The drivers behind San Francisco’s surging coworking sector are rooted in a need for change

By Meghan Hall

The rise of coworking within the city of San Francisco has been paramount, with more international and boutique operators intent on positioning themselves within close proximity to some of the region’s largest flexible space users: technology companies. According to a recent report released by brokerage firm Cushman & Wakefield, coworking within San Francisco specifically has grown faster over 2017 and 2018 than the previous seven years combined. As awareness regarding coworking has increased, so has demand in a city where the rapid pace of growth of start-ups has made the traditional corporate leasing structure tough to navigate.

“There are a few factors that have impacted coworking growth,” explained Derek Daniels, associate director of research at Cushman & Wakefield. “I think the growth of tech start-ups in the City, the collaborative culture in San Francisco [have helped]. Coworking has been around for a long time, but recently it has taken off. Some of these companies may not know their growth trajectory, and coworking allows them to take on space on a short-term, flexible basis.”

Coworking members are voting with their wallet and their feet

Cushman & Wakefield’s report examined leases greater than 3,000 square feet throughout San Francisco and found that there are currently 107 coworking locations occupying close to 2.9 million square feet of space. In all, coworking operators account for 3.5 percent of city-wide office inventory.

In 2017 and 2018, coworking inventory in San Francisco grew by just over 550,000 square feet each year, compared with 2010, where there were just 50,000 square feet of coworking-based leases signed. So far in 2019, approximately 225,000 square feet of coworking leases have been signed. 

And, while the coworking operators can be found in every submarket of the city, the report indicates that roughly one-third of San Francisco’s coworking space can be found in the North Financial District alone. Another quarter of coworking space is found in the adjacent South Financial District, while South of Market and Jackson Square are the two next popular markets. The leases cover all building classes but perhaps the biggest draw, according to Robert Sammons, Cushman & Wakefield’s Northern California head of research, is transit.

“[Coworking operators] are really in every submarket of the city, in all building classes,” said Sammons. “But they do gravitate toward spaces close to public transportation.”

“I think they’re trying to appeal to a wide audience, so that’s why they’re in a variety of submarkets, but certainly transit-oriented development is a huge draw,” added Daniels.

The vast majority of coworking growth is attributed to larger operators, such as WeWork, Regus and Knotel, the report states. For Jamie Russo, executive director at the Global Workspaces Association, this is partially because of the city’s complex and increasingly expensive commercial real estate market.

“San Francisco is actually somewhat unique in that there are very few operators with multiple locations in San Francisco,” stated Russo. “I suspect this is due to the expense of real estate and the high occupancy rates that make finding space to lease difficult.”

The popularity of coworking, according to Russo, Daniels and Sammons, is due to some extent to small start-ups or freelancers with a minimal need for office space. However, tech start-ups are well-known as some of the earliest adopters of coworking space, since they thrive in ecosystems that allow them to connect with potential employees, investors and collaborators. Yet, there is also ample demand from large, established corporate users, as well, a trend that is expected to continue as technology evolves and workers become more mobile.

“The awareness of coworking as a solution for those that want flexible terms along with hospitality, amenities and community continues to grow rapidly. As large brands like WeWork expand their presence and fill our social media accounts with ads, the awareness of coworking increases for the individual user,” explained Russo. “The pace of corporate users offering employees flexible solutions is also picking up pace. As corporate real estate groups wind down long-term leases and get more comfortable with designing protocols for the use of shared workspace, that user group is growing rapidly.”

There is room for the coworking submarket to continue to grow in San Francisco and throughout the greater Bay Area as companies further evaluate the benefits of pursuing a flexible office space. The impact, believes Russo, is that traditional leasing structures will continue to be impacted by flexible agreements, and the market will be forced to shift.

“The perspective of those of us supporting the flexible office market is that the real estate model is broken. The expectation that any company can predict their needs out 5, 10, 15 years is not realistic,” said Russo. “The structures in place serve the landlords, which serve the banks. When the consumer experience is so misaligned with their desire, eventually the model will be forced to shift. So, we see WeWork’s success globally as an indicator that they’ve delivered what people want to buy in the office market.”

West Coast Commercial Real Estate News