Last month Yardi Matrix updated its Q4 2017 study of coworking space in the top 20 U.S. office markets. the 2018 report echoed the findings of the Knight Frank Your Space Report 2018:
Coworking space is the most rapidly growing segment of the office sector, driven by tenant demand for more amenities and flexible leasing arrangements in all major office markets across the U.S.
The key findings from the Yardi Matrix Shared Space: Disrupting the Traditional Office, December 2018 are:
- Coworking space in the top 20 U.S. office markets increased by nearly 62% year-over-year, from 27 million square feet in Q4 2017 to 44 million square feet of coworking office space in Q4 2018,
- Metropolitan office markets with the highest concentrations of high-tech employment are also markets with the largest percentages of shared office space,
- Urban office market coworking space is nearly double that of suburban office markets.
The Five Factors Driving Demand for Coworking Office Space
The Yardi Matrix report found that there are five major factors responsible for bringing nearly 17 million square feet of new coworking space to the U.S. office market in 2018 alone:
- Gig economy and independent worker growth – think Uber, Airbnb, and Upwork,
- Corporations employing more remote workers,
- Competition to hire skilled workers demanding a more relaxed office environment,
- Business viewing office space as a flexible service rather than a fixed cost,
- Rapid growth of large coworking office operators such as WeWork and Knotel.
Top Coworking Office Markets in the U.S. in 2018
The Manhattan office market is the largest in the U.S. With 13.5 million square feet of coworking office space in Manhattan – representing 3% of the total office stock in the market – this New York City borough also holds the title as the ‘Coworking Capital of the U.S.’.
Right behind Manhattan, the markets with over 2 million square feet of coworking office space are: 2) Los Angeles – 4.7 million square feet, 3) San Francisco – 3 million square feet, 4) Dallas – 2.2 million square feet, 5) Seattle – 2.2 million square feet.
These top 20 office markets contain over 42 million square feet of space from over 1,520 coworking locations:
- East: Manhattan
- Southeast: Atlanta, Miami, West Palm Beach, Fort Lauderdale
- Central: Dallas, Houston, Denver, Austin, San Antonio
- Southwest: Phoenix
- West: Los Angeles, San Francisco Bay Area, Orange County, San Diego, Sacramento, Inland Empire
- Northwest: Seattle, Portland
Urban Areas Have Nearly Twice as Much Coworking Office Space
With nearly 28 million square feet of space, coworking office property in urban areas makes up nearly 66% of the total coworking office inventory in the U.S. When measured by total office stock, coworking space in urban areas represents 2.2% of office inventory, while suburban coworking space accounts for just 1.2% of total stock.
While coworking space as a percentage of total office inventory is growing in all areas, there are three main reasons why coworking office space in urban areas has nearly double the market share:
- There are more workers near urban areas,
- Commuting to urban areas is easier,
- More small rental space is available in suburban areas.
Technology Businesses + Office Vacancy Rates = More Coworking Spaces
The technology industry and the vacancy rates also create demand for coworking office space.
Small and startup businesses in the tech sector that are ramping up, business plans that eschew long-term office leases, and younger workforces expecting an amenity-rich office environment from their high-tech employers can all benefit from coworking facilities. Office markets with a higher tech industry presence also have larger amounts of coworking space square footage or are areas where coworking space makes up a higher percentage of the total office stock in the market.
There also appears to be a direct relationship between low office vacancy rates and a higher amount and demand for coworking office space. Markets such as Manhattan, San Francisco, Seattle, Portland, and Austin – where vacancy rates are 10% or less – have a higher percentage of coworking office inventory.
Markets with lower office occupancy rates such as Houston, Phoenix, and Atlanta are also areas where coworking space account for a lower share of total office stock. There’s still demand for coworking office space in higher vacancy markets, there’s just less of it due to overall office market fundamentals.
Coworking Office Space is an Evolving Business Model
At the same time that the office sector is changing due to coworking space, the coworking sector is rapidly changing as well. The initial traditional coworking business model involves one company leasing a large amount of space from a landlord, building out and furnishing the space, adding amenities such as kitchens and concierge services, then leasing small amounts of the space to users.
In the beginning, office landlords were happy to sign long-term leases for large amounts of unused office space to coworking operators. But today, having seen the rapid growth in demand for coworking space, building owners and operators increasingly want their piece of the coworking pie.
Joint venture arrangements between building owners and coworking office operators are becoming increasingly common. Under a joint venture partnership, coworking operators don’t master lease the space. Instead, they build out, operate, and manage the landlord’s coworking space in exchange for a percentage of revenue – and sometimes for a share of the increase in building value.
Top 10 Operators of Coworking Office Space
This doesn’t mean that coworking office operators are going away, only that their business models are beginning to change. The top 10 coworking office operators in the U.S. control nearly 28 million square feet of coworking office space in over 1,450 locations:
- Premier Business Centers
- Boxer Property
- Office Evolution
- Intelligent Office
Long-Term Growth Prospects of Coworking Office Space
The coworking office model has thrived during this long and sustained period of economic growth. Any business that is growing as rapidly as coworking attracts competition.
Barriers to entry are still relatively low, and owners and operators with vacant office space on their hands are choosing to become coworking operators themselves. It’s possible that in the short-term, some markets could see a saturation of coworking office space.
As businesses increasingly view office space as a flexible service rather than an expense, and as the high technology and gig sectors of the economy continue to grow, it’s almost certain that the long-term demand for coworking office space will keep growing as well.