhance the experience and benefits across our industries.  Contact me when you’re ready to obtain additional coworking space.