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Don't Stop Me Now: Coworking Industry Still Growing At Incredible Pace

Coworking is no longer the new kid on the block in office real estate, but it continues to grow at a startling pace.

Coworking in the old days.

From 2017 to 2018, coworking space grew almost 62% in the top 20 office markets in the U.S., according to a Yardi Matrix report. In Q4 2017, those markets totaled 27M SF of shared office space, and by the end of last year that number had risen to 44M SF.

Coworking is twice as prevalent in urban markets compared with suburban ones, and is especially popular in cities with large technology industries and entrepreneur populations. Manhattan is the undisputed king in the industry as the home of both WeWork (now part of The We Company) and Knotel, two of the five biggest coworking portfolios in the country, according to Yardi.

Regus, now IWG, sits at the top of Yardi's list, having been in the flexible office game far longer than second-place WeWork. Its valuation has famously been dwarfed by its younger, buzzier counterpart. In third place is Premier Business Centers, Knotel is fourth and Industrious is fifth. Competition has been fierce in the sector for years now, marked at times by lawsuits and accusations of meddling among its leaders.

Yardi cites a "relatively low barrier to entry" as a secondary driver of the competition in the industry, behind its popularity among an increasing share of office users. As those tenants begin to see office space as "a flexible service rather than a fixed expense," flexible workspace is becoming a must-have amenity for office landlords, whether through a third-party operator or run in-house.

Landlords like Tishman Speyer and Brandywine Realty Trust have launched coworking services for their tenants, and CBRE has launched its own brand to infiltrate a space that is increasingly cutting out brokers. Rather than operating on a traditional lease, more landlords are forming direct partnerships with companies like WeWork and Industrious to share in the profits and the risks and avoid broker fees.

The inside of Industrious' coworking space in Midtown Atlanta

As far as coworking has come, many believe it is just getting started. Manhattan's 13.5M SF of coworking space represents only 3% of its total office market, and it is home to nearly a third of the country's total supply. The 44M SF flexible office market nationwide is only 2.2% of all urban office space and 1.2% of all suburban office space, according to Yardi.

When including incubators and other short-term leasing types with coworking, flex space made up two-thirds of all occupancy gains in the U.S. office market last year, according to a JLL report. That expanded definition of flexible space takes up 5% of the national office market, and JLL projects it to increase to a 30% share by 2030.

When projecting which cities had the most room for coworking growth in the near future, JLL ranked New York at the top, citing its huge freelancer and entrepreneurial population as well as its abundance of investment capital as driving forces that will extend its lead. San Francisco ranks second in growth potential according to JLL, and Yardi estimates it already contains 3M SF of coworking space.

Washington, D.C., and Northern Virginia ranked seventh and sixth, respectively, in JLL's projections, even though neither were listed among Yardi's 20 biggest coworking markets. JLL believes the impending arrival of Amazon HQ2 will give a considerable boost to the industry, and cited nonprofit organizations' attraction to flexible space as another driver of demand in D.C.

While continued growth seems assured, Colliers International's latest flexible office report, released Friday, suggests the market has begun to mature and growth will begin to slow. While Colliers found coworking space nationwide — including in the slower secondary and tertiary markets — grew 16% in 2017, it projects only a 6% growth rate between 2018 and 2022.

Though some still worry about coworking's ability to weather a downturn since all of its growth has come during a now decade-long upswing in the economy, JLL and Yardi believe that its widespread adoption by the office market will ensure its continued growth.

Many in the industry believe it is at the brink of a wave of acquisitions, which a downturn could precipitate if smaller operators' growth begins to falter.

“I think we’re seeing the beginning of consolidation, larger global operators purchasing smaller local operators,” Industrious General Manager Squires Levine said at a Bisnow event in D.C. last year. “I think the endgame is a handful of top players who offer something complementary and slightly different.”