'Coworking' and the Office Sector's Evolution

Michael Tucker mtucker@mba.org

February 08, 2018

The office sector is changing to meet demands for lower costs, more flexibility and a more entrepreneurial workforce, and coworking is a growing part of that change, said Yardi Matrix, Santa Barbara, Calif.

Yardi Matrix's Shared Space: Coworking's Rising Star report studied 20 major markets and found 1,166 coworking sites with 26.9 million square feet of space in those markets.

At 7.7 million square feet, Manhattan has by far the most coworking space, followed by Los Angeles with 3.7 million square feet, the report said. Miami has the most coworking space as a percentage of stock, at 2.7 percent, with Manhattan ranking second at 1.7 percent.

"Although there are numerous companies offering coworking space for lease, the field is dominated by Regus and WeWork," said Yardi Matrix Associate Director of Research Paul Fiorilla, noting Regus manages 9.4 million square feet of coworking space and WeWork operates 6.5 million square feet. "The two industry giants account for nearly 60 percent of all coworking space leased in our 20 markets."

Fiorilla noted Regus pioneered the "workspace as a service" concept in the 1990s. "The idea was to provide space for self-employed workers and for the small number of corporate employees that are traveling or working remotely," he said. "Regus initially aimed its efforts at traditional office employers such as law and accounting firms that wanted to have remote offices, with what was called ‘executive suites' space."

Coworking grew significantly after the Great Recession, driven by trends including growth in the "gig economy" and remote employment, more entrepreneurial workers and office space expense cost-cutting, Fiorilla said.

Federal Accounting Standards Board rules also may play a role because starting next year corporations must treat lease obligations as debt on their balance sheets, which gives incentive to avoid long-term leases, the report noted.

"The upshot is that despite limits, coworking provides, to some degree, a solution for the growing number of entrepreneurial and remote employees, can help to attract talent and improve work satisfaction and enables companies to continue to reduce the long-term fixed costs associated with leasing commercial real estate," Fiorilla said.

The report said coworking space demand is highest in markets with significant concentrations of knowledge workers-"especially information technology but also new media or industries such as biotechnology and telecommunications"--that are friendly to startups.

"Clearly, coworking represents the cutting edge of the office industry, as it caters to social and demographic changes," Fiorilla said. "However, that doesn't mean the market is without risks, the biggest of which is how to maintain revenue during a downturn." He noted short-term leases cut against the coworking industry in economic slowdowns in part because small businesses are the first to fail during recessions and entrepreneurial workers that lease coworking space could instead work from home when budgets are squeezed. "Even large corporations could find it easier not to renew short-term coworking leases when belts need to be tightened," he said.

Another challenge for coworking providers: new competitors have low barriers to clear if they want to compete, Fiorilla noted.

"Coworking as a model is likely in its beginning stages," Fiorilla said, noting the industry provides a service in line with where businesses are going. "It gives tenants flexibility and provides attractive space for young workers and the growing number of self-employed and remote employees. The number of locations and total space dedicated to coworking is impressive, given the industry's youth."

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