5 Possible Scenarios For The Future Of Coworking
The coworking industry is gobbling up the office market like the Cookie Monster on an Ambien-fueled eating binge.
As coworking activity continues to increase in the U.S., including doubling inventory in the past couple of years in major markets, industry experts and asset owners are beginning to study what the future holds for this fast-growing segment.
In analyzing the likelihood of the growth to continue, industry experts at Newmark Knight Frank and JLL took a deep dive in separate reports into how this sector of commercial real estate is evolving. In NKF's report, the term coworking was used as an overarching term to describe coworking, flex office space and executive suites, which are defined as coworking spaces with employees of different companies operating within the same space, but without much interaction among members.
“There has been a lot of media coverage on current and past coworking and flexible office trends, but we have not seen much on what this might mean for the future of the office market,” said Newmark Knight Frank Associate Director Bethany Schneider, author of NKF's report.
“I find it really interesting how the coworking industry has grown so quickly,” Schneider said. “I remember writing about some of the first coworking leases in D.C. in 2013 — that’s pure coworking, executive office suites like Regus have been here much longer — and how it was such a novel trend at the time.
“Now five years later, those leases make up a major portion of our market’s demand, which I don’t think anyone saw coming at the time,” she said.
Overall, coworking is dominating the office market in cities including Austin, New York, Denver and Los Angeles. Newmark Knight Frank data showed rapid growth of coworking firms leasing office space in those markets between 2016 and 2018. Coworking made up almost a third of Manhattan’s office leases in August.
Even multifamily landlords are jumping into the coworking game, with some of them changing lobbies or amenities spaces into workspaces.
According to the JLL survey, most corporate space is underutilized 60% of the time.
“Our research, and our conversations with our corporate clients across the globe, indicate that the flexible work is not just a passing trend; it is part of the very fabric of the future of work,” JLL Corporate Solutions, Americas President Doug Sharp said.
Sharp said one thing coworking has done for the office industry is help visualize what a nontraditional work environment can look like.
“The pervasiveness of flexible work is far beyond just coworking, and it has created engaging, inspiring workplaces that also reflect the realities of how we live, work and play,” he said.
“The modern flex work model empowers employees to trade traditional work-life balance for work-life integration, which for many feels truer to our ‘always on,’ ever-connected environment.”
Based on the 24 U.S. metros studied in the Newmark Knight Frank study, coworking currently occupies 49.7M SF of office space, which equals 1.4% of office inventory in these areas.
Schneider’s report produced five potential scenarios for what coworking could look like by 2023, based on potential changes in the economy:
Coworking continues its rapid growth.
Office inventory occupied by coworking: 20% by 2023
Amount of coworking space: 718M SF in major markets
What this looks like: Coworking market experts told analysts coworking could actually take over as much as 30% of office space — so this scenario is actually a conservative analysis. The major markets, including Chicago, Dallas, Houston, Los Angeles, New York, San Francisco and Washington, D.C., would each have an estimated 40M SF of coworking inventory.
Coworking keeps growing, but with industry consolidation.
Office inventory occupied by coworking: 9.7% by 2023
Amount of coworking space: 347M SF in major markets
What this looks like: The growth rate would continue as it has the past couple of years. Large corporations and smaller businesses and entrepreneurs would continue to utilize coworking spaces, but not as much as in Scenario 1. Coworking operators, finding it difficult to compete in a saturated market, would look at consolidation options.
Newmark Knight Frank Senior Managing Director of National Research Sandy Paul said the team determined Scenario 2 is the most likely of the five to come to fruition. Consolidation may be key for industry success, he said.
“The number of players continues to increase, and they will not all be successful at finding an audience.”
As coworking’s rate of growth slows, large companies remain successful but end ambitious growth plans.
Office inventory occupied by coworking: 1.8% by 2023
Amount of coworking space: 64M SF in major markets
What this looks like: If coworking's ambitious rate of growth were to slow from its current 47.5% per year to just 5% per year over the next five years, it would mean that the current acceleration of growth was happening way too fast, the report’s analysts said. Smaller niche coworking operators would find it difficult to compete in major markets.
Occupancy is reduced, with the coworking industry itself challenged during the next economic downturn.
Office inventory occupied by coworking: 1.2% by 2023
Amount of coworking space: 44.8M SF in major markets
What this looks like: A national recession could lead startups and contractors to lower costs, adversely affecting the coworking industry. Smaller companies would still use coworking in this scenario, but lowered demand would lead the industry into major consolidation.
Coworking is completely disrupted, reducing occupancy by half.
Office inventory occupied by coworking: 0.7% by 2023
Amount of coworking space: 24.9M SF in major markets
What this looks like: In this scenario, a national recession leads contractors, startups and corporations to cut spending on coworking spaces. Midsize companies would still utilize coworking, but large tenants would lease space directly from asset owners. Startups, finding the cost of coworking too excessive, would work from coffee shops and home offices.
The power of the industry
One surprise finding in the Newmark Knight Frank study was the data showing today’s increase in management agreements over traditional leases, Paul said. In a management agreement, office owners receive a portion of the profits and keep control over their space, while coworking operators handle the marketing and managing of the space.
This no-commitment model keeps things casual: no long-term lease required.
“These agreements reduce risk for the coworking firm,” Paul said. “That coworking operators have been successful in securing these arrangements, which have some benefits for asset owners but more for the coworking operators, is a sign of how much influence coworking firms wield in today’s office market.”
No matter how the economy affects the coworking market over the next five years, it is clear the revolution has radically changed how office space will forever be utilized, Schneider said.
“One thing that seems certain is that the concepts underlying coworking — well-amenitized and flexible office space with shared tenant resources — are here to stay,” Schneider said. “Though the format will continue to evolve, tenants have responded to this office space model in a way that will not be undone.”