By Meghan Hall
The rapid rise and fast success of coworking giants such as WeWork and Regus have caught the eye of property owners and real estate executives in gateway markets across the country, placing the flexible-office space center in the limelight. While flexible work space still only accounts for a small percentage of total office inventory, CBRE reports that 85 percent of real estate executives are seeking to incorporate flexible office solutions into their portfolios. While enterprise customers are in the early stages of implementing flexible-office uses as a portfolio strategy, widespread success could contribute to rapid spread of coworking space.
Currently, flexible workspaces only account for two percent of total office inventory, with the vast majority of that space in the nation’s top ten markets. Those top ten markets—which includes San Francisco at number six and Seattle at number eight—account for 38.7 million square feet, or 73 percent, of flexible space inventory in the United States. Nationwide, CBRE reports that there is a total of just under 53.183 million square feet of flexible office space.
Manhattan alone accounts for 25 percent of the nation’s flexible office inventory, with 13.48 million square feet of flexible office space, more than any other metro in the country. San Francisco and Seattle have just about 2.8 million and 2.18 million square feet of flexible office space, respectively. San Francisco and Manhattan are the most saturated markets when it comes to flexible work space, at over three percent each, while Seattle’s flexible office inventory grew the largest on a percentage basis throughout 2018, jumping 44 points. San Francisco’s flexible space inventory also grew significantly; between 2017 and 2018 the market grew by 1.03 million square feet, or 37 percent.
Other top markets include Los Angeles, who ranks second with 4.232 million square feet of flexible office space, Washington D.C., with 3.282 million square feet, and Chicago with 3.217 square feet. Other metros part of CBRE’s Top 10 Flexible Space Markets include: Boston, Dallas/Fort Worth, Denver and Atlanta.
Across all ten metros, the biggest operators are WeWork and Regus. Both companies hold 50 percent of U.S. flexible office inventory. Knotel and Industrious, also among the top five operators, hold an additional ten percent. Currently, flexible space operators are in the market for more than six million square feet of space, and growth of these operators is only expected to continue.
CBRE also notes that despite the rise of flexible office space, there was still more than 19 million square feet of small, traditional office deals for spaces less than 5,000 square feet in the nation’s top 20 markets. There is also more than 140 million square feet of space coming up for renewal in the next 24 months, of which more than half is 50,000 square feet or less, indicating that there is more market share to be gained.
Additionally, nearly 40 percent of office building sales with some flexible-space component achieved values greater than the average for office buildings in their market with no flexible space component. CBRE did not elaborate on how much building values increased when a flexible-space component was included in the deal. While higher capitalization rates still appear to correlate with higher amounts of flexible space occupancy, long term lease commitments are still seen as more viable and stable to investors.
The flexible leasing trend is one that is impacting all submarkets and is not solely limited to offices; medical labs, industrial facilities, housing and retail also show potential, states CBRE. Niche operators that cater to specific demographics and businesses are also emerging, and there remains potential for diversification across asset types and geographic submarkets. Only 15 markets currently have more than one million square feet of flexible office inventory, with high office-using employment growth markets such as Nashville, Austin and Charlotte capable of major flexible-office growth.
How much flexible space operators will grow, and how they will operate as the market continues to mature, are questions that CBRE states have yet to be answered. Looking ahead, however, CBRE predicts future growth of the flexible space market due to the value they provide to tenants, landlords and occupiers, even if the structure of flexible-space offerings changes and evolves.
