By Meghan Hall
Over the past couple of years, coworking has established an undeniable presence in major commercial real estate markets around the country, and what was once thought of as a trend is now solidifying a more permanent place in the market. Demand for flexible office space continues to surge and that momentum will hold strong heading into the future, according to experts at Savills, a brokerage firm, and Workthere, an extension of Savills and a global platform focused on the flexible workspace market. In a report entitled, “The Flex Machine,” Savills and Workthere emphasize that co-working and flexible office usage is here to stay, and more and more traditional office players are taking the plunge.
“The driving demand is there, and it is stronger than ever from the corporate occupier and the start-up community,” said Dominic Harding, head of Workthere Americas. “That is the key behind it all right now.”
Much of that demand has been highlighted in the rapid expansion of operators such as Knotel and WeWork, who have played a critical role in jump starting the flexible space industry and introducing it to the commercial real estate industry at-large.
Harding elaborated on this, adding, “We have had a huge amount of supply, mostly driven by one player—WeWork—but what that has really done is brought the whole flexible office marketplace to a level where it is really starting to provide a good alternative to occupiers who have always wanted more flexibility to be able to manage their real estate in an appropriate way to support their staff and to really making the acquiring of real estate and the use and management of it more conducive to their businesses.”
According to Savills and Workthere’s report, WeWork accounted for 67 percent of all leasing by flexible space providers through the third quarter of 2019, including all of the top 10 largest transactions that the firms profiled.
For those at Savills and Workthere, the co-working and flexible office market is at a pivotal turning point: one where the flexible office market has become mainstream, as opposed to a fringe-like trend, and whose impact on the market can no longer be denied.
“I think it really just is kind of following that cultural shift of how people want to work, with the flexibility and the amenities and the community that [those like] WeWork mainstreamed with their rapid expansion and bringing those options to the table,” commented Sarah Dreyer, Savills vice president and head of research Americas. “And now, others are following suit.”
San Francisco now has 2.9 million square feet of office space controlled by flexible space providers, 65 percent of which is located in the financial district. The square footage makes up nearly 3.6 percent of the total office inventory that Savills tracks. New York City’s numbers are even more impressive. Overall, NYC has 14 million square feet of flexible office space, or about 3.1 percent of total office inventory. About half of that square footage is located in Midtown. Markets like the OC, in California, and Washington D.C., have more moderate proportions of flexible office space, but those numbers are growing. The two markets have 1.6 million square feet, or 1.9 percent of the market, and 3 million square feet, or 2.4 percent of office inventory, respectively.
“[The amount of coworking space] is directly correlated to the kind of worker that is there,” explained Dreyer or markets who are both tech savvy and millennial heavy. “Those are the kind of workers you imagine want the flexibility and the amenities and the ability to scale up and down.”
With co-working and the flexible space market establishing a solid footing in markets across the United States, Savills and Workthere are seeing more players entering the market. However, many are moving at a pace slower to WeWork, carefully selecting on assets to focus on before proceeding further.
“I think WeWork was something of a unique player in terms of their appetite for acquiring new space,” said Harding. “Most other providers are filling up space, moving on cautiously and spending a lot of time and due diligence on their markets and transactions.”
This trend applies not just to operators, but an increasing number of landlords and property owners entering the market. As more players continue to enter the market, Harding and Dreyer also expect the deal structure and leasing formats surrounding flexible workspaces to further evolve.
“The way in which providers across the board are acquiring space is shifting very much to a landlord partnership model through MSAs or management agreements; many are looking to move more into a property management function, upgrading amenities or services within total building ecosystems rather than just having a floor within an isolated coworking space,” said Harding. “We are seeing that shift really play out dramatically.”
Harding, as an example, pointed to large firms like Tishman Speyer, who are using extra space as flexible offices and are working to leverage their existing portfolios in a new way. Heading into 2020 and beyond, this is a trend that is likely to continue, as coworking and flexible space is here to stay.
“They’re a really interesting player,” said Harding. “They’re able to offer something differentiated in the marketplace and they are in a better position, being a large landlord, to manage those solutions as well. There are definitely some shifts going on in how the overall business model is looking, but the appetite for coworking and flexible office solutions is still there. It is something tenants of all sizes really want to be using.”