Can Coworking Stabilize Houston’s Office Market?
Goodbye sublease glut, hello coworking?
At the height of the most recent oil downturn, nearly 13M SF of office space sat on Houston’s sublease market, and those terms expiring and slamming the direct vacancy market have been a major concern recently.
But Parkway Chief Operating Officer Mike Fransen thinks coworking could take up some space that traditionally has been put up for sublease, therefore stabilizing Houston’s office market in future cycles.
Houston is notorious for the volatility of its office market. The city claimed the top spot for markets to watch in 2015 by the Urban Land Institute but the following year dropped 30 spots (the most dramatic move on the list) and within three years was down 60 spots from its peak. For 2019, the organization ranked Houston as the 37th market to watch.
National coworking concepts can provide balance and stability to Houston, especially when located in robust submarkets and office product, Fransen said.
Houston’s citywide office portfolio is 200M SF, and Fransen said if 5% of the market (10M SF) was converted into coworking space, that would represent more than half of the available sublease space during the energy slowdown.
During a down market in Houston, office expansion comes from small companies and tech firms. Many create new products and services that align with the oil and gas industry.
Those players, typically starting small but with growth in mind, like to sign short-term leases and could be good candidates for coworking or shared workspace. Then as the industry recovers, those companies expand and generally need traditional office space.
In high markets, institutional companies that are growing could place temporary or short-term teams into coworking spaces and only take on more space for their permanent hires, reducing Houston office users’ tendency to overextend their offices in preparation for growth that may not come.
This back-and-forth refueling of the coworking market keeps the office market healthy and generally more insulated, Fransen said. It reduces the devaluation of the market, and the credit and user risks lessen.
Houston-based The Work Lodge founder Mike Thakur said the potential benefit of coworking in the Houston market is high. By partnering with coworking companies, landlords can better manage their space utilization.
"Everyone has their place within the industry," he said. "[Coworking] is a part of that village."
The Work Lodge opened its first location at Cypress in 2015, as one of only two operators in Houston. The other one later dissolved. Houston now has between 12 and 15 coworking companies operating in Houston, according to Thakur.
The company has been open through this oil trough, and Thakur said Fransen’s take on small tenants signing short-term leases in Houston during down times has historically been true, but with the volatility of the Houston office market in mind, The Work Lodge features a more diversified tenant mix with only one-third categorized as startups. The company also limits the number of tenants per industry. Other industries represented include professional, medical and technology service providers.
It is too early to tell if the other half of Fransen’s theory will play out here — if small companies that filled The Work Lodge over the last few years will begin to move out to traditional space now that the market is strengthening, and if institutional players will take coworking space when the market is hot.
Thakur believes Houston's coworking space will amass 1M SF within three to four years.
While the economy is diversifying, Houston's perceived oil dependence has curtailed the rapid expansion of coworking, Thakur said.
"Most people still see Houston as an oil and gas town," he said. "They don't understand that there is so much more to the city other than old Texas money. That is why we have been left out when you think of the bigger coworking companies."
During coworking’s initial spark nationwide, many national coworking brands skipped over Houston. Many have just recently decided to jump into the Houston market.
WeWork, a New York-based operator with more than 500 locations, opened its first two Houston-based locations in Downtown and the Galleria area this year. Impact Hub, an incubator with 100 worldwide locations that aims to solve social issues, was slated to open in Houston in November, according to the Houston Chronicle.
With two suburban locations in place, The Work Lodge is looking to add four to six locations within the next three years in Houston, Thakur said.
Selecting a coworking operator is similar to buying a car, Fransen said. Once a building operator decides to add coworking, it must determine which brand most closely aligns with its ideal tenant mix.
Parkway is adding a coworking operator to several assets within its local office portfolio. In 2017, TechSpace, a national coworking provider, opened in CityWest Place, an office campus near Beltway 8 and Westheimer Road. The 46K SF workspace offers 95 private offices suites totaling 450 workstations. Spaces, a coworking provider, signed a 53K SF lease at its Post Oak Central complex next year.
Life Time Inc. is building a fitness center in the 89K SF space formerly occupied by the Houston City Club at Greenway Plaza, and Fransen said both parties are interested in building a shared workspace in the property, though nothing has been determined to that end. In late November, the Minnesota-based wellness concept announced plans to add coworking near its CityCentre location.
While there has been a rush of new coworking providers in the market, the full effect and impact of the coworking market have yet to be determined in Houston, Avison Young principal Charlie Neuhaus wrote in an email.
He has completed a handful of deals with coworking providers for tenants looking for quick, flexible alternatives. The traditional users see coworking as an amenity but also raise concerns that the buildings become more populated.
Other than simply being a new concept, coworking also unveils an underlying issue with the unavailability of parking spots, he said. Since most Houstonians drive to work rather than use mass transit, he believes the area where mass transit is the norm are better primed for more coworking operators.
"It is important that office users feel that parking and access to their offices are separate than that of those visitors utilizing the retail/living component," Neuhaus said. "If parking or access is complicated it is tough for office users to buy into being a tenant in the project."
Will Houston overcome stigmas and parking issues to become a strong coworking market, and will that rein in its ups and downs? The next few years may tell.