In October, Yardi Matrix released its latest special report, “Shared Space: Coworking’s Rapid Growth Set to be Tested.” According to the findings, the coworking segment continued its growth in 2019, despite industry headlines being dominated by the struggles of The We Company. However, this rapid expansion is set to be put to the test in the near future, as some may now believe that the entire business model is at risk.
The study also looked at year-over-year growth, top metros, key players in the industry, evolving business models and more. Keep reading for a more detailed overview.
Growth Remains Steady in 2019
As of September, coworking had reached 93.2 million square feet—1.7% of the total office space inventory—in the top 50 U.S. markets. When looking at only 20 markets, Yardi Matrix found 57.5 million square feet of coworking leases as of October, up from 40.4 million square feet in Q4 2018 and 26.9 million square feet in Q4 2017. This marks a 40% year-over-year growth, as well as a 100% growth over two years, in those 20 markets.
Manhattan led the way in terms of footprint growth at the metro level, largely due to WeWork. The borough added 4.1 million square feet of coworking space since Q4 2018, a 31.1% year-over-year increase. Los Angeles came in second, growing by 2.7 million square feet, or 62.4% year-over-year. Other metros that saw significant increases in coworking space include San Francisco, Dallas, Atlanta, Miami, and Seattle.
Some of the key factors fueling the sector’s growth are the rise of the gig economy and the number of independent workers, employment growth in the tech industry, corporations’ desire for more flexible lease arrangements, and workers’ preference for buildings with modern amenities.
NYC Still the Coworking Capital of the US
The six primary commercial real estate markets are also the top metros when it comes to coworking space. Manhattan; Los Angeles; Washington, D.C.; Chicago; Boston; and San Francisco account for 44.1 million square feet of coworking leases, roughly 47% of the total space registered by the report.
With 503 locations, Manhattan boasts the largest coworking inventory out of the top 50 U.S. markets—17.3 million square feet. Los Angeles and Washington, D.C., take the next two spots, with 7 million square feet and 5.8 million square feet respectively. New York City also leads in terms of coworking as a share of stock, with Manhattan’s 3.7% second only to Brooklyn’s 3.9%. Miami is close behind with 3.5%.
Over the years, Yardi Matrix also found a strong correlation between low vacancy rates and high percentages of coworking as a share of stock. In particular, Manhattan, Seattle and Boston all have office vacancy rates below 10%, which is lower than the national average of 13.5%. The metros are also among the top six markets in terms of coworking as a share of stock. On the other hand, markets such as Houston, Dallas and New Jersey, which have vacancy rates of at least 18.5%, have a considerably lower percentage of coworking space.
Suburban Areas Show Potential
So far, coworking has been growing more rapidly in urban areas, but suburbs hold great potential for future development, as well. The report found that urban submarkets contain 63.3 million square feet of coworking spaces, representing 2.7% of the total urban office stock. In comparison, suburban submarkets encompass 30.4 million square feet, or 1% of the total stock.
This is likely due to a series of advantages that urban areas have over suburbs, including proximity to a larger number of workers and better access to public transportation. For example, tech companies and workers, the most active users of coworking spaces, prefer urban areas. Moreover, suburban areas have a greater supply of small office spaces.
On the other hand, suburban spaces are more appealing to those working from home, looking to break the routine and/or network, as well as large companies in need of small satellite offices. Coworking operators whose locations average between 7,000 and 13,000 square feet, such as Office Evolution, Intelligent Office and Boxer Workstyle, are on the rise.
The markets with the largest share of suburban coworking spaces are Las Vegas (2.1%), West Palm Beach (2.0%) and Orange County (1.9%). Yardi Matrix expects suburban coworking to grow as the industry matures.
WeWork, Regus Dominate List of Providers
The two biggest names in the coworking industry remain WeWork and Regus. Together, they account for 48% of the coworking space in the top 50 metros. Currently, WeWork operates 27.6 million square feet, while Regus’s portfolio encompasses 16.9 million square feet.
Since Q4 2018, WeWork increased its space in the top 20 markets by 11.5 million square feet, or 71.2%. Other companies expanding rapidly are Spaces and Knotel, which added 4.2 million square feet and 2.7 million square feet respectively. Regus’ growth was relatively modest, adding 580,000 square feet year-over-year.
Furthermore, the report warns that, after The We Company’s failed IPO, the coworking sector’s steady growth will be put to the test. Property owners might be less likely to lease to coworking operators and large corporate users might turn back to traditional office space—at least until the industry can demonstrate that the model works.
However, Yardi Matrix reminds readers that WeWork’s troubles do not invalidate the reasons why coworking became popular in the first place. Corporations, as well as small users, increasingly demand attractive amenities and flexible lease arrangements.
New Business Models Emerge
While lucrative if properly executed, the industry’s original model—which involved leasing a block of space long-term and then re-leasing it to multiple users at a higher price—raised concerns about what would happen to owners during downturns. In response to this, a new partnership model has evolved. Landlords with blocks of vacant space team up with coworking operators that build out the space and market it. Rent proceeds are then split between them.
Coworking is also growing outside of traditional office buildings. For instance, shared and flexible spaces are on the rise in locations such as apartment buildings, malls, airports, and hotels. Yardi Matrix has found more than 1,500 such coworking properties, which equates to roughly 30% of the total facility count in its database.
The coworking segment has been growing at a fast pace in the past few years, and it’s still in its early stages of development. Therefore, the way in which it will accommodate market demands is likely to keep evolving.
Yardi Matrix’s study is based on a review of the leases of 5.5 billion square feet of office space in the top 50 markets in the U.S. The study covers buildings with 50,000 square feet or more in some metros and 25,000 square feet or more in others.